Economics 101 notes2 - Economics 101 notes 16:57:00 ←...

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Unformatted text preview: 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? 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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This note was uploaded on 03/09/2009 for the course NUCLEAR AN 373 taught by Professor Richardshaten during the Fall '07 term at University of Wisconsin.

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Economics 101 notes2 - Economics 101 notes 16:57:00 ←...

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