Chapter 1 - What is economics

Chapter 1 - What is economics - • Economics discipline...

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Ideas for Beyond the Final Exam 1. How much does it really cost? Opportunity cost Value of next best alternative forgone University expenses include the salary forgone 2. Fine weather-abundant crops- lower prices Price floors: Surplus of Crops Price ceilings on rent: Shortage of apartments 3. Surprising principle: comparative advantage China: Cheaper manufacturing Law of comparative advantage: Jane is a doctor is very skilled in organizing. Should she do her own organizing or should she hire less organized Beth to do the job? 1
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Ideas for Beyond the Final Exam 2. Importance of thinking at the margin Marginal costs Marginal benefits Airplane example: AC: 300$ Standby tickets: 200$ 3. Externalities - shortcoming of market Externalities – social costs Positive (Vaccination) Negative (Pollution) Cure: Intervention (Tax-Subsidy etc.) Cure: Construct mechanisms that people can solve the problem themselves. 2
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Inside the Economist’s Tool Kit
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Unformatted text preview: • Economics - discipline – Mathematical reasoning – Historical study – Statistics • Abstraction – Humans are too complicated to study! – Ignore many details – Focus: most important elements 3 Inside the Economist’s Tool Kit • Abstraction, simplification – Unimportant details – Necessary • Understand complex economy • Degree of abstraction – Objective of analysis 4 Inside the Economist’s Tool Kit • Theory is a deliberate simplification of reality to explain how relationships work. • It is not an untested assertion of alleged fact. It is an explanation of the mechanism behind observed facts. • Statistical correlation – Variables - go up or down together – Need not imply causation, we need theory for that. 5 Inside the Economist’s Tool Kit • Economic model – Simplification - aspect of economy – Expressed • Equations • Graphs • Words • Disagreements – Imperfect information – Value judgments 6...
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Chapter 1 - What is economics - • Economics discipline...

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