Notes 01 - Notes 01 - Introductory Microeconomics ECON 1110...

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Notes 01 - Introductory Microeconomics ECON 1110 Economics: the study of how people make decisions in the presence of scarcity. (E.g. Money, time, effort, natural resources, lives, etc.) Scarcity: a situation where resources are limited, and can be used in different, but mutually exclusive, ways. Opportunity Cost: The next best foregone alternative (whatever must be given up to obtain a good). Economics is a social science Social: the study of people (Experimentation is tough – unethical, people know it is an experiment and alter their behavior.) Science: if economics is a science it must have its root in empirical proof Theory: a simplified representation of the world (e.g. a map). Theory must be testable, refutable, and predictive. Three Key Features of Theories i) Simple ii) General iii) Useful, in making predictions about the world. Examples: what consumers do when prices rise; what producers do when prices rise. Assumptions we will make throughout: people are rational, know their tastes, and learn from their errors. 1
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Comparative Advantage and the Gains from Trade In this section we will explore the issue of free trade. While free trade is often discussed in terms of international trade, the principles of free trade, and the following simplified analysis, apply equally to international and domestic trade. Prior to beginning the analysis, let’s present some vocabulary specific to this analysis. Autarky: a world with no exchange (imagine it!). Specialize: produce a bundle different than you consume. Specialization would be impossible without trade. Gains from Trade: a material measure of how much better off people are from engaging in trade. Gains from trade can be measured in dollars, or quantities of goods, but not in happiness or other esoteric units. If trade increases the amount of goods, then gains from trade will be positive. Opportunity Cost: The opportunity cost of any item is the next best foregone alternative. To an economist, virtually nothing is free (or “there is no free lunch”). The reason is that in order to obtain a good, something must be given up. For example, if you have a finite amount of money, whenever you spend it on one good, it means that you can’t spend that same money on another item (by choosing one good you “forego” another). The concept works equally for time: if you decide to watch TV you can’t go for a walk at the same time. Notice that when you spend your money – or time – you forego all other goods. The opportunity however is only the cost of the best foregone good – the next best alternative. Even if you are given (find) a good it has an opportunity cost since you could sell it. Therefore, every scarce good has an opportunity cost. Marginal Cost:
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Notes 01 - Notes 01 - Introductory Microeconomics ECON 1110...

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