For tutor faith..

EC Part 1 Notes

 

Introduction

 

1)  Nature of Economic Knowledge and Ignorance

 

a. Economics is an unusual field in that many myths and foolish superstitions are commonly accepted by otherwise reasonable, educated people. 

 

 

b. The average person’s misconceptions about economics are similar to the confusion exhibited by the “Cargo Cults” in the 1940s—primitive tribes that thought they could clear land, pray to cargo gods so that magic silver birds would come to them bringing wondrous gifts of “cargo”

 

 

c. Economic ignorance often influences, even drives, economic policy.. 

d. Consider the world culture’s focus on jobs. Jobs are very important but means to an ends.

e. What is the end purpose of the economy?

f. Name a beneficial thing that would destroy jobs.

g. Name a harmful thing that would create jobs.

h. Economic ignorance often influences, even drives, economic policy. This results in massive reductions in incomes and increases in poverty, reduced health care and nutrition and much human suffering in general.  The world would be a far better place if citizens understood basic economic principles.

 US income is depressed about $5000 per year per household by harmful barriers to international trade!

 

 

2)  How can such economic ignorance persist given the massive costs?

 

a. Consider how long it took for knowledge that the earth was not the center of the universe to spread to average people.

 

 

b. How does counter-intuitive knowledge (like the earth isn’t flat and it’s moving through space) become common?

 Economic ignorance reflects a worldwide failure of public education

 

c. Once “cargo cult” policies are in place they will benefit some people even though such policies harm the economy overall.

 

 

 

3) Why does economics seem much more controversial than it actually is?

 

a. _____________________________ draws disproportionate attention

 

 

b. economists, like lawyers and others, often are paid (or will otherwise benefit)  to advocate bad policies, i.e. economists are human and sometimes __________________

 

 4) Here are the main areas that remain controversial, and where economists tend to divide along usual “conservative” or “liberal” lines:

Income redistribution-

Taxing the middle class and wealthy to provide welfare to the poor (and many who are not so poor). All agree this will harm the economy but liberals think reduced income growth and welfare dependency affects are minor, conservative economists think they are major such that these preprograms may even harm the poor.

Macroeconomic Stabilization (Keynesian economics)

Liberals think government spending financed by debt stimulates growth in the short run, though it can pose long run problems. Conservatives believe borrowing from Peter to send a government check to Paul provides no stimulus and just worsens government debt problems.

Liberals think printing currency to cause moderate inflation can be a stimulus. Conservative think inflation is a bad idea, more likely to cause financial bubbles and crises than provide any real stimulus.

4) Economic way of thinking

o   Economics takes as a given that people generally respond to _______________________in a predictable manner.

  ex. Store sales,  “How’s my driving stickers”

4b) What is economics?

Study of how we can most efficiently _____________________to allocate limited resources in order to best satisfy unlimited wants.

Many practical applications, this course mainly lays a foundation. Need to understand how the economy works before you can tackle how to make money in the stock market.

5) Key to Economic success: Cooperation

  ex. “Two people can produce more than twice as much as one” from Ecclesiastes

o   Division of Labor and trade = increased output

6)  How do we generate cooperation? 2 theoretical approaches, though one has clearly failed in practice, the other has not been attempted

Complete command and control (Complete Socialism)   \  polar (Various specialized Police control the economy

o   Complete free enterprise (Complete Voluntary)               /  opposites

o  

o   Where is the USA on that continuum?

7)  The evidence is overwhelmingly clear.  Historically, anything close to complete socialism has failed.   The more free enterprise the better is economic performance generally.

 

less government spending,

fewer government regulations,

lower tax rates,

fewer international trade barriers,

stable currency values (rather than excessively printing currency and causing inflation)

 

a. doesn’t mean all government programs are counterproductive—virtually all economists support government role in providing national defense, criminal justice system, enforcing property rights and basic environmental protection

 

b. have little to no experience with anything close to complete free enterprise; there is debate whether we should go that far

 

8) However, it is clear that many government programs do more harm than good.  Economists of differing political philosophies agree on many core issues and are more skeptical of government than people who don’t know economics.  

Brookings Institute    brook.edu   is a leading Democrat/liberal leaning think tank

 

Heritage Foundation    heritage.org   is a leading Republican/conservative leaning think tank

 

9) The two above are in general agreement on many economic issues, including most of those to be discussed in our class.

 

10)  Adam Smith, Father of economics

 

o   Book “Wealth of Nations” 1776

 

o   “People left free to pursue ___________ ___________interests will be guided as if by an invisible hand to also generally act in the interest of society”

  Example:   Baker cares about society but more about his family. To improve life for his family he will make great bread for society.

 

 

11)  Invisible Hand  key  is _______________ ______________________

Supply and Demand

· 1) DEMAND SIDE:

· Law of demand- the lower the price, the higher the demand.

· Change in quantity demand- caused by price change, move along demand curve.

· Change in demand- curve shifts to the right (for the same price people get more.) caused by SOMETHING OTHER THAN PRICE CHANGE. Those two are NOT the same!!!

 

 

 

         Demand Determinants – shift the whole curve, increase (decrease) is a rightward (leftward) shift

o   Preferences or taste

o   More consumers

o   Prices of complimentary goods

o   Quality

o   Prices of substitutes

o   Expected future price

o   Advertising

Disposable income Normal good - as income rises so does demand (cars, air travel) *most goods*

· Inferior good - income rises, demand decreases (spam)

· Neutral good - income change has no impact

 

 

         2)  Supply Curve

· Quantity supplied rises in a short time- prices are higher. (Cost per unit is higher) supply curve is all about cost. Quick changes are always more expensive.

 

· Change in quantity supplied- caused by price change, move along curve.

·  

· Change in supply - curve shifts to the right for increase (for the same price firms sell more more.) caused by SOMETHING OTHER THAN PRICE CHANGE. Those two are NOT the same!!!

 

 

 

         Supply Determinants

o   Lower (higher) production costs increases (decreases) supply

o   New Entry – Increases supply

o   New Exit – Decreases supply

 

3) Equilibrium

 

· P* (on a graph) is the equilibrium price-the price settled at as long as supply and demand are constant.

· A basic sign, if price is to low, demand is stronger you will know because quantities will be depleting quickly—leading to shortage if price isn’t raised.

· If there is a surplus of the product, the price is too high.

 

 

To determine new equilibrium price and quantity figure out which curve shifts where, then draw that shift and simply interpret the graph.