Midterm #1
Overview of Econ 1
Microeconomics – decision making by individual economic agents
Externalities, private business, distribution of income, asymmetric information
Macroeconomics – economy as a whole
Behavior of consumers, business, government agencies, and international companies
Usually applied to national economy but can be used on any aggregation of economies
Goal of course - want to apply economic principles to the real world
Evaluating Policy – have to compare the policy’s results with what would have been in the absence of the policy
What today would have been like without policy vs. Today with the policy
Counterfactual – what would have been in the absence of policy
We use models to know what would have been (guess what the counterfactual is)
Models – used to answer questions
Characteristics:
A question – what determines the (measure) of (category)?
Simplifications and abstractions – the world is too complicated to think about it all at the same time
A different set of simplifications is a different model
Assumptions about economic behavior – changing assumptions changes the model
Expressing a Model – words, graphs, and equations
Analyzing and Judging effects of policy are different
Positive Economic Analysis – simply looks at what are the policy effects on the specific measure of economics we care about
Normative – deciding whether or not the policy should be enacted
We use positive economics in class because we need to have the right data to be able to judge
Four Criteria for Judging Economic Policy
Efficiency – are we producing the right goods and services at the lowest possible cost?
Allocative Efficiency – producing the right goods and services
Productive Efficiency – producing at the lowest possible cost
Equity – is the outcome fair
Growth – does the policy increase how much goods and services can be produced
Stability – does the policy make the swings of unemployment more or less
Policy can help one area and hurt another
Your value system dictates which goals are more important than others
Economics – the disciplined study of the allocation of scarce resources
Resources:
Land – natural things
Labor – people who are able to produce goods
Capital – buildings, machines, and inventory
Knowledge – how we understand how to put things together
Resources are scare because there is a limited amount of land, labor, capital, and knowledge but we have unlimited wants and needs
We have to make decisions and tradeoffs to allocate goods
Allocation and production of goods are subject to constraints:
Technological – do we have the technological knowledge to put together resources
Institutional – the laws and the government can control how we use our resources
Norms, culture, etc. can as well
Production Possibilities Frontier Model – describes the allocation of scarce resources
Question – what are the general characteristics of the possible combinations of output that can be produced in an economy in a given time period?
Simplification – only 2 types of output
Too hard to track all things
Can divide whatever we want to talk about into two groups
Assume – no deliberate waste; we use all resources as efficiently as possible
Opportunity Cost – most desired activity foregone in order to do something else
What we give up to get more of another good
We have to give up something to get more of another good if the amount of resources stays the same
Mostly not monetary, but related to time
There are opportunity costs to everything because you can’t clone yourself
Law of Increasing Opportunity Cost – the reallocation of resources to the production of one good from another takes a comparatively larger amount of resources the more you reallocate because resources are not equally well-suited to all tasks
Exists because not all resources are equally suited to produce all goods
Resources are usually specialized for the production of one good
When reallocating resources to the