MECH 3360 - Ten Principles

Economics Lecture 1

What is the study of Macroeconomics?

Macroeconomics focuses on the global or national scale of economics.

What is the study of Microeconomics?

Microeconomics focuses into a company/personal scale of economic policy.

The Malthusian Growth Model was a famous, and rather bold, economic theory. Provide a short summary as to what the growth model predicted, and why it was ultimately proved/disproved.

The Malthusian Growth Model stated that food production would not be able to keep up with the growth in the human populous, resulting in calamity. This was later proven otherwise thanks to technological developments, trade, global interconnectedness, and migration.

People facing tradeoffs is an essential problem of economics. Briefly define what a tradeoff is.

Scarcity form the backbone of what a trade-off is. Since the consumers resources are heavily limited, they must decide as to how to best allocate that time by making a trade off.

Scarcity can be induced by both demand and supply. Provide examples of each type.

An example of a demand induced scarcity can be a growth in population requiring more land/food/housing. An example of a supply induced scarcity mostly lies with the supply being degraded; overfishing, crop failure, lack of housing.

Illustrate what a potential trade-off is.

A student must decide how to allocate their time. They can either spend all their time studying economics, studying mechanics, or attempt to balance it out by spending equal time with the two subjects.

Considering the pros and cons of an action is the backbone of making a decision. What is an opportunity cost?

An opportunity cost is what you must forgo in order to get something.

Provide an example of an opportunity cost.

You get 75 dollars an hour working at a consulting firm. If you instead decide to go to a 25 dollar, two hour concert, the opportunity cost would be 150 dollars for two hours of missed work.

You choose to spend the night at a casino one day. The casino has given you $100 dollars worth of chips which must be wagered by the end of the night.

There are two tables that catch your interest, the roulette and blackjack table.

If you choose to go all-in on the roulette table, you are expected to win $83. If you instead bet on blackjack, you are expected to win $86.

What is the opportunity cost of betting the chips on blackjack instead of the roulette table?

The opportunity cost would be 83 dollars.

Provide a brief description of what acting rationally is.

Rational thinking expects one to consider both ends of an extreme, consider the margins, then try their best to achieve their objective using the information they have.

What is an example of rational thinking?

Firm managers wish to produce a level of output that maximizes their profits.

Illustrate an example of rational thinking.

At dinner time, it isn’t a choice between absolute fasting and eating like a hog, but rather the difference between one or two scoops of mashed potatoes.

What defines an incentive? How does it relate to rational people?

An incentive is something that induces a person to act. It relates to rationale as it’s highly influential when considering the costs and benefits of a decision.

Provide an example of what an incentive can be.

When the price of gas goes down, people are incentivized to fill up their cars.

Incentives can have unintended consequences. Give an example of one.

Capping the price of rent as a result of public pressure can lead to lower incentives for landlords to upkeep or supply housing. Capping the price on rent ultimately resulted in a lack of housing.

It is said that trade can make everyone better off. How is this so?

Trade allows for a specialization in products that countries/families can do best; it allows for a division of labor.

Briefly explain the market economy principle.

A market economy is one that allocates resources through the decentralized decisions of firms/households as they interact with goods and services.

Many countries adopted, and subsequently reversed, a centrally planned economic system throughout the 20th century. Why did system fail?

Centrally planned economies do not allow for the market to work.

Provide examples of government interference/market distortion.

Subsidies, taxes, quotas.

Market economies, despite their successes, are still susceptible to failing. How do they fail? How do governments circumvent this?

Market economies fail when the market fails to allocate resources efficiently. Governments introduce policies that are intended to circumvent market failures.

Provide examples of Pigovian taxes.

Taxes that aim to circumvent polluting sources, such as taxes on gasoline or carbon.

A country’s standard of living is dependent on what?

Its ability to produce goods and services.

Define productivity and explain its relation to the standard of living.

Productivity is the quantity of goods and services produced from each unit of labor. The higher the country’s productivity, the higher the standard of living is for its citizens.

What is living standards manifested as in economic theory?

Gross Domestic Product per Capita. (GDP)

When a government prints too much money, the prices of goods and services rise. This is otherwise known as?

Inflation.

What is usually the result of inflation?

A decline in spending power, real wealth, and confidence with the markets.

When does hyperinflation occur? What is a modern example of hyperinflation?

Hyperinflation i when the price of goods and services exceed more than 50 percent a month. This was recently seen with Zimbabwe’s economic crisis.

Society at the end of the day face a short-run trade-off between inflation and unemployment. Illustrate this with a short description.

Inflation can be good for a healthy economy, as more money circulating can stimulate more spending on higher quality goods and services. Because of the increased demand in quality goods and services, employers must hire more people, which reduces unemployment.

What is stagflation and how do governments circumvent it?

Stagflation is commonly characterized as low economic and productivity growth, combined with a high inflation rate. Governments usually wait until the inflation rate is controlled before they reduce interest rates and promote economic spending.

In an economy, what determines its trends?

Government policy, international transactions, speculation/expectation, and the balance between supply and demand.

What does CPI an abbreviation of?

Consumer Price Index