[ECON 201] Chapter 2

Fred is a student at UK who rents an attic apartment in an old house on Euclid Avenue. Fred likes to shop at the Kroger on Euclid because the people that shop there are far more interesting than the shoppers at other Kroger stores and it is within walking distance of his apartment. Fred is going to Kroger and he has $10 to spend. Fred plans to use his $10 to buy Doritos which cost $2 per bag and bottles of Pepsi, (2-litre size), which cost $1 each. Fred plans to spend his entire $10. What is the opportunity cost of consuming one bag of Doritos? i.e. every time Fred buys one bag of Doritos, how many bottles of Pepsi is he giving up?

2, The opportunity cost of one bottle of Pepsi is half of a bag of Doritos.

ceteris paribus assumption

A ceteris paribus assumption is often key to scientific inquiry, as scientists seek to screen out factors that perturb a relation of interest. Thus, epidemiologists for example may seek to control independent variables as factors that may influence dependent variables—the outcomes or effects of interest.

deterministic relationship

IV completely determines value of dependent variable

Suppose Jessica goes to the store to buy fruit. If she only buys mangos, she can buy 6. If she only buys papayas, she can buy 18. Each time she buys one mango she gives up buying 3 papayas. Based on this information, which of the following linear equations is a correct representation of Jessica's budget constraint? (assume P=papayas and M = mangos)

M = 6 - 1/3P

inward shift of PPF

able to produce less

outward shift of PPF

able to produce more— more things produced therefore shifts out

demand curve

almost ALWAYS curves downward. The more something is $, the less people want it

An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers' preferences it would

c. move the economy along the production possibilities frontier. the production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the trade-off between producing hot dogs and hamburgers doesn't change, because resources remain the same. However, the consumption point along the production possibilities frontier has changed, because consumers now prefer to consume more hot dogs. This is represented by a movement along the production possibilities frontier to a point with more hot dog production and less hamburger production.

positive statements

descriptive and make a claim about how the world is, economists trying to be scientists

negatively correlated

downward graph

efficiency on PPF

getting all it can from scarce resources— along the PPF line

production possibilities frontier

graph that shows the various combinations of output shows the trade-off between outputs of different goods at a given time, but the trade-off can change over time

markets for goods and services

households are buyers, and firms are sellers. Households buy the output of goods and services that firms produce

markets for the factors of production

households are sellers, and firms are buyers. Households provide the inputs that firms use to produce goods and services

inefficiency on PPF

inside line of PPF— not using all its resources to get max. profit

micro.vs.macro.

microeconomics— study of how households and firms make decisions and how they interact in specific markets macroeconomics— study of economy wide phenomena

assumptions

models often involve simplifying assumptions -power of theories and models lies in their ability to predict of explain economic outcomes

stochastic relationship

other things besides the independent variable influence the value of the dependent variable

normative statements

prescriptive— make a claim about how the world ought to be, Economists trying to be policy advisors

Outer loop of circular-flow diagram

represents the corresponding flow of dollars, the households spend money to buy goods and services from the firms. The firms use some of the revenue from these sales to pay for the factors of production, such as the wages of their workers. What's left is the profit of the firm owners, who themselves are members of households

Inner loop of circular-flow diagram

represents the flows of inputs and outputs— households sell the use of their labor, land, and capital to the firms in the markets for the factors of production. The firms then use these factors to produce goods and services, which in turn are sold to households in the markets for goods and services.

Production possibilities frontiers are usually bowed outward. This is because

resources are specialized; that is, some are better at producing particular goods rather than other goods.

In the simple circular flow diagram, the flow of money from the markets for goods and services to the firms is called

revenue

shifts in curve

right— income increases left— income decreases VARIABLES NOT ON GRAPH CAUSE SHIFTS

reverse causality

saying that A causes B when B causes A. 'Minivans cause more babies born"

The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and

the available production technology

scientific method

the dispassionate development and testing of theories about how the world works

circular flow diagram

the economy is simplified to include only two types of decision makers— firms and households. Firms produce goods and services using inputs, such as labor, land, and capital. Households own the factors of production and consume all the goods and services that the firms produce

Infrastructure

the large-scale public systems, services, and facilities of a country or region that are necessary for economic activity, including power and water supplies, public transportation, telecommunications, roads, and schools

Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that

the nation is not using all available resources or is using inferior technology or both.

omitted variable

third variable not on graph that causes a shift

movements along PPF

trade-offs and opp.costs

positively correlated

upward graph

movements along the curve

variables in graph change

factors of production

what firms produce goods and services with, inputs like labor, land, and capital