All Rights ReservedDr. David P Echevarria1 Rocks and Shoals Tips on getting through this course. before Skim read the assignments before class This an

All Rights Reserved Dr. David P Echevarria 1

Rocks and Shoals

Tips on getting through this course.Skim read the assignments beforebefore class

This an foundation knowledge course – that means we will be building on this base in future courses

Reading the material the night before the exam will invariably lead to a poor grade.

Keep up with the homework questions. They are key to doing well on the exams.


Rocks and Shoals

Attendance; key to learningECN 221 lectures involve some complex material.

Missing class discussions will affect exam performance.

Class ParticipationASK QUESTIONS if something is not clear.Your ability to compete is largely a function of knowledge,

preparation, and participation.

EmailI use email to communicate important information to

students. Make certain your email account is able to receive mail.


A Final Thought on Exams

Life is not fair.Honesty is still the best policy.

Call or email me if your world blows up just before exams. We can always work something out.

If you don’t – it means you get Exam Exam Version 2Version 2 which is the nightmare exam.

Proper prior planning prevents poor Proper prior planning prevents poor performanceperformance


LECTURE #1: MICROECONOMICSCHAPTER 1

Ten PrinciplesEconomics as Science


Economics & Scarcity

Society allocates people, land, buildings, and machines to various productive tasks. It also allocates the output of goods and services produced.

Society decides who will eat caviar and who will eat potatoes. It must decide who will drive a Ferrari and who will take the bus.

Allocation is necessary because goods and services are scarce relative to the demand for those same goods and services.


Economics & ScarcityScarcity means that society has limited

resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the highest standard of living to which he or she might aspire.

Economics is the study of how society manages its scarce resources. How are resources allocated and who makes the allocation decisions is the subject of economics.


Ten Principles of EconomicsHow People Make Decisions

1. Decision makers face trade-offs. "Guns vs. Butter" argumentClean environment vs. high levels of income argumentEfficiency vs. Equality: dividing the pie – the role of gov't

2. All things incur opportunity costsWhat must you give up in order to get something else?

3. People are economically rationalDecision making at the marginsThe concept of marginal costs vs marginal benefits

4. Incentives MatterWhat induces a person to act?Government Policy and Social Objectives


Ten Principles of EconomicsHow People Interact

5. Trade makes every one better offComparative advantage and opportunity costs

6. Free markets are the most efficient way to organize economic activity

Moving the allocation and production decisions to the individual

Price are an important allocation criterion

7. Governments can sometimes improve market outcomes

The key word is 'sometimes'The property rights issueMarket power: ability to influence outcomesMarket failure: inefficient allocation of resources


Ten Principles of EconomicsHow The Economy As A Whole Works

8. The Standard of Living reflects the ability to produce goods and servicesWhat causes differences in the standard of living across

countries?Why is productivity important?Why are property rights and stable democratic

governments necessary?9. Governments can upset the economic cart

Financing public services by printing money >>> inflation10. Is there a short-term trade-off between

Inflation and UnemploymentWhat causes inflation: too much money or too much

demand or both?Does the economy need some level of inflation to work?The role of governmental policy


Break Time


Economist as Scientist/Investigator

Chapter 2 Economics = Science =>

Economist=ScientistThe Scientific Method

Collect Data (observation or experimentation)

Formulate Behavioral HypothesesMake Predictions (attention to role of

uncertainty)Run Experiments to prove/disprove

behavioral hypotheses.


Economist as Scientist/Investigator

Chapter 2The Role of Assumptions

Simplifying facts about the world around usIdentifying the essential elements of the few to

generalize about the many

The Role of ModelsModels are used to describe the way the world

worksModels consist of diagrams and equationsExample 1: The Circular Flow of Money and

Goods (Figure 1)

G. Mankiw 13

Circular Flow of Money and GoodsFactor Inputs and Outputs

Diagram is a schematic representation of the organization of the economy. Decisions are made by households and firms. Households and firms interact in the markets for goods and services and in the markets for the factors of production. The outer set of arrows shows the flow of dollars, and the inner set of arrows shows the correspon-ding flow of inputs and outputs.

G. Mankiw* 14

Production Possibilities FrontierProduction possibilities frontier

A graph showing the various combinations of output that the economy can possibly produce…

Given the availableFactors of production (labor,

capital, materials)Production technology (capital

intensity)

G. Mankiw 15

Production Possibilities Frontier

Quantity ofComputersProduced

Quantity ofCarsProduced

0 300 600 700 1,000

3,000

AB

C

D

E

F

1,000

2,2002,000

ProductionPossibilitiesFrontier

The production possibilities frontier shows the combinations of output - in this case, cars and computers - that the economy can possibly produce. The economy can produce any combination on or inside the frontier. Points outside the frontier are not feasible given the economy’s resources.

G. Mankiw 16

ProductivityTechnological advance

Outward shift of the production possibilities frontier

Economic growthProduce more of both goods

G. Mankiw 17

A shift in the production possibilities frontier

3

17

Quantity ofComputersProduced

Quantity ofCars Produced

0 600 650 1,000

3,000

A2,2002,300

A technological advance in the computer industry enables the economy to produce more computers for any given number of cars. As a result, the production possibilities frontier shifts outward. If the economy moves from point A to point G, then the production of both cars and computers increases.

4,000

G


Economist as Policy Advisor Chapter 2

The Positive vs. Normative [Argument]Positive – the way things are (descriptive)Normative – the way things ought to be

(prescriptive)Business Week (April 27: "What Good Are Economists

Anyway?“)

"Why they failed to predict the global economic crisis – and why their help is critical to a recovery."The "reality" – predicting the future is more art than

science. A lot has to do with our assumptions and our experiential memories.

Thomas Sargent (NYU): "…the economy is volatile, in part, because households and businesses hold 'fragile beliefs' that shift quickly." (pg 031)


Sources of Disagreement among Economists

Chapter 2

Differences in Scientific Judgments (opinions regarding interpretation)

Differences in Measuring Impact of Policy

The problem of perception versus reality


A Quick Review of GraphingChapter 2

Cause (X-axis) and Effect (Y-axis)Magnitude (Y) and Time (X)Grade Point Average (Y) and Time

Spent Studying (X)Slope and Intercept

Slope = the rate of change in Y given a change in X (y / x)

Intercept: The value of Y when X = zero.


Homework Assignment

Chapter 1:Questions for Review: 1, 3, 4, 6, 8, 9Problems and Applications: 1 (parts a, b,

c, and e), 8, 12 (parts a and b)

Chapter 2:Questions for Review: 2, 3, 4, 7, 9Problems and Applications: 4 (parts a, b),

6

Documents

All Rights ReservedDr. David P Echevarria1 Rocks and Shoals Tips on getting through this course. before Skim read the assignments before class This an