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| | '''Next week: Midterm exam, about 30 multiple choice questions. Closed book. No penalty from wrong answers (the CLEP exam has no penalty for wrong answers either).''' | | '''Next week: Midterm exam, about 30 multiple choice questions. Closed book. No penalty from wrong answers (the CLEP exam has no penalty for wrong answers either).''' |
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| − | <Add material about the meaning of the word "economy" from the Greek word for "household", and elaborate on the significance of that>
| + | The word "economy" is derived from the Greek word for "household", which is the most basic and perhaps the most efficient unit of an economy. Think of how there is division of labor; diminishing marginal utility for activities; supply and demand for food in the refrigerator; both "long run" and "short run" decisions; economies of scale in buying dinner; and very few transaction costs within a family. The family or household unit may be the most efficient structure possible. |
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| − | It is worth emphasizing two important points. First, keep “supply” and “demand” separate in your mind. When asked about “returns to scale,” for example, realize that is purely a function of supply. It has nothing to do with demand. Do not cite the demand when determining the returns to scale. This is a common mistake. Avoid it.
| + | As we prepare for the midterm next week, it is worth emphasizing two important points. First, keep “supply” and “demand” separate in your mind. When asked about “returns to scale,” for example, realize that is purely a function of supply. It has nothing to do with demand. Do not cite the demand when determining the returns to scale. This is a common mistake. Avoid it. |
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| − | Second, realize that the market acts in ways that are contrary to what you would prefer. We may care what happened yesterday, for example, but the demand curve does not. Nor do stock buyers care if selling off their shares will cause a company to go out of business and everyone to lose their job. The market maximizes efficiency, which can sometimes have unfortunate or counter-intuitive results. Someone who opposes communism in China can affect his own buying decisions, but do not confuse his views and utility with that of the market. | + | Second, realize that the market acts in ways that are contrary to what you would prefer. We may care what happened yesterday, for example, but the demand curve does not. Nor do stock buyers care if selling off their shares will cause a company to go out of business and everyone to lose their job. The market maximizes efficiency, which can sometimes have unfortunate or counter-intuitive results. Someone who opposes communism in China can affect his own buying decisions, but do not confuse his views and utility with that of the market, which may not care at all whether something cheaper was made in communist China. The market sets the price. |
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| | Let’s pause for a moment and divide economic concepts into three levels of difficulty: Easy, Medium and Honors: | | Let’s pause for a moment and divide economic concepts into three levels of difficulty: Easy, Medium and Honors: |
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| | == Review == | | == Review == |
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| − | "Variable" costs "vary with the amount of output.
| + | Here are some common mistakes or misunderstandings that your Instructor has seen on homework: |
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| − | "Returns to scale" is in the "long run" and has nothing to do with "marginal" effects. The term is "deceasing" returns to scale when productivity does not increase as fast as costs when the size of a firm is increased. The term "diminishing" is a "marginal" concept that applies to the very different concept of "diminishing marginal utility." | + | *a "transaction cost" is not the overall cost of the transaction. It is the portion of the overall cost that is due to "friction", or the time and expense of obtaining what you really want from the transaction. Examples include tips, taxes, commissions, salesmen, broker fees, gas to drive there, etc. |
| | + | *a "variable cost" is not a cost that varies with demand. It is a cost of a firm that varies with output. It is a cost that grows bigger as the number of units made grow bigger, such as electricity for staying open later, printing charges for making more copies of lectures, gas costs for taking more taxicab rides, etc. |
| | + | "Returns to scale" is in the "long run" and has nothing to do with "marginal" effects. There are not "diminishing" returns to scale like "diminishing marginal utilitym" which suggests a rapidly declining rate. Instead, there are "decreasing" returns to scale. |
| | + | *In calculating overall utility, keep in mind in which order someone chooses to maximize his marginal utility. Exam questions might ask how someone specifically spent his third hour of time based on assumptions about how the utility for different activities diminish over time. |
| | + | *the concept of "marginal product" is specific to an input, as in "marginal product of labor," which is the additional overall output (product) produced due to an additional unit of that input (labor). |
| | + | *speaking of inputs, we might as well include this concept: "factors of production." These include the four basic resources for a firm or company: land, labor, capital and entrepreneurship. Exam questions typically ask most about the input of labor for a firm or company |
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| − | == Applying Economic Insights to Politics == | + | == Example 1: Economic Insights to Politics == |
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| | <campaign spending divided by votes obtained> | | <campaign spending divided by votes obtained> |
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| | <transaction costs> | | <transaction costs> |
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| − | ==Example: Homeschool Dinner Event== | + | ==Example 2: Homeschool Dinner Event== |
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| | To illustrate the practical aspects of microeconomics, consider a dinner event we held in 2004 and 2005. The goal was to maximize attendance while making a small profit. To maximize efficiency, we set up committees to handle a division of labor. | | To illustrate the practical aspects of microeconomics, consider a dinner event we held in 2004 and 2005. The goal was to maximize attendance while making a small profit. To maximize efficiency, we set up committees to handle a division of labor. |