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FSU ECO 2013 - Economic Approach III

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ECO2013 Lecture 3 Outline of Last LectureI. Eight guideposts to economic thinkingOutline of Current Lecture I. Eight guideposts to economic thinkingII. Positive and normative economicsIII. Four pitfalls to avoid in economic thinkingCurrent Lecture Chapter 1: Economic Approach (continued)- Cost-benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs 5. Information helps us make better choices, but is costly 6. Beware of Secondary Effects: economic actions generate both direct and indirect effects- Secondary effects: the indirect impact of event or policy that may not be easily and immediately observable  7. The value of a good or service is objective- Because goods are subjective voluntary trade creates value- Moving goods and services to those who value them most is a primary source of economic progress 8. The test of a theory is its ability to predict- If real world events are consistent with a theory, that theory is valid Positive v. Normative Economics Positive economics: the scientific study of what is (testable)\ Normative economics: Judgments about what ought to be (not testable) 4 Pitfalls to avoid in economic thinking: 1. Violation of ceteris paribus principle - Ceteris paribus: other things constant 2. Good intentions don’t guarantee desirable outcomes 3. Association is not causation- Example) superstitions 4. Fallacy of composition: belief that what is true for one might not be true for all Microeconomics v. Macroeconomics Microeconomics: Focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms Macroeconomics: Focuses on how human behavior affects outcomes in highly aggregated markets such as the nation’s markets such as the nation’s market for


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FSU ECO 2013 - Economic Approach III

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