Ch. 1 The Economic Approach What%is%Economics?%• Economics%is%the%study%of%how%we%make%choices%under%scarcity%o Choice:%The%act%of%selecting%among%alternatives%o Scarcity:%The%concept%that%there%is%less%of%a%good%freely%available%from%nature%than%people%would%like% i.e.%time,%money,%cars,%etc.;%air%is%not%scarce,%but%clean%air%is%scarce%Scarcity%• A.%Scarcity%is%not%the%same%thing%as%poverty!%o Scarcity%=%objective%o Poverty%=%subjective%%• B.%Scarcity%necessitates%rationing%o Rationing:%allocating%scarce%goods%to%those%who%want%them%more% i.e.%1st%come,%1st%serve% In%a%market%economy,%price%is%used%to%ration%goods%• C.%Scarcity%leads%to%competitive%behavior%=%good!%Allows%for%productivity,%better%goods%and%a%range%of%prices%o Similar%to%Darwin’s%Natural%Selection%—%those%who%make%good%products/services%will%profit%What%do%we%do%in%the%face%of%scarcity?%• When%will%the%world%run%out%of%oil?%NEVER%• First%get%the%apples%from%the%floor%(cheapest),%then%when%those%run%out,%grab%them%from%the%first%branches%(more%expensive),%then%when%those%run%out,%go%to%the%next%level%of%branches%(even%more%expensive),%etc.%• As%oil%becomes%more%scarce,%the%prices%will%rise%to%a%point%where%people%will%no%longer%want%to%spend%that%much%and%will%begin%to%search%for%alternatives%8%Guideposts%to%Economic%Thinking%• 1.)%Resources%are%scarce%so%decision%makers%must%make%tradeWoffs%(No%such%thing%as%a%free%lunch)%o Opportunity%cost:%the%highest%valued%alternative%that%must%be%sacrificed%when%choosing%an%option%(2nd%best%option)% i.e.%an%hour%of%your%time,%how%you%spend%your%next%$15% “With%every%choice%you%rick%the%life%you%would%have%had;%with%every%decision,%you%lose%it.”W%Richard%Bach% Failure%to%understand%this%is%one%of%the%biggest%mistakes%made%in%economic%reasoning%• 2.)%Individuals%are%rational:%they%try%to%get%the%most%from%their%limited%resources%o Greatest'benefit'at'least'possible'cost%2%o i.e.%beer%vs.%liquor%@%same%price—%will%choose%one%based%on%preference.%If%indifferent%and%prices%vary,%will%go%with%cheaper%option%o *What%is%rational%for%one%person%may%not%be%rational%for%everyone%• 3.)%Incentives%matter:%choice%is%influenced%in%a%predictable%way%by%changing%incentives%o i.e.%money%game,%killer%seatbelts,%prices%• 4.)%Individuals%make%choices%at%the%margin%o Marginal:%describes%the%%effect%of%a%change%in%the%current%situation%o I.e.%Ponderosa%Buffet,%Supersizing%your%extra%value%meal%o Drive%or%fly%%Drive'8'hours'$100'Fly'3'hours'$400'MB%5%Hours%%MC%%$300% Fly?%If%time%>%$60%=%fly;%if%time%<%$60%=%drive% MB%>%MC%=%fly% MB%<%MC%=%drive%o CostWBenefit%Analysis:%one%will%undergo%an%action%when%the%marginal%benefits%outweigh%the%marginal%costs% MB%>%MC%=%go% MB%<%MC%=%no%• 5.)%Information%helps%us%make%better%choices%but%it%is%costly%o We%can%never%know%all%the%information.%It%will%never%be%perfect%information.%But,%the%more%we%know,%the%better%we%know%what%the%MB%and%MC%are.%o %i.e.%New%car%(large%decision%%more%research)%vs.%New%pencil%(smaller%decision%%rational%to%stop%researching%early)%• 6.)