Basic Economic Theories

After we do science (prove it)

Don't get ahead of yourself though...

Have to examine Falacies first

A fallacy is a hypothesis that has been proven false but is still accepted by many people, because at first glance, it makes sense.

Most widely accepted fallacy???

Current recommendation...

What does science say?

60% fat, 35% protein, 5% carbohydrate

So why are we doing things wrong?

No idea...

Let's say I sell popcorn

I like money, so i make lots of popcorn

but other popcorn sellers like money too...

We have way too much popcorn

Popcorn becomes cheap

I spent lots of money to make extra popcorn so people would buy it, consequently making me more wealthy. Other people had the same idea. All of us ended up unhappy with the outcome.

Fallacy of comoposition

This works other way too

Free trade is awesome

Some people lose their jobs

post hoc fallacy (cause and effect Fallacy)

(A) event precedes another behavior/event (B) and concludes that behavior/event A must be the cause of behavior/event B.

Every time i go to a leafs game

Therefore, we can conclude

My roses blossom every spring

Fallacy of single causation

Based on the premise that a single factor or person caused a particular event to occur.

He did this because his gf dumped him

The housing crisis in the states was not caused by one single factor. Rather a bunch of things adding up.

Law of diminishing returns

I run a restaurant

To keep my patrons happy, I have 2 servers employed during dinner time. Some of my patrons feel neglected and complain it takes too long to get service from my servers.

To remedy this, I hire one more server. The patrons are complaining less, but I still hear a few comments here and there

I hire one more and now hear no complaints at all. Would it make sense to hire another?

outputs will increase when a PARTICULAR input increases

Law of increasing returns to scale

Back to my restaurant. Is there a way I can hire more waiters and earn more money?

My restaurant would have to get bigger

When ALL productive resources are increased simultaneously, we can grow the business and won't drop off profit by just adding/removing one input.

Production possibilities curve

Wants always exceeds available resources, so people have to make choices.

provides visual model of production choices

Assumptions

• Only two products can be produced by this simple economy
• The economy has fixed technology and resources
• The economy is at full employment 

two products only

There are consumer goods (products and services which satisfy human wants) and captial goods (goods used in the production of other goods).

Fixed tech and resources

Economy at full employment

Law of increasing relative cost

In order to get greater amounts of one product, one has to sacrifice an ever-increasing amount of other products.

Even though production is changing by a constant amount each time, the quantity of production of the other product changes increasingly each time.

Outer limit of curve is called frontier

This happens only if all productive resources are fully employed... Doesn't happen though

We're usually inside or below the frontier, but the goal is to reach the frontier and move beyond it. We can move beyond the curve by increasing technology, population growth, etc.

Quiz 1