Chapter 1 What is Economics the study of how we make choices under scarcity 1 Choice selecting something among alternatives 2 Scarcity concept that there is less of a good available than people would like ex money time textbooks a Rationing allocating scarce goods to those who want them b Price is used to ration goods c Leads to competitive people Resources A input used to produce an economic good a Human resources b Physical resources c Natural resources Capital human made resources used to produce other goods and services Economic Thinking 1 Resources are scarce so there are trade offs 2 Opportunity costs the highest valued alternative that must be sacrificed when choosing a option a Hour of your time 3 4 individuals are rational they try to get the most from their limited resources what is rational for one might be different for another incentives matter choice is influenced in way by changing incentives a prices 5 people make decisions at the margin a marginal describes effect of a change in the current situation 6 cost benefit analysis one will undergo an action when marginal benefits outweigh the marginal costs information is costly but helpful 7 8 generate indirect and direct effects a secondary effect indirect impact of an event that may not be immed Observable 9 value of a good is subjective 10 the test of a theory is its ability to predict Positive vs normative economics Positive study of what is testable Normative judgments about what people think not testable Pitfalls to avoid 1 violation of other things constant principle 2 good intentions don t always equal desirable outcomes 3 assoc is not causation fallacy of consumption 4 MACRO human behavior on a large scale
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