Eco 101: Chapter 1 notes

1
Eco 101 Chapter 1 notes
2
Definition of economics

• the study of how individuals and societies use
  limited resources to satisfy unlimited wants.

3
Fundamental economic problem

• scarcity.
• individuals and societies must choose among
  available alternatives.

4
Economic goods, free goods, and economic bads

• economic good (scarce good) - the quantity
  demanded exceeds the quantity supplied at a zero
  price.
• free good - the quantity supplied exceeds the
  quantity demanded at a zero price.
• economic bad - people are willing to pay to avoid
  the item

5
Economic resources

• land
• natural resources, the free gifts of nature
• labor
• the contribution of human beings
• capital
• plant and equipment
• this differs from financial capital
• entrepreneurial ability

6
Resource payments
Economic Resource Resource payment land rent
labor wages capital interest entrepreneuria
l ability profit
7
Rational self-interest

• individuals select the choices that make them
  happiest, given the information available at the
  time of a decision.
• self-interest vs. selfishness

8
Positive and normative analysis

• positive economics
• attempt to describe how the economy functions
• relies on testable hypotheses
• normative economics
• relies on value judgements to evaluate or
  recommend alternative policies.

9
Economic methodology

• scientific method
• observe a phenomenon,
• make simplifying assumptions and formulate a
  hypothesis,
• generate predictions, and
• test the hypothesis.

10
Simplifying assumptions

• ceteris paribus holding everything else
  constant
• abstraction in economics
• used to simplify reality

11
Logical fallacies

• fallacy of composition
• occurs when it is incorrectly assumed that what
  is true for each and every individual in
  isolation is true for an entire group.
• post hoc, ergo propter hoc fallacy (association
  as causation)
• occurs when one incorrectly assumes that one
  event is the cause of another because it precedes
  the other.

12
Microeconomics vs. macroeconomics

• microeconomics - the study of individual economic
  agents and individual markets
• macroeconomics - the study of economic aggregates

13
Algebra and graphical analysis

• direct relationship

14
Direct relationship
15
Inverse relationship
16
Linear relationships

• A linear relationship possesses a constant slope,
  defined as

17
Linear relationships (continued)

• If an equation can be written in the form
  YmXb, then
• m slope, and
• b Y - intercept.