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 entrepreneurial 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: Y=mX+b, then: m = slope, and b = Y - intercept.