Economics 101 notes2 - Economics 101 notes 16:57:00 What is...

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Economics 101 notes 28/01/2008 16:57:00 What is Economics? We live in a world of scarcity. What does this mean? It means that we live in a  world where we cannot have or do everything we want. o Because we live in a world of scarce resources- we cannot have  everything and we cannot do everything- we are forced to make many  decisions and tradeoffs. o Economics : the study of how these and other decisions are made in  the face of scarcity. o Example:  o Everyone in this room made a decision to attend college. This decision  also has cost benefits o o Cost     o -tuition o -books o -stress o -etc o -forgone income-what you could have made if were working instead of  in college- this is a form of opportunity cost.  o Benefits     -Increased income -a better job -Psychic benefits- enjoyable Economic Model: a device used by economists to explain how economic decision  makers allocate scarce resources Economic models usually rely on assumptions .Why do economists rely on  assumptions? o Many features of a particular decision are not important  o Without some assumptions many interactions and decisions are too  complex to analyze o A good model makes sharp, clear predictions about cause and effects  that are consistent with reality o What assumptions does our model of student test taking in econ 101  make?
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Students seek to maximize their test scores Students know that it will not take longer than 4 minutes to write  the answer A 60% chance at 5 points is just as good as 4 points-risk  neutrality – a subtle assumption o o What predictions does our model of test taking in econ 101 make? o Students who believe they have at least a 60 percent chance of getting  the answer right will take the extra time.  o Are these predictions testable? How would you test them? o Net Benefit = 5 * P – 3 > 0 o 5p>3 o P>3/5 Production Possibilities Frontier-  The boundary between those combinations  of goods and services that can be produced and those that cannot. Efficiency:  achieved when we cannot produce more of one good without  producing less of some other good- or be using fewer inputs The production possibility frontier shows all combinations of two goods that satisfy  efficiency Opportunity cost-  The highest value alternative forgone…  Ex.  To get a fish I have to give up some tapioca. This amount of tapioca given up  to obtain one fish is the opportunity cost of one fish.
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