Eco 101: Chapter 1 notes

Definition of economics

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

Fundamental economic problem

scarcity. individuals and societies must choose among available alternatives.

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

Economic resources

land

natural resources, the free gifts of nature the contribution of human beings plant and equipment this differs from financial capital

labor

capital

entrepreneurial ability

Resource payments
Economic Resource land Resource payment rent

labor
capital entrepreneurial ability

wages
interest profit

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

Positive and normative analysis

positive economics

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

normative economics

Economic methodology

scientific method

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

Simplifying assumptions

ceteris paribus holding everything

else constant abstraction in economics

used to simplify reality

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.

Microeconomics vs. macroeconomics

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

Algebra and graphical analysis

direct relationship

Direct relationship

Inverse relationship

Linear relationships

A linear relationship possesses a constant slope, defined as:

Linear relationships (continued)

If an equation can be written in the form: Y=mX+b, then:

m = slope, and b = Y - intercept.