Microecon Lecture Notes.pdf - What is Economics I Economics...

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What is Economics?: I. Economics bases on well-being and asks: Is capitalism efficient/fair? II. Individual preference sets amount that people will want at any price, while business costs of production set amount that business supply at any price A. When they meet, the price is such that free supply (determined by technology) equals free demand (utility and preference) and by the available resources, factor endowments B. These curves can move due to changing preferences, technology, or factor endowments III. If demand curve do not slope down or supply curves not up, then no market equilibrium, and without this, supply and demand do not set prices and quantities, and are determined by administrative/political power. Income and Happiness: I. Robinson Crusoe - central figure of orthodox economics (neoclassical economics) A. Shipwrecked at South Pacific, wrote story of years on the island II. Getting more not necessarily gets happier, goes from negative externalities to growth, and how social factors can shape happiness III. Orthodox economics expect that the more we have, the happier we’ll be A. “The key to happiness is having lots of toys, and if you don’t want something, just throw it out” IV. If Robinson Crusoe had more stuff, he would use it or leave it in the ground V. For 11,000 years, nothing happens to European Per Capita Income, and by 1800, drastically increased VI. US per capita grown 2% for 200 years, therefore we know we must be happier (inflation), about $30,000 of stuff VII. Happiness depends on relationships, and stuff can make or break us VIII. Within countries, rich are happier than poor (so are middle class) through survey A. Somes check with MRI to associate happiness in the brain IX. Increasing aggregate wealth does NOT make us happier (ex. Americans have more money but aren’t happier, similar for Europeans and Japanese)
X. Easterlin Paradox says more increases happiness within countries, but after a certain point, happiness stops growing XI. Advertising makes people think that they will be unhappy if they don’t get it, as capitalism needs unhappiness in order to make people buy stuff A. We will need to take care of more stuff B. We will have to work harder to give time for employers and buy more, or we will be punished C. In order to be happy, we want to have social relationships, but taking care of things can crowd this out, like income crowding out sex D. By getting richer, everyone else is getting better than you E. Not everything will be at an unlimited supply, as those who make them die F. When other people have more, they create externalities, like congestion and pollution, but when we have more, we are happy, making us feel superior - drives people out due to withdrawal from social activity G. Sometimes new things don’t make us happy, but are essential to our lives XII. We compare economic status to others, as how you are doing in comparison to your neighbors or sisters XIII. There is no correlation between another’s success and your own happiness, as you don’t have a good reason as to why you should XIV.

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