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Transcript of Section 1: Introduction to Economics. 1.1 Definitions of Social Science and Economics Social Science...
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Section 1: Introduction to Economics
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1.1 Definitions of Social Science and Economics
Social ScienceStudy of human society and of the relationships between people and organizations/institutions.
Fields of studyHistory, sociology, psychology, anthropology, political science, economics
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Weaknesses of Social Sciences
Lack of absolute answersConflicting claims and conclusions
Natural sciences more absolute
Too many unknown variables
Assumptions must be made in order to derive a hypothesis (question to be proved).
Theories and models change with time.
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Reliability and Validity of Data
Who, what, where, why, and how
Sources and motivations (agendas) are always important when viewing data.
Ex. Global warming debate
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John Maynard KeynesEconomist
“Economics is the most difficult of sciences because one needs to be a mathematician, philosopher, politician, and psychologist.”
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Economics (p. 6-8)
The study of society’s optimal use of scant resources focusing on societal systems of
Production
Consumption of goods and services
Distribution
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Microeconomics
Def: Deals with the inter-relationship between individual components in the economy: firms, industries, and consumers (households). Firms output and pricing decisions vs. Individual purchasing decisions.Supply and DemandIndividual Markets
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If gasoline reaches $10.00/gallon, how will that affect consumer behavior?
What reasons might there be for oil companies to raise prices to this point?
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Macroeconomics
Def: The aggregate (sum) of all individual markets.Main issues:
OutputPrice levelsLabor marketsForeign sector dealings
Trade and exchange rates
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Macro (cont.)
Business cycle: total output of economy over time.
Expansion vs. recession
Deals with all products and all consumers
Ex. Pepsi Co. vs. U.S. economy
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Question p. 10
Explain the main difference between micro and macro using the term “aggregate”.
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Macroeconomic Policy
Government attempts to influence economic activity
Demand Side PolicyInfluence spending level in society
Ex: interest rates, taxes, govt. spending
Supply Side PolicyCreate more output by increasing willingness and ability of
– firms to produce
– laborers to work
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Growth p.12
Increase in national output within an economy during a time period.
Real growth (adjusted for inflation)
national output or GDP (Gross Domestic Product)-
Sum of all goods produced in a country
National income
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Development (12-15)
Difficult to define when comparing MDCs and LDCs (more and less developed countries)
Goals 1. Increase basic necessities (food, water, shelter, health care, safety)
2. Raise living standards, employment, education.
3. Economic and Social Choice, freedoms, rule of law
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What first hand examples do we have (among our class) of life in poor countries?
Examples pg. 15
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Sustainable Development (14-15)
World Bank Def: Growth that “lasts” within the long-term capacity of the environment with respect to population and use of resources.
Ex: Amazon rain forests vs. short-term economic gain.
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Ceteris Paribus (16-18)
Assumption in economic models that keeps certain variables (not addressed in the model) constant.
Ex. Change in weight by changing only eating habits, not exercise.
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Positive and Normative Concepts
Positive- free from conjecture (speculation), judgements. Objective. Fact that can be proven.
The sun is in the sky.
Normative- subjective, opinionated, judgemental, cannot be proved
The war in Iraq is justified.
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Toward which concept does economic theory strive to reach, positive or normative?
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Factors of Production (18-19)
Land Raw materials, primary goods (dig it up, chop it down, pluck it)
Labor Transforms raw material to manufactured
CapitalItems used in the production of goods
Management/entrepreneurshipCreativity/Ambition +land, labor, capital
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Scarcity
Lack of limited resources to satisfy the unlimited wants of people.
Central issue in economics
Faced by all nations.
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Payments to Factors of Production (20-21)
Interaction between households and firms.
Firms pay Households for Factors of Production
Rent (Land)
Wages (Labor)
Interest (Capital)
Profit (Entrepreneur)
Households pay Firms for goods and services
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Circular Flow Model (21)
What are the 2 sectors providing for each other?
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Utility and Marginal Utility
Utility:
Benefit/satisfaction/usefulness one gets from consumption of a good.
Differs from person to person.
Impossible to measure
Key economic concept
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Mmmmm Wings
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Marginal UtilityThe addition to Total Utility by consuming one more good.
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Opportunity Costs
The 2nd best alternative that is given up in order to obtain the 1st alternative.Permeates most economic issues.The decision about what is the 2nd best alternative is central to social and political debate.How do you rank the alternatives on page 27?
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Production Possibility Frontier
Total attainable output based on the limits of available resource.
All output shown using two groups.Ex. Guns and Roses
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What does A and B represent?
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Are points a and b possible?
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Opportunity Costs and the PPF
OC is on the PPF
If PPF is straightOC is constant
Why can’t OCs be incurred inside the PPF?
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Increasing OC
How does this curved PPF represent an increasing OC?
Diminishing Returns
OC = Returns
Real world example?
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Increasing Output
Growth (within the PPF)
Better utilization of available resources
Ex. Longer workdays, increasing land use.
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What causes a shift of the curve?
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Increasing Potential Output
Possible Growth
Shift PPF out
Real Output unchanged
Point F (inside PPF)
Potential Output improved.
How?
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Changing Quality of FOP
Ex. Quality of LaborEducation, training, experience
LandNew farming methods
CapitalImproved technology
Potential to produce more.
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Quantity of the FOP
More FOP means greater potential for growth.
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PPF and Development
Public /Merit Goods/ InfrastructureIncreases Potential Output
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Rationing Systems
How do we deal with scarcity?
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Answer:
Choices
Economic systems deal with choices3 Basic Questions
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Free Market Economy
Characteristics
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Command Economy
Characteristics
All Countries are “mixed”
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Public Ownership
Public Sector Vs. Public Ownership
PS Govt. Bureaucracy
Funding from Taxes
POGovt. control of firms
Nationalized industriesOften utilities
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Justification for Public Ownership/Control
PoliticalBenefits reach all rather than the “few” =rich
Equality in societyRedistribution of wealth (taxation and social welfare)
Enlightenment
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Economic Argument
Private ownership fails to provide goods at the right:
Quantity
Price
Under-Provision
Ex. Roads, Education, Health CareOver-provision of “harmful” goods
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Govt. Influences w/o direct control
Sin Taxes
Subsidies
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Private
Self-InterestAre all actions based on self-interest?
Profit= IncentivesHard work
Innovation
Private Ownership Rule of Law / Property Rights (vs. Corruption)
Essential element of free markets and democracies
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Adam Smith 1723-1790
Father of Economics
Quote pg. 57
Wealth of NationsInvisible Hand
Self-Interest creates maximum efficiency
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The Firm
Creates goods and services
Add value to resourcesLabour value-added
Provides national incomePromotes consumption
Tax base
New products and innovation.
New technology
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Milton Friedman-Free to Choose
4 ways to spendOn oneself
On others
Others money on oneself
Others money on others
In terms of efficiency, which is most desirable? Why?
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