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8/12/2019 Introdution to Economics.ppt
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8/12/2019 Introdution to Economics.ppt
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Instructional Method
Primarily Lecture format with discussion,
simulations, and video presentations
Constructive discussion is welcomed
Grading is based on Aplia Homeworks
(20%), five of seven quizzes (20%), three
midterms (20% each), and an optionalcomprehensive final (replaces lowest
midterm)NO MAKEUPS GIVEN
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Instructional Method
Suggestions for the study of economics
Read the book before coming to class
Recopy lectures and reread the book withinseveral hours of class
Identify what you dont understand
Ask questions in class
Use the study guide
Go to supplemental instruction
Visit the professor
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Definition of Economics
Mankiws definition
How Society manages its scarce resources
Hedricks definition How society chooses to allocate its scarce resources
among competing demands to best satisfy human wants
Alternative definitions
Economics is the study of choice.
Economics is what economist do.
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Scarcity and the Fundamental
Questions of Economics Scarcity : Unlimited wants versus limited
resources
Choices and tradeoffs (MP#1) Opportunity Costs (MP#2)
All societies must answer the WHFM questions
What is to be produced? How is to be produced?
For whom will it be produced?
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Economics as a Science
The scientific method Observation Hypothesis Testing
Observation: identifying and measuring important variablesorderly loss of information
Hypothesis: educated quesses about cause and effect with thevariables
Theories Models: realism or usefulness
Testing: theories cant be proven and are supported by repeatedfailed attempts to disprove them.
Microeconomics vs. Macroeconomics
The assumption of rational behavior (MP#3) Max TNB = TB TC Boxes Example
MB=MC rule
People respond to incentives (MP#4)
Limits to the use of rational behavior (e.g. axe murders)
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Microeconomics versus Macroeconomics
Normative vs. positive approaches
A brief history of economic thinking
The language of economics
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The Ten principles of Economic
Thinking
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Categories of Basic Principles of
Economics How people make decisions?
How people interact?
How does the economy work overall?
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How People Make Decisions
Principle #1 - People face tradeoffs
Time allocationan example of tradeoffs
Efficiency versus equity
Production Possibilities Frontier
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How People Make Decisions
Principle #2 - The cost of something is what
you have to give up to get it
Opportunity costs come from Von Weiser, aGerman economist late 1800s
Opportunity costs are independent of monetary
unitsTINSTAAFL
The real costs of going to college
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How People Make Decisions
Principle #3 - Rational people think at the
margin
Rational or irrational decision-making
Marginal benefits and costs versus total benefits
and costs
Weighing marginal costs and benefits leads tomaximizing net benefits (total welfare) *
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How People Make Decisions Principle #4People respond to incentives
Reactions to changes in marginal benefits and costs
Increases (decreases) in marginal benefits mean more
(less) of an activity Increases (decreases) in marginal costs mean less
(more) of an activity
Example of seat belts leading to increased speeds
Example of SUV (with child car seat) in Issaquah
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How People Interact
Principle #5 - Trade can make everybodybetter off
Adam Smith author of the An Inquiry into the
Causes and Consequences of the Wealth ofNations 1776
Gains from the division of labor andspecialization
Mercantilists perspectives
Example of why Ellensburg
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How People Interact
Principle #6 - Markets are usually a good
way of organizing economic activity
Feudal times and haciendas in the new world
The power of trade: cooperation versus conflict
Markets: prices and quantities traded, typical
and abstract
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How People Interact
Principle #6 - Markets are usually a good
way of organizing economic activity
creativity and productivity and resourceallocation
Failure of centrally planned economies
set it and forget it becomes compete or beobsolete
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How People Interact
Principle #7 Governments can sometimes
improve market outcomes
Market signals can fail to allocate resourcesefficiently or equitably
Public goods, the exclusion principle, the free-
rider problem and non-rival consumptionExternal costs and benefits
Examples: vaccines, education, pollution
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How People Interact
Principle #7 Governments can sometimes
improve market outcomes
Equitable or fair distribution of resources
Efficiency and equity: the pie analogy
Government Failure: is government
intervention always the proper solution?
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How the Economy works as a
Whole Principle # 8A countrys standard of living
depends upon its ability to produce goods andservices
Adam Smiths An Inquiry into the Nature and theConsequences of the Wealth of Nations
Materialismmore toys mean more welfare
wealth: a necessary or sufficient condition for
happiness (are rich people happier, children with lots oftoys)
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How the Economy works as a
Whole Principle # 8A countrys standard of
living depends upon its ability to produce
goods and servicesleisure time and productivity
the factors of production: land or natural
resources, labor, capital, entrepreneurshiptechnology and productivity
the rule of 72 for growth rates
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How the Economy works as a
Whole Principle #9The general level of prices
rises when the government prints and
distributes too much moneyDefinition of money, and economic language
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How the Economy works as a
Whole Principle #9The general level of prices
rises when the government prints and
distributes too much money Examples: Not worth a continental and
Argentina
Establish of the Federal Reserve and theintroduction of sustained inflation in the US
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How the Economy works as a
Whole Principle #10Society faces a short-run
tradeoff between inflation and
unemploymentShort-run and the long-run
Demand and supply shocks
Short-run increases (decreases) in output above(below) long-run potential output lead to
adjustments
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How the Economy works as a
Whole Principle #10Society faces a short-run
tradeoff between inflation and
unemploymentCounter-cyclical stabilization versus pro-
cyclical destabilization
Political business cycles
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