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. Attempts to repeal laws of supply & demand - Market strikes back 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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