%Beware%of%secondary%effects:%economic%actions%generate%both%direct%and%indirect%effects%o Secondary%effect:%the%indirect%impact%of%an%event%or%policy%that%may%not%be%easily%and%immediately%observable% Things%we%do%no%expect;%may%cancel%out%primary%effect% i.e.%Yacht%tax—%meant%to%hurt%the%rich%class,%but%instead%severely%hurt%the%middle/lower%class%workers%who%lost%their%jobs%because%the%rich%were%no%longer%purchasing%yachts% i.e.%Trade%restrictions—%putting%a%tax%on%Japanese%cars%to%boost%auto%production%in%US—%meant%to%boost%US%production,%but%because%a%tariff%has%been%put%on%incoming%cars,%Japan%has%put%a%tariff%on%American%corn.%Now%boosting%an%industry%that%was%not%doing%well%(American%auto)%and%hurting%an%industry%that%was%doing%well%(American%corn).%Government%is%not%creating%jobs,%just%shifting%workers%from%one%industry%to%another%3%• 7.)%The%value%of%a%good%or%service%is%subjective%o i.e.%FSU%football%tickets%o i.e.%How%much%would%you%pay%for%a%bottle%of%water%right%now?%What%if%you%were%days%lost%in%the%desert?%o Moving%goods%and%services%to%those%who%value%them%most%is%a%primary%source%of%economic%progress.%Voluntary%exchange%makes%both%parties%better%off%• 8.)%The%test%of%a%theory%is%it’s%ability%to% p redict%o If%real%world%events%are%consistent%with%a%theory%(through%testing),%then%that%theory%is%valid%o I.e.%Red%cars%do%not%get%more%tickets,%do%not%cause%more%accidents;%bulls%are%not%attracted%to%red%%tested%theories%have%disproved%these%myths%o Should%always%look%at%multiple%or%broadWset%studies%Positive%vs.%Normative%Economics%• Positive%economics:%the%scientific%study%of%what%is%(testable!)%o Facts.%Has%nothing%to%do%with%true%or% fa lse/right%or%wrong!%o i.e.%It%is%100%degrees%outside.%• Normative%economics:%judgments%about%what%ought%to%be%(not%testable!)%o Opinion%o i.e.%It%is%too%hot%outside.%4%Pitfalls%to%avoid%in%Economic%Thinking%• 1.%Violation%of%ceteris%paribus%principle%o Ceteris%paribus:%other%things%constant;%isolate%control %variables%o i.e.%buying%roses:%“If%the%price%of%roses%increases,%then%people%buy%less%roses”%[ceteris%paribus=%on'all'non<Valentines'days]% On%Valentines%Day,%people%buy%more%roses%even%if%the%prices%are%higher%than%normal%• 2.%The%belief%that%good%intentions%guarantee%desirable%outcomes%o Economists%care%about%outcomes,%not%intentions!%o i.e.%Endangered%species%act:%If%a%woodpecker%was%living%in%a%tree%on%your%property,%you%could%not%touch%the%area%50%feet%surrounding%it%by%law—%people%started%cutting%off%all%of%the%trees%on%their%property—%now%woodpeckers%have%nowhere%to%go—%made%woodpeckers%worse%off%o i.e.%AntiWdepressant%medication:%had%a%label%that%read%“Warning:%may%increase%suicidal%thoughts”%on%the%labels—%depressed%and%already%prone%to%suicidal%thoughts%people%avoided%because%thought%it%would%increase%suicidal%thoughts—%higher%suicide%rates%because%depressed%people%were%not%taking%their%prescribed%antiWdepressant%medication%o The%Nirvana%Fallacy:%the%logical%error%of%comparing%the%actual%situation%with%its%idealized%counterpart%rather%than%the%actual%alternative%4% i.e.%Child%labor%in%sweatshops:%in%reality%the%kids,%if%not%working,%would%be%worse%off%because%the%alternatives%are%even%worse% Options:% $1%a%day%in%a%field%
View Full Document
Unlocking...