Intro to Economics Essay

Reasons to study economics
1. better understand the world in which you live -give you an insight into human behavior
2. be a more astute participant in the economy (makes you wealthier)
3. give you a better understand the potential and limits of economic policy -helps you be a more informed citizen (vote smarter)

Macro vs. Micro
-Micro: how individuals, families, single markets, single firms, how people/ companies make decisions
-Macro: how all of the markets work together; closely associated with govt economic policy -Fiscal Policy: congress (tax and spend) -Monetary Policy: Federal Reserve Bank (central bank of the U.S.) --> control money supply

Correlation vs. Cause: -the relationship between two things vs how one thing affects the other -making sure its causal not correlation: in science, they control it by only changing 1 variable and keeping the rest the same -independent variable vs. a dependent variable -"All other things being equal": look at one relationship and assume that everything else remains constant (ex: Price vs Demand)
-reverse causality: where the dependent variable causes the independent variable -ex: Amount of Crime vs number of police -you can make an argument that you might raise the crime rate by adding more police

Positive vs. Normative
-positive: just the facts -positive economists: just look at the facts (ex: income tax--> close the gap between rich and poor, savings rate will go down; sales tax--> raises the savings rate, does nothing to close gap) -using the facts to determine the best course of action without imposing their values
-normative: imposes a certain value judgement on things

10 Principles of Economics
1. People and countries face trade offs -Guns vs. Butter (1960's): the decision of whether to invest money in national defense or in raising the standard of living of its people -Vietnam War vs. Great society: the war versus programs to close gap between the rich + poor -Efficiency vs. Equality: incentive to work by lower and upper class would go down; lower class receives handouts and upper class is taxed into ground -efficiency: getting the most out of your scarce resources (highest GDP out of resources) -Consumer goods vs. Capital goods: more capital goods you produce, the less consumer goods you can produce (Chinese example: expand capital goods but not one of consumer goods) -consumer more now vs. consume more later: how much do we save; low saving rates= low investment rates and high consumption rate and vice versa;

2. Opportunity cost: what you have to give up in order to get something -there is a cost for everything, time and money include -ex: college: 1. tuition 2. The value of your lost time (4 years 3. investment (the best/most lucrative alternative such as rent from a house)
3. People maximize their utility -people are rational and think on the margins -marginal cost: cost of making one more (something) -constantly changing -marginal benefit: the benefit you gain from making one
4. People respond to incentives -learn how to predict how people will respond to incentives -law of unintended consequences: intervention in the economy may have unintended effects -ex: economics show how many public policies fail because they do not anticipate what incentives will be created by their policies
5. Free trade makes most people better off -Market economy: a method of organizing an economy where decisions are based on supply and demand -Most economists: a) believe people are rational b) believe people choose what is in their perceived self interest (people are selfish) c)

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