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Course Lecture Notes for Cumulative Final Exam (Combined weeks 1-10)

Course Lecture Notes for Cumulative Final Exam (Combined weeks 1-10)

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Published by James Crombez

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Published by: James Crombez on Mar 13, 2011
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Instructor Lecture: Nature of Economics
Content Author:
Dr. Basma BekdacheThis week we begin our introduction to the exciting world of economics. By the end of this semester, you will be able to readthe daily economic news and understand what it means, how itimpacts you, and how to analyze it using the economic way of thinking. You may even be able to make a prediction using oneor more of the economic models that you will learn in thiscourse!The first thing we have to do before we study a new subjectmatter is to introduce its language so that we are all on the samepage. The language of economics includes several terms thatyou may also encounter in other disciplines, and some that willbe unique to economics. In this lecture, we will discuss anddefine a number of concepts, which will be used throughout thesemester and that are central to the study of economics. Firstand foremost let's define what economics is all about.
What is Economics?
Economics can be defined as the study of how we allocatescarce(or limited)resourcesto satisfy unlimited wants. It is the study of how people makechoices.
Resources are things that we use to make goods and services that people want.Examples of resources are:
TimeMaterialsLabor hoursLandCapital Oi
Why do people have to make choices?Click here for answer.
That's right, we have to make choices because resources are limited or scarce.Think of the resource time. What kind of choices do you have to make everydayto satisfy your wants given your limited time?
In making choices people respond to
, which are the rewards we receivewhen we choose to engage in particular activities.
Macroeconomics and Microeconomics
We can think of economics as consisting of two major branches: Macroeconomics andMicroeconomics.
(macro for short) is the study of the economy as a whole or economic aggregate. Can you think of examples of topics that fall under thesubject of macroeconomics?Click here for answer.
Correct. The unemployment rate, inflation, interest rates, the governmentbudget deficit or surplus, and GDP (Gross Domestic Product) are allexamples of topics that we study in macroeconomics.Microeconomics
(micro for short) is the study of specific markets, individuals,and firms in the economy. A few examples of microeconomic topics are:
What determines the demand and supply for cars or pizza?
How does an individual decide how much time to spend working or takingvacation?
How does a business decide how much to produce?We will see later as the semester progresses that often times, we need to blend Microand Macro analyses in order to answer some questions about the economy. For example, to understand what determines the amount of jobs available in the economy,or unemployment, we use a demand and supply model of the labor market along withan aggregate demand and aggregate supply model of the aggregate economy's level of production.
Instructor Lecture: How Do We StudyEconomics?
Content Author:
Dr. Basma BekdacheEconomics is often described as an empirical science. This is because we useeconomic models and test them using the scientific method. However, since people'sbehaviors determine outcomes in the economy, economics cannot be analyzed as anexact science (such as physics or chemistry), therefore, we tend to describe economicsas a mix of science and art.We have already used the term economic model. What is a model?Click here for answer.
A model is a simplified representation of a reality.
Can you think of examples of models that you encounter in your daily life, notnecessarily related to economics?Click here for answer.
I can think of these models: a map is a model of roads, a clock is a model of time,and a small car prototype is a model of actual size car, etc.
Notice that in some cases (e.g., clock time, map) the model does not resemble thereality. In economics, our models will take a variety of forms that don't resemble thereality. They can be graphs (see lecture on graphs), tables, equations, and prose thatdescribe
among economic variables.A
is something that can change over time. We will refer to many of theeconomic terms we use this semester as economic variables since their values maychange from period to period. For example prices, income or the interest rate you payon your credit card are all examples of variables. An example of an economic modelfrom macro is the relationship between household spending and income. An examplefrom micro is the relationship between the price of a good and the quantity demandedand supplied for that good.Each model is usually based on a set of 
. Assumptions are things that wetake to be true for the purpose of the model we are building. For example, let's say weare trying to model the relationship between price and the quantity that people want topurchase of a good or service. We might say that when the price of pizza decreases,people will want to buy more pizzas. This statement is based on the assumption that

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