ECO Class Notes - Risk Adverse person Utility K/L ECO Class...

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K/L Risk Adverse person Utility Wealth ECO Class Notes * January 22, 2010 Liquid asset – to be able to pass it on to someone else. They are worth less “Other things equal” Banks that have given mortgages will sell them to another entity else who can spread the risk Government sponsored entities buy the mortgages to make banks want to give out mortgages. RMBS are bundles combined by all the things to sell to investors to reduce the risk Balance Sheet Recession * January 25, 2010 The Economist as a Scientist Economics = science Scientific method o Dispassionate development and testing of theories about how the world works Looks for “patterns (correlations)” or “relationships” in economic data Standard terminology: “Stylized facts” or “empirical regularities” Devise theories to try to explain what is going on the in economy Use data to test theories Verify or refute theories Economic models o Diagrams & equations o Omit many details o Allow us to see what’s truly important o Built in assumptions o Simplify reality to improve our understanding of it Our first model: The circular-flow diagram (Figure 1) o Firms Produce goods and services Use factors of production/inputs (labor, capital (plant, equipment, machinery), land, human capital (education and skills), entrepreneurship) o Households Own factors of production Consume goods and services Our second model: The production possibilities frontier (Figure 2) o Production possibilities frontier Combinations of output that the economy can possibly produce Given the available
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Factors of production Production technology Increasing Opportunity Cost Opportunity Cost of one good o Give up the other good Bowed out (“concave”) productions possibilities frontier illustrates the Law of Increasing Opportunity Cost – with given resources and technology, the more of one good that is being produced, the more that production of the other good(s) must be sacrificed in order to produce more of the first good. * January 27, 2010 Slope o MRT – A -> B: ∆Guns/∆Butter = -75/100 = -0.75 o MRT – C -> D: ∆Guns/∆Butter = -150/100 = -.1.5 Production Possibilities Frontier Technological advance or growth in resources o Outward shift of the production possibilities frontier (Figure 1 on notebook) o Economic growth (Figure 2 on Notebook) o Produce more of both goods Positive and Normative Analysis Positive vs. Normative Analysis o Positive Statements Attempt to describe the world as it is Descriptive Confirm or refute them by examining evidence Most of the times statistically Ex. What are the effects on the minimum wage? Most of the semester we will be dealing with this kind of statement o Normative Statements Attempt to prescribe how the world should be Prescribe Ex. Is the minimum wage good or bad?
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