8 Guideposts of Economic Thinking 1 There are ALWAYS tradeoffs What you give up is your opportunity cost of next best alternative Why do taxi drivers quit early on rainy days Why don t celebrity marriages last NO SUCH THING AS FREE LUNCH 2 Individuals choose purposefully Referred to as economizing behavior try to get the most benefits for the least cost or effort AKA rational behavior 3 Incentives matter as the incentive goes up you will be more likely to do something or try to and vice versa 4 Think on the margin not in total or on average Marginal is incremental Rule to live by continue to engage in an activity as long as the marginal benefit is greater than the marginal cost How long should you study for a midterm 5 More information leads to better decision making but more information is costly to get 6 Many choices create a secondary effect Secondary effects usually comes later and is not visible Ex Punch in the arm 7 Value is subjective The primary effect is often immediate and visible 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 Economists do it with models Ex A campus map 1 There are always trade offs Individuals choose purposefully 2 Incentives matter 3 4 Think on the margin Don t make one of these errors It is Latin for other things constant 1 Violation of ceteris paribus We want to isolate variables so we typically allow only one to change at a tie 2 Good intentions do not necessarily result in good outcomes Example race to campus Milton Friedman there is nothing that does so much harm as good intentions 3 Association is NOT causation 4 Fallacy of composition What s good for the individual is good for the group Making this assumption is the fallacy Why do women endure the discomfort of high heels Chapter 2 1 When people trade one person gains and the other person loses a Referred to as a zero sum game 2 When people trade both parties gain a Wealth is created by trade 2 kinds of property rights 1 Common rights everybody owns it 2 Private rights only one person owns it 4 incentives created by property rights 1 Give proper care 2 Conserve for the future 3 Use resources in ways other people value 4 Mitigate cause possible harm to others The PPC can shift 1 Shift out growth produce more 2 Shift in shrink produce les Trade Output advantage 1 Law of comparative advantage Make the good for which you have a low opportunity cost and trade for the good which you have a high opportunity cost Transition make something you re good at and trade for something your not good at Chapter 3 Key points 1 Excess supply and excess demand are not unique points 2 Equilibrium is a unique point This is called supply and demand analysis You don t have to use graphs but its helpful Use this 3 step procedure o Identify the change o Determine if supply or demand is affected and how o Draw and read graph or reason through the change Adam smith an inquiry into the nature and causes of the wealth of nations Personal self interest directed by market prices is a powerful force promoting economic progress Many outcomes are the result of human action but not human design Chapter 7 macro 4 learning goals 1 Define gross domestic product and describe the key phrases of the definition 2 List the ways to measure gross domestic product and identify the source of higher income levels 3 Differentiate between real and nominal gdp 4 Examine the limitations of gdp as a measure of output Gdp a measure of output Definition of gdp the market value of final goods and services produced within a country during a specific time period Gdp as a measure of both income and output First way to measure gdp expenditure approach o Gdp sum of purchases o Gdp y c i g x o C consumption purchases for goods and services by consumers o I investment o G government purchases o X net exports exports imports Some gdp facts 2nd quarter 2010 Gdp 14575 billion C 102080 71 I 1839 13 G 2992 21 X 536 4 Second way to measure gdp income approach Add up income generated in the production of goods and services Kay point higher income levels are caused by more output This is more output comes first then higher income comes second Use CPI represents simple goods bought by households Market basket And GDP deflator accounts for almost all goods bought broader measure then cpi Inflation the percentage change in an index Applications in economics p 158 Fueleconomy gov Chapter 8 Economic fluctuations unemployment and inflation Proposal to reduce unemployment Recall those two goods you predicted wouldn t be produced in 2020 I propose we make it illegal to lay off those workers Keep them employed making these goods Some unemployment is unavoidable and arguably desirable Natural rate of unemployment normal frictional and structural unemployment The natural rate occurs when the economy is operating at a sustainable rate Full employment is when the natural rate of unemployment exists Actual and potential gdp Potential output the economies maximum sustainable output occurs when the natural rate of unemployment exists Potential output is perhaps best thought of as the 3 growth rate discussed earlier Actual output can be greater than or less than potential The effects of inflation Inflation a persistent increase in the general level of prices In February 2008 a loaf of bread was 200 000 Zimbabwe dollars In august 2008 that same loaf of bread was 1 6 trillion dollars That s 11 2 million percent Why is inflation bad 1 2 3 It reduces investment long term projects are more risky It distorts information delivered by prices relative prices are skewed because some prices adjust more quickly than others It results in less productive use of resources people will spend more time trying to combat the effects of inflation rather than engaging in productive activity Macro chapter 9 an introduction to basic macroeconomic markets Circular flow diagram o 4 key markets coordinate the circular flow of income Aggregate demand for goods and services What is aggregate demand o A summation of all goods and services desired o AD is the relationship between two variables amount of goods desired and the price level o Aggregate supply of goods and services The summation of all goods and services offered for sale The relationship between two variables amount of goods offered for sale and the PRICE level When thinking about AS you must
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