Economics Notes - UNIT 1 Economics o Study of how people...

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UNIT 1 Economics o Study of how people make decisions when faced w/ scarcity What to produce? Which combination of factors of production should be used in production? Who (if anybody) should allocate resources? (One individual, group, markets?) - All resources are scarce; don’t h ave unlimited input of resources - Free Market Economy is one in which thes e qu estions ar e a nswered by the buyers a n s ellers o Econo mics is a social science (de als w/ actions a nd interactions of people) o The Scientific Method 1. Question/ Observation (ex. How is the m arket of ____ will b e effected by particula event?) 2. Define hypothesis (best guess; how you think individuals will respond to a chang e incom e [increas e in incom e, p eople buy m ore], tax rat e, etc) 3. Test hypothesis (evaluat es the whole process) Interpret dat a Controlled vs. Natural exp erim ents Controlled: chang e, m e a sure, observe at particular place and tim e Natural: ev eryday life; ex. Une m ploym ent rat es; e ss entially in econo mics w resort to n atural exp erim ents o Correlation vs Causation: two variables m ove at sa m e tim e (one increasing, one d ecre asing) = variables are correlat ed; caus ation = one variable is causing chang e in other variable 4. Revise original hypoth esis Gives birth to theories m ost of tim e 5. Hypothesis supported by d at a beco m es p art of theories Best explanations, but by no m e a ns the “truth”
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Economic Models o Abstract representations (of particular behavior we are concerned with) Represents behaviors of consumers (how price changes behavior of consumer) Higher price =people want to buy fewer units (smaller quantity) Simplifying assumptions are used to make these abstract reps. Ex. You buy soda, there are many variables that go along w/ buying the sod   if it’s hot out, time, credit card available; however we focus on price and   quantity o Behavioral Economics (Vernon Smith) Essentially accounts for all emotions involved in buying and selling  Experiments in field consist of economic decision and which part of brain is   responding to decision; not quite as abstract, more specific model of buying/ sellin   decisions o Goals: Make predictions Good/accurate predictions of how variables are related o Generalizations  About behaviors of consumers Cannot include all details that are involved in consumer decisions o “Ceteris Paribus” Everything else the same; everything as equal Assumption Essentially making sure we only change one aspect of model at time o Graphical Representation Why Economies Disagree?
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