Microeconomics Exam 1

Notes 8/19

Economics is a

Social Science

Economics is a

Study of human behavior

The fundamental economic problem is that

Resources are scarce

Definition of economics

The study of how society manages its scarce resources

Constraints lead to

Choices

Where do most economists work

Government agencies, shaping policy, analyzing regulation

Why hire economists

Analyze complex data and can identify complex trips

Basis for economists

Genesis 1

Cultural mandate

Should fill, work, subdue, and steward the Earth

Intro to Freakenomics

What happened prior to the 1990s

Crime skyrocketed

What was predicted

Continued to grow, but it dropped

Did the roaring economy turn back crime

No

Norma McCorvey

She was Roe in Roe v. Wade

Women who abort children

These children more likely to commit crimes

How do experts treat you

Depend on how incentives are set up

Best way to measure experts

How they provide same service for themselves

Correlation

X and Y are related

Amount of money spent by candidates

Hardly matters (point of diminishing return)

What is the book about

Stripping layer off, seeing what happens underneath

5 fundamental ideas

Incentives are cornerstone of modern life, conventional wisdom is often wrong, dramatic effects often have distant even subtle causes, experts serve their own agenda, and need to know what to measure and how to measure

Chapter 4

Reverse image of the American Crime story

Romania; abortion was legal, then they made it illegal to strengthen population

4 things that do not prevent crime

Good economy, capital punishment, innovative policing, and gun laws

What things can somewhat prevent crime

High rates of imprisonment, crack bubble bursting, and more police

Is there a link between a strong economy and less violent crime

NO

What led to the rise in crime

Incentives; slim chance of being convicted (didn't want to be accused of being racist) and shorter prison sentence

What strategies did New York have that had little effect of lowering crime

Compstat and broken window theory; because crime went down everywhere, not just New York

Switzerland

Every guy has a gun and is very safe

Brandy Act

Background check and waiting period before buying a handgun, INEFFECTIVE

Why do gun laws not work

There is a black market for guns

Crack bubble popper

Smaller profits didn't justify the risk

Why did aging America not change crime rates

Demographic change is too slow and subtle

Majority opinion in Roe v. Wade

When a woman does not want a child, usually has good reasons

3 characteristics of someone likely to have an abortion

Unmarried, teen, poor

Greatest predictor of a kid growing up to be a criminal

Poverty, single-parent

What does legalized abortions lead to

Less unwantedness (unwantedness leads to high crimes)

What event tipped the crime scale

Roe v. Wade

What is the crime drop called

Unintended benefit

How do some attempt to quantify this

1.5 million abortions; 1 newborn is worth 100 fetuses; 1.5 million/100 = 15,000 (number of people that die in homicide every year; trade-off is generally inefficient

Principles of Microeconomics: Chapter 1

Economy

Comes from oikonomus, means one who manages a household

What do a household and society have in common

What jobs, who will do them, allocate goods and services

Scarcity

Limited nature of society's resources

Economics

How society manages scarce resources

Principle 1

People face trade-offs; to get something we like, usually have to give up something else we also like

Efficiency

Society is getting the maximum benefits from its scarce resources

Equality

Distributing economic prosperity uniformity among members of society

Principle 2

The cost of something is what you give up to get it; need to compare the costs and benefits of alternative courses of action

Opportunity cost

Whatever must be given up to obtain some item

Principle 3

Regional people think at the margin

Rational people

Systematically and purposefully do the best they can to achieve their objectives

Marginal change

Describe small incremental adjustment to an existing plan of action

$40 for streaming service, 8 movies, $5 is the ___ cost

Average

What would the marginal cost be

$0; same $40 regardless of number of movies streamed

Marginal benefit

Depends on how many units a person has; money is essential, but plentiful

Principle 4

People respond to incentives

What is an incentive

Something that induces a person to act

Higher price equals

Consume less

Who needs to remember incentives

Public policy makers

Seatbelt laws

People drive faster and less carefully, more accidents

First 4 principles

How people make decisions

Principles 5, 6, and 7

How people act with one another

Principle 5

Trade can make everyone better off

Why

Allows each person to specialize in activities it does best, greater variety

Principle 6

Markets are a good way to organize each activity

Market economy

Allocates resources through decentralized decisions of firms and households as they interact in markets for goods and services

Market prices

Reflect values of a good to society and costs to society of making the good

What impedes the invisible hand

Government

What does the invisible hand do

Guides self-interest into promoting general economic well-being

Economists love __

Uber

Principle 7

Government can sometimes improve market outcomes

The most important thing

Enforce rules and maintain institutions

Property rights

Own and exercise control over scarce resources

2 reasons to intervene

Efficiency and equality

Market failure

Market left on own fails to allocate resources efficiently

Externality

Impact of one person's actions on well-being of bystanders

Market power

Ability of a single economic actor (or group) to have a substantial influence on market price

Principles 8, 9, and 10

Concern working of economy as a whole

Principle 8

Country's standard of living depends on ability to produce goods and services

Productivity

Quantity of goods and services produced from each labor of input

Principle 9

Prices rise when government prints too much money

Inflation

Increase in the overall level of prices in the economy

Principle 10

Society faces a short-run trade-off between inflation and unemployment

How does this work

Increases money, people spend more; higher demand, hire more; more hiring, lower unemployment

Business cycle

Fluctuations in economic activity such as employment and production

Notes 8/21

Principles 1-4

How people make decision

Principles 5-7

How people interact

Principle #1

People face tradeoffs

Tradeoff

Exchange of something for something else

__ decisions involve tradeoffs

All

Principle 2

The cost of something is what you give up to get it

All choices have __ associated with them

Costs

The opportunity cost of any item is

Whatever must be given up to obtain in; what you would have gotten if you'd done the other thing

Is it the __ cost for decision making

Relevant

Principle #3

Rational people think at the margin

Rational people

Systematically and purposefully do the best they can to achieve their objectives

Economic rationality

People compare the costs and benefits