Introduction and Math Review

- The most important part of any economic model are the
**assumptions**. - A model with good assumptions should make good predictions.

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- Studying economics will teach you a way of thinking.
- You will learn to use three key concepts in your daily lives:
**efficient markets****marginalism**and**opportunity cost**

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- Profit opportunities are rare because everyone is looking for them.
- Efficient markets eliminate profit opportunities immediately.
- Ex. You'll never find a good parking space, because if there was a good one, it would already be taken before you got there.

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**Average Cost**-- total cost divided by quantity- If I spend 300 hours preparing 30 lessons for you, then my average cost is 10 hours per lesson.
**Sunk Cost**-- costs that can no longer be avoided because they have already been "sunk"- If I teach this class again next semester, I will have already sunk 300 hours into preparation.
**Marginal Cost**-- cost of producing one more unit- Next semester I can recycle my notes, so my marginal cost per lesson will equal 75 minutes.
- (Compare that with my current 10 hours!)

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- We all face choices because
**resources are "scarce."** - We cannot spend more time or money than we have, so we have to give up one opportunity to take advantage of another.
- If I have a choice between earning $1000 per month by teaching this course
**OR**earning $500 per month by working at McDonald's, then: - It takes me one month to
**produce**$1000 worth of teaching. - It takes me one month to
**produce**$500 worth of hamburgers. **Q:**What's my opportunity cost of teaching?**A:**Half a hamburger per unit of teaching.

$$\begin{array}{lll}\frac{\frac{\text{one month}}{\text{\$1000 of teaching}}}{\frac{\text{one month}}{\text{\$500 of hamburgers}}}& =& \frac{\text{\$500 of hamburgers}}{\text{\$1000 of teaching}}\\ \\ & =& \frac{\text{1}}{\text{2}}\cdot \frac{\text{hamburgers}}{\text{teaching}}\end{array}$$

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**point plotting (X,Y):**- the first point in a pair lies on the X axis (horizontal axis)
- the second point in a pair lies on the Y axis (vertical axis)

- The following equation is plotted in red squares:

$$y=-5x+20$$

- and its line is drawn by connecting points: (0,20), (1,15), (2,10), (3,5) and (4,0)

- the
**slope**of a line is the change in**y**divided by the change in**x** **y**decreases from 15 to 10 when**x**increases from 1 to 2- so the slope is -5

$$\frac{\Delta y}{\Delta x}=\frac{10-15}{2-1}=\frac{-5}{1}=-5$$

- the
**y-intercept**is the value of**y**, when**x=0** **y=20**when**x=0**- so the y-intercept is 20

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- slope is
**positive**if**y**increases as**x**increases - the equation below (and plotted in blue circles) has positive slope:

$$y=4x+1$$

- slope is
**negative**if**y**decreases as**x**increases - the equation below (and plotted in red triangles) has negative slope:

$$y=-2x+15$$

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- Suppose that the relationship between income and consumption is:

$$C=0.60Y+14000$$

- where:
**C**= consumption**Y**= income- The income coefficient (0.60) is the
**marginal propensity to consume**. - consumption increases as income increases,
**but** - a $1000 increase in income only increases consumption by $600
- At higher income levels, consumption is less than income. (Higher income households save).
- At lower income levels, consumption is greater than income. (Lower income households dissave).
- Along the 45 degree line, income equals expenditure.

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$$C=0.60Y+14000$$

**Model**-- formal statement of a theory (often presented mathematically)**Variable**-- a measure that can change (for example: income and consumption)- dependent variable
- independent variable
- In the example above, consumption depends on income.
**Parameters**-- value which remain constant in an equation (in the example above: 0.60 and 14,000)

$$Y=C+I+G+(X-M)$$

**Ceteris Paribus**-- "all else equal"- How does an increase in investment,
**I**, affect national income,**Y**? - To determine the effect of investment alone (on income), we must hold all other variables constant.

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- Studies the decision-making of individuals, households and firms
- Studies the distribution of wealth and income

- Studies the behavior of the economy as a whole
- Explores the factors that affect:
- Gross Domestic Product
- the price level
- the unemployment rate

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- No judgements
- Just asking how the economy operates

- Makes judgements
- Evaluates the outcomes of economic behavior
- Makes policy recommendations

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**Positive**-- economic policy starts with positive theories and models to develop an understanding of how the economy works- Then economic policy
**normatively**evaluates outcomes on the basis of: **Efficiency**-- Is the economy producing what people want at the least possible cost?**Equity**-- Is the distribution of wealth fair?**Growth**-- Increase in total output of the economy.**Stability**-- steady growth, low inflation and full employment- And recommends (normative) courses of action to policy-makers (presidents, congressmen, etc.)

Copyright © 2002-2023 Eryk Wdowiak