FSU ECO 2023 - Chapter 1: The Economic Approach

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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 offers 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 difference in the cost and benefits between two alternatives. •Secondary Effects - 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 & Tradeoffs - Scarcity leads to tradeoffs 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 Tradeoffs •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 effort. 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 tradeoffs •2. Individuals choose purposefully •3. Incentives matter •4. Think on the margin 6. Many Choices Create a Secondary Effect •The primary effect is often immediate and visible •The secondary effect 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 •Economists use data and information generated by people to explain and predict actions !Positive and Normative Economics: •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 !Pitfalls to Avoid in Economic Thinking: Don’t Make These Errors: 1. Dont Violate Ceteris Paribus •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 •These are called “secondary effects” 3. Association is NOT Causation •Just because two things happened around the same time, that does not mean that one caused the other to happen •For Example: If you change clothes for a football game, and the team wins, its not because you changed clothes 4. Fallacy of Composition •Wrong Assumption: Whats good for the individual is good for the group •Making this assumption when its false is the fallacy !Random Things to Know: •Over time living standards improve, but this is not be accident. Things get better and cheeper. But living standards do not always improve. !!!!!!!!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 through market prices •Socialism - When the Gov. owns machines, buildings, land, and decides what goods will be produced !!Trade Creates Value: Two Opposing Views of Trade: •1. When people trade, one person gains and the other


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FSU ECO 2023 - Chapter 1: The Economic Approach

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