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ECON 1 - LEN TOP 1 CH 1-2


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Econ 1 – ELEMENTS OF ECONOMICS 1 LECTURE NOTES Foster, UCSD 7-May-09 TOPIC 1 – INTRODUCTION TO ECONOMICS A. Terminology 1. Definitions: a) What is Economics? 1) Study of production and distribution of goods and services, and of the distribution and spending of incomes earned in that production. (Emphasizes "circular flow.") 2) Study of allocating scarce (limited) resources among alternative uses so as to satisfy unlimited human wants. (Emphasizes "rational choice.") b) Microeconomics vs. macroeconomics. c) Positive vs. normative economics. (Fact) (Opinion) d) Why economists disagree. Unwilling to admit ignorance in positive matters Different value judgments in normative matters Different benchmarks for "high" and "low” Unclear about SR or LR predictions Media emphasis on division of opinion 2. Commodities: a) A commodity is a good (tangible) or service (intangible). 1) Economic commodities -- produced by human effort using scarce resources. 2) Free goods -- so abundant in nature that no one will pay for more per time period. b) Three dimensions of a commodity. Thing itself Place available Time available 3. Scarcity and Rational Choice: a) Scarcity -- the "fundamental economic problem." 1) Except for free commodities like air, most things we want have to be produced using energy from sun, material from earth's crust, and human effort. These resources are scarce in that there is not an unlimited amount available; only a finite amount can be extracted/time period. 2) The problem is that what we have is limited, but what we want is not! Thus, we must choose what to have now, what to have later, and what to forego altogether. SCARCITY CHOICE.
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Ec 1 INTRODUCTION p. 2 b) Rational Choice -- the "fundamental economic activity." 1) A choice is rational if, given information set available to decision maker at the time and the set of feasible alternatives to choose from, the alternative chosen is expected to yield the maximum benefit. 2) Examples. 4. Opportunity Costs of Choices: a) Because of scarcity, we choose from a list of alternatives, trying to pick the best one. The opportunity cost of a choice or decision is the benefit associated with the next best alternative. This is what we give up to get the benefit of our best choice. CHOICE COST. Opportunity cost is a ratio: decrease in the quantity produced of one good divided by the increase in the quantity produced of another good. (PPC Graph) b) Examples -- alarm, belt, TANSTAAFL, sunk costs. Paris Anderson Class EX. 5. Stocks and Flows: a) Definitions. 1) Flow -- a quantity measured per period of time. 2) Stock -- a quantity measured at an instant of time. 3) A flow can be thought of as the rate of change of a stock, while every stock has associated with it an inflow and an outflow . b) Examples -- water tank; investment, depreciation and stock of physical capital; budget surplus, deficit and national debt.
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