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Unlimited Wants |
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but |
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Scarce Resources |
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Goods |
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Anything that satisfies a human want |
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Resources |
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Land, Labor, Capital |
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Consumption |
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Use Goods to satisfy wants |
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Production |
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Combine resources to create goods |
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4 Principles of Individual Choice |
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5 Principles of Markets |
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Result of Economic Problem |
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Both Resources & Time are Scarce |
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Measured by value of best alternative given-up |
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What could have been if this choice were not
made |
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Marginal: the next unit, or the incremental unit |
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Quantities are chosen marginally by comparing
marginal benefits vs. marginal costs |
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“Self-Interest” |
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Individuals try to maximize the expected
benefit, given constraints |
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Assumed Rationality |
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Voluntary, not Coerced |
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Diversity creates opportunities for “gains from
trade” |
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Voluntary trade ONLY occurs if both parties gain |
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Given conditions, everybody is doing the best
they can |
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No incentive to change |
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more precise definition later |
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Making the most of limited resources |
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Economic Efficiency |
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“Pareto Optimal” |
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“Allocation” efficiency |
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Efficient Production |
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Max Output, Given Current Resources |
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What about Equity? |
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Competitive markets achieve greatest efficiency |
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Exceptions: |
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monopoly |
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externalities |
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public goods |
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Sets the “rules” |
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Enforce Contracts |
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Public goods |
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Correct market “failures” |
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Bastiat’s Fallacy of the Window: |
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A child throws a brick though a window. The owner pays a glazier to replace the
window. |
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Who gains? |
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Who loses? |
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Was there economic “growth” and production? |
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Examples of the fallacy? |
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“What is often called sound economics is very
often what mirrors the needs of the respectably affluent”.
J.K. Galbraith (Money,
1975) |
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Simplied |
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“If…..then….” |
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Predict Behavior |
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Key Factors Only |
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Too Many Details
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Unwieldy |
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Aim to
Explain |
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Stories, Graphs, Data, Math |
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Economic Agents: |
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Households |
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Firms |
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Where they interact: |
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Markets for goods and services |
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Markets for factors of production |
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Theory & Positive Economics |
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Evidence Supports/Denies |
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Conditional Forecasts |
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“ceteris paribus” |
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How things work/ What “is” |
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Policy & Normative Economics |
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Change Rules |
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What to do / What “should” |
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How to answer 4 questions? |
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What to produce? |
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How much to produce? |
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How to produce? |
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Who gets to consume? |
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What to produce? |
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How much to produce? |
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What’s possible? |
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What’s a fantasy? |
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What’s most we can make? |
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Model of Economic Problem & Choice |
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Max. Production Quantities Possible of 2 Goods |
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All Resources Used Efficiently |
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Assumptions |
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Two Goods |
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Fixed Time Period |
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Resources available: |
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Fixed Quantity |
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Fixed Quality |
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Technology does not change |
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Shift curve (right/out or left/in) |
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Changes in Resource Quantity / Quality |
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Increase Capital Stock |
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Technological Change |
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Shape curve |
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Comparative Advantage
& Trade |
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Law of Increasing Costs |
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Homer & Ned
Stranded on Two Islands |
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Opportunity Costs |
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Gains from Trade and Specialization |
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Comparative advantage: |
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opportunity cost of is lower than for other
people. |
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Determines trade patterns |
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Absolute advantage: |
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physical resource cost is least |
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When trade happens…. |
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How is price determined? |
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How is the quantity traded determined? |
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