lecturenotes_test1 - ECON 2106 1Lecture Notes Economics is...

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ECON 2106 1Lecture Notes Economics is the study of choices made by governments, institutions, societies, and individuals concerning their use of limited resources. Scarcity is what makes economics work; every choice involves elements of scarcity. It is the lack of an infinite supply of a good or service. Time and money are scarce resources. Famous economists include Adam Smith (The Theory of Moral Sentiments [1759] and The Wealth of Nations [1776]), David Ricardo, Thomas Malthus, Joseph Schumpeter, John Maynard Keynes, Alfred Marshall, etc. Who are today’s famous economists? Cost-Benefit Analysis : costs of doing x should be < benefits of doing x before something is done. To apply this rule, however, one needs to be able to define and measure ALL of the relevant costs and benefits (to society as well). This suggests that we need a theory of value – long discussion in the literature (labor theory of value, etc.) that ends up at EconValue = V PRIVATE + V SOCIAL . Discuss the value “in use” versus value “in exchange” debate using the water-diamond paradox. Rational = making decisions according to cost-benefit criterion. Individuals may assign weights to those costs and benefits that accrue directly to them. Ex. Voting. Purely self- interested person is likely not to vote unless he/she is motivated. Costs of voting are positive. If everyone who favors your candidate stayed home on election day, this fails to acknowledge the fundamental incentive problem that the likelihood that other people will vote is unaffected by any one person’s decision to vote. Marginal analysis : purchase additionally if MB>=MC. But who actually does these mental benefit-cost models? One response is that we can make useful predictions if we assume that people act that way. An alternative response is to concede that actual behavior often differs from predictions of economic models. Models provide decision making guidance, not decision finality. Positive economics is the art of describing economics as it is now. Normative economics is theorizing about what ought to be in economics. Economic analysis cannot answer the “is/ought” questions alone - subjectivity is needed. According to another text, policy analysts who formulate questions, test there empirically, and draw conclusions are normative economists. Do you agree? Humans have unlimited wants and a scarce amount of resources, therefore choices must be made over the use of those resources. Incentives influence how resources are used. Example: In the Pacific Northwest, logging companies cut down the few remaining virgin redwood trees to supply contractors with timber to build homes. Many of these trees are > 2000 years old. Bottom line: the trees are worth more to the logging companies as timber than as monuments to the past. This makes it impossible for logging companies to realize the true value society places on these trees. The invisible hand breaks down when incentives in private markets do not lead us to protect non-
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This note was uploaded on 11/16/2011 for the course ECON 2106 taught by Professor Staff during the Fall '08 term at Valdosta State University .

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lecturenotes_test1 - ECON 2106 1Lecture Notes Economics is...

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