Section 1 Basic Economic Principles Is life getting better or worse What objective measures should we analyze Life Expectancy Health Income Education Entertainment Look at the changes in Our transportation i e computers laptops Cars are better with better technology included Our technology Our medicine Our entertainment Video game graphic progression i e surgery and CAT scans Life has gotten so good that people have forgotten how good they have it The Study of Economics Economics the science of how individuals make choices under scarcity Science developing and testing objective theories Individuals a person or group of people Choices the act of selecting among alternatives Scarcity the concept that there is less of something freely available from nature than people would like Ex Time money cars etc Scarcity Not the same thing as poverty depends on time and place Necessitates rationing Rationing allocating scarce goods to those who want them In a market economy price is used to ration goods Scarcity leads to competitive behavior and competition is good What do we do in the face of scarcity When will run out of oil Never Resources An input used to produce an economic good Human resources human capital Physical resources physical capital Natural resources Capital human made resources used to produce other goods and services Examples of Human Capital Albert Einstein Chuck Norris Twelve Key Elements of Economics Using the economic way of thinking things are not always as they appear 1 Incentives Matter Incentives matter choice is influences in a predictable way by changing incentives o ex Money game the difference between the people racing to get 0 01 1 00 and 5 00 o ex Killer seatbelts the number of accidents went up when people HAD to wear seatbelts by law because people drive more recklessly o ex Prices This economic principle influences all people o Students more likely to do an assignment that s worth more points More likely to people in class on an exam day than the Thursday before Spring Break o Politicians o Altruists Mother Theresa s group was trying to run a shelter but they had to move it elsewhere because the costs were too and had to keep moving for this reason o Criminals Security system signs prevent robberies Individuals are rational they try to get the most from their limited resources greatest benefit at least possible cost o Note What is rational for one person may not be Utility rational for everyone The subjective benefit or satisfaction a person expects from a choice or course of action Another word economists use for happiness 2 There is No Such Thing as a Free Lunch Because resources are scarce trade offs must be made Even Opportunity Cost if it is free to you it is not free to society sacrificed when choosing an option The highest valued alternative that must be o ex An hour of your time the hour you spend doing something you can t spend doing anything else o ex How you spend your next 15 the 15 you spend on one thing you can t spend on anything else o ex Airbags vs 50 billion to put airbags in all new cars and saved 400 lives but can that same money be used to save more lives in things like cancer research or something like that o With every choice you risk the life you would have had with every decision you lost it Richard Bach What is usually the biggest cost of getting your college degree o Working for those four years o Football player example Johnny Manziel misses his junior and senior year of college in order to go Pro and make at LEAST 5 5 million 3 Decisions Are Made at the Margin Margina situation Marginal Change or Additional l Describes the effect of a change in the current o ex Ponderosa Buffet All you can eat side bar 7 50 OR Steak AND All you can eat side bar 9 00 Marginal Cost MC 1 50 Marginal Benefit MB Steak o ex Supersizing your extra value meal MB Bigger drink and more fries MC 0 70 o ex Drive or Fly Going to Miami Drive 8 hours for 100 worth of gas OR Fly 3 hours for 400 MB 5 hours vs MC 300 If your time is worth 60 an hour then fly if it s worth 60 an hour then drive Law of Diminishing Marginal Utility the marginal utility derived from additional consumption will eventually decline As consumption increases o The Diamond Water Paradox Don t confuse total value with marginal value o This helps us answer questions about our world 1 Why do top pro wrestlers and actors typically make more than top nurses and teachers 2 Why do people cheat on their spouses Comparison between your 1000th hour with your spouse and your 1st hour with someone else Marginal thinking may also be why a stepwise criminal justice punishment system might be more effective than a capital system the marginal benefits and the marginal costs when making a decision one compares Cost benefit analysis o To be economically efficient 1 All actions generating more benefits than costs should be undertaken 2 No actions generating more costs than benefits should be undertaken ex J R PuffnStuff sells bongs blunts pipes and other smoking paraphernalia Mr High all the time needs to buy blunt wraps and a bong He notices that if he buys 9 boxes of blunt wraps at 2 00 per box then the bong is 1 50 However J R Puffnstuff is running a special that if you buy 10 boxes of blunt wraps then the bong is free What is the marginal cost of the 10th box of blunt wraps 50 cents This is why people will rationally choose to not be fully informed when making decisions o ex New car vs New pencil 4 Voluntary Trade Promotes Economic Progress Voluntary vs Coerced Coercion Someone will devote resources to make you worse off if you don t comply Because the value of a good or service is subjective voluntary trade moves goods from people who value them less to people who value them more o ex The candy game Trade makes larger output and consumption levels possible because it allows us to specialize in what we do best How much of what you have or use everyday do you make yourself Pretty much nothing The Law of Comparative Advantage individuals economies and nations should produce that which they can make at a lower opportunity cost and trade for everything else o ex Should LeBron James clean his own house No he could pay someone else to do it and spend his time doing something else that could make him more money It s cheaper for him to have someone else clean his house o ex Who should mow the lawn Hours to mow the lawn per hour cost Bob 5 5 25 Bob s father 2 20 40 Bob should mow the lawn because more money would