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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
labor
the contribution of human beings
capital
plant and equipment
this differs from financial capital
entrepreneurial ability
Resource payments
Economic Resource Resource payment
land rent
labor wages
capital interest
entrepreneurial ability 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
normative economics
relies on value judgements to evaluate or
recommend alternative policies.
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.