INTRO TO MACROECONOMICS http psyentificnonsense files wordpress com 2013 04 gwartney macroeconomics private and public choice 13th ed pdf 8 29 2013 Economics How humans make choices The study of how humans make choices Things con strain us We all have needs but what about desires Limited needs unlimited desires we are trying to meet these needs with limited resources Scarcity A free good is something so abundant in nature that if the price were 0 we still wouldn t run out i e sunlight salt water dirty air A scarce good is just about everything else It is not so abundant in nature that if the price were 0 you still couldn t get as much as you want How do we allocate who gets what in a market economy U S Putting a price on something first come first serve rationing Time can be a scarce resource Chick fil a example you have retired people and college stu dents You won t see doctors or lawyers lining up Allocating with bias is inefficient Price is un bias price does not care about who is buying so bias is eliminated However if you have a product someone needs and they can t afford it Priorities influence decisions most people can afford a ferrari if they make tremendous sacri fices 4 major resources A resource is any good used to produce another good 1 Land natural resources anything contained within the land 2 Labor mental physical labor 3 Capital Physical and financial a bulldozer or a sewing machine 4 Entrepreneurship anyone who brings together the other three forms of resources Land L return is rent Labor N return is wages Capital K return is interest Entrepreneurship profit pi symbol Communism From each according to his ability to each according to his need Positive vs Normative Economics Positive Objective statement doesn t have to be true just testable Normative subjective statement someone s judgment opinion The word should can really trip you up Suppose this If I exercise eat less I should lose weight this is still positive because it s testable 23 050 poverty line it s normative because its an arbitrary judgment 9 3 2013 The Economic Way of Thinking Principles of Economic Thinking 1 There is always a tradeoff we call that our opportunity cost there is always a cost seat belts cost 50 billion a year saves 400 lives statistical murder 2 Individuals choose purposefully therefore economically Trying to get the most for least An example would be suppose you re getting taken out for a steak lobster or pasta vegetarian dinner If three things cost the same which one would you choose the one you like best There is a method to the way we do things There is a logical manner in the way we make choices Utility how much enjoyment you get out of something The benefit the satisfaction The high est utility is the most satisfaction How do we measure utility This weekend you ran into someone at an ice cream place One scoop scenario Whoever outbid on the ice cream had the highest utility Whatever he paid is that utility This is actually not a good measure of utility The idea you can measure utility based on dollars is not ideal The drawback is that not everyone values money the same If you have three things that give the same utility you would choose the one that cost the least A transactions cost is anything beyond the price that you have to pay to get that thing a text book costs 89 dollars way across campus but 90 dollars at the store right in front of you You will probably just choose the store right in front of you 3 Incentives matter Does FSU want you parking in handicapped spaces how do you know People respond to incentives in a predictable way Utility Amanda the potty training video got a lot of benefit from M Ms She was MAXIMIZ ING her utility by controlling her behavior During collective decision making government tries to create the right incentive to get us to do what they want Sometimes the government says I m going to tax homes with windows So the incentive is one thing but the result is very different When have government programs had one intended consequence but the actual unintended consequences were very different Legislating morality the government created a law against drinking alcohol There intentions were to clean up America The unintended consequences were gangs bootlegging and all this crime 4 Economic thinking is marginal thinking People make decisions at the margin Marginal just means additional benefit The way you think marginally is this is what i m going to do what would an additional choice entail last month I had to choose between food and my prescription drugs 5 Information is a costly good As such we know that we probably don t get fully informed on every decision we re going to make Economist assume since information is expensive you are going to be let s say an uniformed voter You re on your way to class and you go into a store to buy a pencil You didn t research which pencil is best So you don t always have a well informed decision Buying a car would be a different story We have people voting who are less than per fectly informed Rational ignorance you remain rationally ignorant as long as you ve done a benefit analysis and figure out the cost of knowing my representatives name is bigger than the benefit of knowing that name The idea that we remain ignorant about something when the cost of knowing doesn t outweigh the benefit 6 Remember the secondary effects Houses being taxed with windows Their intention was to get revenue from taxing homes but everyone built houses without windows and the backfire was now people aren t getting enough vitamins from the sun to avoid being taxed Pitfalls in economic thinking Ceteris paribus means all else equal 1 Violating the ceteris paribus condition don t forget you can only change one thing at a time hold things constant If you exercise more you shouldn t necessarily eat more You should hold eating constant 2 Good intentions do not guarantee good outcomes seatbelt laws Causing more people to drive on highways instead of flying on airplanes causing more highway accidents The tragedy of the commons When things are owned commonly instead of privately they can be abused or overused like fishing in the sea 3 Association is not causation every time it rains i see folks with umbrellas Conclusion there fore umbrellas cause rain erroneous conclusion Are umbrellas and rain causally related Yes they are But umbrellas do not cause rain Other examples of correlation is not causation Smart people wear glasses I see overweight people
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