EC101LectureNotes - EC101Test1 02/09/200911:02:00...

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EC 101 Test 1 02/09/2009 11:02:00 9/4 Introduction to Economics     The Central Questions of Economics o What gets produced? Answered differently based on the type of economic system Ie capitalism, communism etc. o How does it get produced? o Who gets what is produced? How is the output and therefore income distributed? The Essence of a Market System o Self interest Motivated by the amount of money one person or a group can  make.  o Checked by competition Self  o Within a framework of law There are laws specific to elements of a market economy Ie minimum wage, false advertising laws. Four Central Concepts of Economics
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o People are Rational When people make a decision, they take into account all  aspects of the situation. o People Respond to Incentives o Every Decision Involves an Opportunity Cost Every decision you make means you had to give something up. o The Best Decisions are Made by Thinking “at the margin” The Past is history. It should have  no  impact on your immediate  decisions. The Methods of Economics o Unique Methods o Observations and formal analysis Models, abstraction, and the role of assumptions Don’t ask “Is this realistic?” Ask: “is it useful?” Ex/ Map of Manhatten. Doesn’t have every single object  in manhatten on it, but it helps us navigate. The role of quantification o The glory of economics: Unified explanation Same explanations on different market systems. Positive vs. Normative Issues. o Positive Economics: What is 
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o Normative Economics: What ought to be Value Judgements Paternalism vs. Individual Choice “No one should smoke because it’s bad”- Paternalism Income Redistribution Do the poor deserve the riches’ money Sooner vs. Later Micro vs. Macro o Microeconomics Economic descisions of individuals: Individual consumers (households) Individual firms Individual markets o Macroeconomics Economy as a whole All consumers All firms All markets Aggregated
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Overview of the Economy o Households Households supply Factor Markets (Labor,  Capital) Firms Demand Firms 9/9 Demand side of Economics     Determinants of Demand Price Income or Budget o Normal goods: Goods whose demand increases when income  increases o Inferior Goods: Goods whose demand decreases when income  increases Price of related goods o Substitutes: Demand goes up when the price of a substitute goes up o Complements: Demand goes down when the price of a complement  goes up. Tases and Preferences
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EC101LectureNotes - EC101Test1 02/09/200911:02:00...

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