Chapter 1 The Economic Approach Chapter Terms Definitions Scarcity There is less of a good freely available from nature then people would like Resources The ingredients people used to produce goods and services Capital Human made resources Natural Physical Human Objective Fact based on observable phenomena Subjective Opinion based on personal preference and value judgements Rationing Allocating a limited number of a good or resource among people who would like it Opportunity Cost The Best alternative that must be sacrificed as the result of choosing something else Economizing Behavior Choosing the option that o ers the greatest benefit at the least possible cost Utility The benefit or satisfaction a person expects from a choice or course of action Marginal The di erence in the cost and benefits between two alternatives Secondary E ects The bad indirect impact of something that may not be easily or immediately observable Scientific Thinking Developing a theory and testing it against events in the real world Positive Is fact it is what is they can be confirmed or proven false by scientific testing Normative Is opinion it is what ought to be these cannot be confirmed or denied Ceteris Paribus A term that means all other things constant Fallacy of Composition What is good for one may not be good for the whole What is economics about Economics Economics tries to explain and predict the behavior of consumers firms and government Economics is a social science Scarcity Scarcity means that there is limited or scarce supply of almost everything Scarcity Tradeo s Scarcity leads to tradeo s which result in people making choices Scarcity requires that some wants remain unfulfilled Scarcity means there is not enough for everyone to have what they need want Someone gets left out The economic way of thinking The 8 Guideposts to Economic Thinking 1 There are Always Tradeo s What you give up for something else is your opportunity cost the value of the next best alternative Common Mistake The opportunity cost is not the sum of every thing you give up Nothing is 100 free there is no such thing as a free lunch Opportunity costs refer to more than just money 2 Individuals Choose Purposefully People try to get the most benefits for the least possible cost or e ort This is referred to as economizing rational behavior 3 Incentives Matter As incentives go up people will be more likely to do something or try to and vice versa Incentives are not always money 4 Think on the Margin Not in the Total or on Average Marginal means additional or incremental Marginal Benefit is additional benefit Marginal Cost is additional cost Rule to live by Continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost 5 More Information Leads to Better Decision Making but More Information is Costly to Get Refer back to 1 4 1 There are always tradeo s 2 Individuals choose purposefully 3 Incentives matter 4 Think on the margin 6 Many Choices Create a Secondary E ect The primary e ect is often immediate and visible The secondary e ect usually comes later and is not as visible 7 Value is Subjective Beauty is in the eyes of the beholder Value is determined by the purchaser 8 Economic Thinking is Scientific Thinking Positive and Normative Economics Pitfalls to Avoid in Economic Thinking Don t Make These Errors 1 Dont Violate Ceteris Paribus Economists use data and information generated by people to explain and predict actions Positive Economics Is fact it is what is they can be confirmed or proven false by scientific testing Normative Economics Is opinion it is what ought to be these cannot be confirmed or denied Ceteris Paribus means all other things constant We want to isolate variables so we typically allow only one to change at a time 2 Good Intentions do not Always Lead to Good Outcomes Just because two things happened around the same time that does not mean that one caused the other to For Example If you change clothes for a football game and the team wins its not because you changed Wrong Assumption Whats good for the individual is good for the group Making this assumption when its false is the fallacy These are called secondary e ects 3 Association is NOT Causation happen clothes 4 Fallacy of Composition Random Things to Know standards do not always improve Over time living standards improve but this is not be accident Things get better and cheeper But living Chapter 2 Some Tools of the Economist Chapter Terms Definitions Transaction Cost is a monetary or non monetary barrier that lowers the benefits of trade Middlemen Arrange trades between buyers and sellers and reduces transaction costs Property Rights The right to use control and obtain the benefits from a good resource Private Property Rights Property Rights held by am owner and is protected against others by laws Production Possibilities Curve A curve that outlines all possible outputs that could be produced Investment The creation or purchase of resources Ex Machinery education Technology The technological knowledge available at any given time Invention The creation of a new product process Innovation The improvement of an invention Entrepreneur A person who introduces a product or service Creative Destruction When new methods of production replace old ones Division of Labor Breaking down product production to a series of tasks Law of Comparative Advantage The total output of a company nation or individuals will be greatest when the output of each good is produced by the person s with the lowest opportunity cost for the good Market Organization Method of organization where parties make plans decisions form unregulated markets Capitalism Economic system in which productive resources are owned privately and goods are allocated Socialism When the Gov owns machines buildings land and decides what goods will be produced through market prices Trade Creates Value Two Opposing Views of Trade 1 When people trade one person gains and the other person loses Refereed to as a zero sum game 2 When trade occurs both parties gain Wealth is actually created by voluntary trade Trade Creates Wealth and Promotes Economic Progress With or without production with or without money exchanges voluntary trade is expected to benefit both parties involved Potential trades 1 Finished goods exchanged through barter 2 Finished goods exchanged for money 3 Businesses buying resources 4 Consumers buying products The Importance of Property Rights
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