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Unformatted text preview: 26/02/2008 22:33:00 ← PRELIM 1 ← ← Chapter 1 • Economics is the study of how individuals and societies choose to use their scare resources that nature and previous generation have provided. They key word in the definition is choose. Economics is a behavioral, or social science. It studies how people make choices • Why Study Economics? o To learn a way of thinking (opportunity cost, marginalism, sunk costs, efficient markets) o To understand society o To understand global affairs o To be an informed voter • Microeconomics examines the functioning of individual industries and the behavior of individual decision making units • Macroeconomics examines the economic behavior of aggregates • Positive economics attempts to understand behavior and the operation of economics without making judgments about whether the outcomes are good or bad. Normative economics looks at the results and asks whether they are good, bad and if they can be improved • Economics uses a lot of abstraction and although it can be a powerful tool, it is possible to oversimplify • Using the device of ceteris partibus is one of the processes of abstraction. It help us simply the reality and focus on the specific relationship we are interested in. • The post hoc fallacy says that although A came before B, A did not necessarily cause B • Fallacy of composition is the erroneous belief that what is true for part is true for the whole • Economic outcomes are judged by 4 things (1) Efficiency (2) Equity (3) Growth (4) Stability ← ← Chapter 2 • The basic resources that are available to a society are known as factors of production • Absolute advantage means that you can make it better with using fewer resource including time • Comparative advantage is who cam make it with the lowest opportunity cost and winds up being more efficient for the economy because there are gains from trade. It also allows us to weigh the present and expected costs and benefits. • Capital is everywhere and does not need to be tangible • Because resources are scare, the opportunity costs of every investment in capital is forgone present consumption • PPF illustrates the principles of constrained choice, opportunity cost and scarcity o Shows the combination of goods and services that can be produced if all society’s resources are combinations of goods and services o Y-axis is capital goods, X-axis is consumer goods o Unemployment of labor means unemployment of capital – points inside the PPF o To be efficient an economy must produce what people want, need to be operating on the right point in the PPF o The negative slope demonstrates the fact that scarcity exists. o The law of increasing opportunity costs – neg. slope demonstrates tradeoffs, represents choices available within the constraints imposed by the current state of agriculture technology (growth = when technology increases) o Economic growth is characterized by an increase in the total output and occurs when firms acquire new resources or learn to produce more existing resources...
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