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Economic_Principles_111Handout1 - Economic Principles 111...

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1Economic Principles 111 Handout #1 Dr. Happel BACKGROUND FUNDAMENTALS AND SCIENTIFIC METHODOLOGY I. Definition of economics A. The study of scarcity-conflict-discrimination-choice; economists focus on incentives; “No!” response likely when economists are involved 1. What is the “best” way to discriminate? Free market economists argue price; nothing is free on earth. B. Microeconomics versus macroeconomics C. Secular humanism versus religious beliefs and chaos theory II. Beginning of modern economics - The Classical School (1776-1880's) A. Adam Smith and the Wealth of Nations (1776) 1. Attacks on Mercantilism 2. Beauty of laissez-faire capitalism, labor theory of value, division and specialization, free trade, invisible hand (greed creates societal welfare with the right institutions) B. Malthus and Ricardo 1. Malthus: passion between the sexes and population growth 2. Ricardo: rent (a return to a fixed factor) and income distribution issues 3. Corn Laws (1815-1846): Malthus for and Ricardo against C. Marx and Das Kapital (1867) 1. Stages of growth: chaos, feudalism, capitalism, socialism, communism 2. Flaw in capitalism is equity, not efficiency–problems with labor saving technology and the resulting reserve army of unemployed as capitalists try to maintain rate of return. III. Early Austrians (Menger, Bohm-Bawerk, Weiser) A. Utils–JOLTS OF JOY B. Marginalism IV. Neoclassical Economics (Marshall (1890)) A. Demand/supply determine value B. Free trade and voluntary exchange benefits both parties C. Beauty of Capitalism D. Mathematical and scientific E. The world is an ordered place and equilibrium states exist for “extended” periods V. The Scientific Method A. Positive statements (fact) versus normative statements (personal opinion) judgment) B. Three parts of a model 1. Definitions of variables a. Independent versus dependent variables
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b. Stock versus flow variables 2. Assumptions a. The assumption of ceteris paribus (everything else the same or constant) and its widespread use in economics 3. Conclusions or hypothesis C. Logical fallacies 1. Fallacy of composition (individual vs. group) 2. After this fallacy 3. But the cat doesn’t speak French fallacy (applying a theory in the wrong place) 4. Ceteris paribus fallacy (too much held constant) D. How to judge the correctness or beauty of a model 1. Extreme realism for assumptions vs. only conclusions matter (Friedman) E. Ways to present models 1. Words - tyranny of words 2. Graphs - 2 (or 3) dimensions 3. Mathematical equations - complexity and multiple relationships F. Arguments for theoretical economic reasoning 1. Unity of all knowledge 2. Baumol and abstraction VI. The critical concept of Opportunity Cost and Trade-offs A. Full value of best alternatives foregone B. Production possibility curves - straight (resources are not specialized) vs. curved (resources are specialized) Hamburgers/Month 50 25 Dozens of Cookies/Months
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Economic_Principles_111Handout1 - Economic Principles 111...

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