Introdution to Economics (new)

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D.W. Hedrick
 Primarily
Lecture format with discussion,
simulations, and video presentations
 Constructive discussion is welcomed
 Grading is based on Aplia Homeworks (20%),
five of seven quizzes (20%), three midterms
(20% each), and an optional comprehensive
final (replaces lowest midterm) – NO
MAKEUPS GIVEN
 Suggestions
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for the study of economics
Read the book before coming to class
Recopy lectures and reread the book within
several hours of class
Identify what you don’t understand
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Ask questions in class
Use the Aplia and the study guide (optional)
Go to tutors in supplemental instruction (if offered)
Visit the professor during office hours
 Mankiw’s
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How Society manages its scarce resources
 Hedrick’s
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definition
definition
How society chooses to allocate its scarce
resources among competing demands to best
satisfy human wants
 Alternative
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definitions
Economics is the study of choice.
Economics is what economist do.
Wikipedia's perspective
 Scarcity
: Unlimited wants versus limited
resources
 Choices and tradeoffs
 Opportunity Costs
 All societies must answer the WHFM
questions
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What is to be produced?
How is to be produced?
For whom will it be produced?
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The Scientific Method
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Observation →Hypothesis →Testing
 Observation: identifying and measuring important variables – orderly loss
of information
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Paraphrasing Einstein, “ Everything should be made as simple as possible, but no simpler.”
K. Boulding, “Knowledge is always gained by the orderly loss of information.”
Assumptions and ceteris paribus
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Theories
Models: realism or usefulness
Hypothesis: educated guesses about cause and effect of the variables
Testing: theories can’t be proven and are supported by repeated failed attempts to
disprove them.
Microeconomics vs. Macroeconomics
The Assumption of Rational Behavior
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Max TNB = TB – TC
Boxes Example
MB=MC rule
People respond to incentives
Limits to the use of rational behavior (e.g. axe murders)
 Normative
vs. positive approaches
 A brief history of economic thinking
 The language of economics
 How
people make decisions?
 How people interact?
 How does the economy work overall?
 Principle
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#1 - People face tradeoffs
Time allocation – an example of tradeoffs
Production Possibilities Frontier
Efficiency versus equity
 Principle
#2 - The cost of something is what
you have to give up to get it
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Opportunity costs come from Von Weiser, a
German economist late 1800s
Opportunity costs are independent of monetary
units
TINSTAAFL
The real costs of going to college
 Principle
#3 - Rational people think at the
margin
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Rational or irrational decision-making
Marginal benefits and costs versus total benefits
and costs
Weighing marginal costs and benefits leads to
maximizing net benefits (total welfare)
 Principle
#4 –People respond to incentives
Reactions to changes in marginal benefits and costs
 Increases (decreases) in marginal benefits mean
more (less) of an activity
 Increases (decreases) in marginal costs mean less
(more) of an activity
 Example of seat belts leading to increased speeds
 Example of SUV (with child car seat) in Issaquah
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 Principle
#5 - Trade can make everybody Society
better off
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Adam Smith author of the “An Inquiry into the Causes
and Consequences of the Wealth of Nations” 1776
Gains from the division of labor and specialization
Mercantilists perspectives
Example of why Ellensburgians should trade with
others
 Principle
#6 - Markets are usually a good way of
organizing economic activity
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Feudal times and haciendas in the new world
The power of trade: cooperation versus conflict
Markets: prices and quantities traded, typical and
abstract
 Principle
#6 - Markets are usually a good way
of organizing economic activity creativity
and productivity and resource allocation
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“Failure” of centrally planned economies
“set it and forget it” becomes “compete or be
obsolete”
 Principle
#7 Governments can sometimes
improve market outcomes
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Market signals can fail to allocate resources
efficiently or equitably
Public goods, the exclusion principle, the freerider problem and non-rival consumption
External costs and benefits
Examples: vaccines, education, pollution
 Principle
#7 Governments can sometimes
improve market outcomes
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Equitable or fair distribution of resources
Efficiency and equity: the pie analogy
Government Failure: is government intervention
always the proper solution?
 Principle
# 8 – A country’s standard of living
depends upon its ability to produce goods
and services
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Adam Smith’s “An Inquiry into the Nature and the
Consequences of the Wealth of Nations”
Materialism – more toys mean more welfare
wealth: a necessary or sufficient condition for
happiness (are rich people happier, children with
lots of toys)
 Principle
# 8 – A country’s standard of living
depends upon its ability to produce goods
and services
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leisure time and productivity
the factors of production: land or natural
resources, labor, capital, entrepreneurship
technology and productivity
the Rule of 72 and growth rates
 Principle
#9 – The general level of prices rises
when the government prints and distributes
too much money
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Definition of money, and economic language
 Principle
#9 – The general level of prices rises
when the government prints and distributes
too much money
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Examples: “Not worth a continental” and
Argentina
Establish of the Federal Reserve and the
introduction of sustained inflation in the US
 Principle
#10 – Society faces a short-run
tradeoff between inflation and
unemployment
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Short-run and the long-run
Demand and supply shocks
Short-run increases (decreases) in output above
(below) long-run potential output lead to
adjustments
 Principle
#10 – Society faces a short-run
tradeoff between inflation and
unemployment
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Counter-cyclical stabilization versus pro-cyclical
destabilization
Political business cycles
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