T-ShirtsWageDJ Pauly D (Comparative Advantage!)20$50The Situation10Willing to PayPrice = $51.$20CS: $152.$15CS: $103.$10CS: $5Total CS: $30What is Economics?Economics is the study of how we make choices under scarcityChoice: The act of selecting among alternativesScarcity: The concept that there is less of a good freely available from nature than people would likei.e. time, money, cars, etc.; air is not scarce, but clean air is scarceScarcityA. Scarcity is not the same thing as poverty!Scarcity = objectivePoverty = subjectiveB. Scarcity necessitates rationingRationing: allocating scarce goods to those who want them morei.e. 1st come, 1st serveIn a market economy, price is used to ration goodsC. Scarcity leads to competitive behavior = good! Allows for productivity, better goods and a range of pricesSimilar to Darwin’s Natural Selection — those who make good products/services will profitWhat do we do in the face of scarcity?When will the world run out of oil? NEVERFirst 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 alternatives8 Guideposts to Economic Thinking1.) Resources are scarce so decision makers must make trade-offs (No such thing as a free lunch)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.”- Richard BachFailure to understand this is one of the biggest mistakes made in economic reasoning2.) Individuals are rational: they try to get the most from their limited resourcesGreatest benefit at least possible costi.e. beer vs. liquor @ same price— will choose one based on preference. If indifferent and prices vary, will go with cheaper option*What is rational for one person may not be rational for everyone3.) Incentives matter: choice is influenced in a predictable way by changing incentivesi.e. money game, killer seatbelts, prices4.) Individuals make choices at the marginMarginal: describes the effect of a change in the current situationI.e. Ponderosa Buffet, Supersizing your extra value mealDrive or flyDrive8 hours$100Fly3 hours$400MB5 HoursMC$300Fly? If time > $60 = fly; if time < $60 = driveMB > MC = flyMB < MC = driveCost-Benefit Analysis: one will undergo an action when the marginal benefits outweigh the marginal costsMB > MC = goMB < MC = no5.) Information helps us make better choices but it is costlyWe 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.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 effectsSecondary effect: the indirect impact of an event or policy that may not be easily and immediately observableThings we do no expect; may cancel out primary effecti.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 yachtsi.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 another7.) The value of a good or service is subjectivei.e. FSU football ticketsi.e. How much would you pay for a bottle of water right now? What if you were days lost in the desert?Moving goods and services to those who value them most is a primary source of economic progress. Voluntary exchange makes both parties better off8.) The test of a theory is it’s ability to predictIf real world events are consistent with a theory (through testing), then that theory is validI.e. Red cars do not get more tickets, do not cause more accidents; bulls are not attracted to red tested theories have disproved these mythsShould always look at multiple or broad-set studiesPositive vs. Normative EconomicsPositive economics: the scientific study of what is (testable!)Facts. Has nothing to do with true or false/right or wrong!i.e. It is 100 degrees outside.Normative economics: judgments about what ought to be (not testable!)Opinioni.e. It is too hot outside.4 Pitfalls to avoid in Economic Thinking1. Violation of ceteris paribus principleCeteris paribus: other things constant; isolate control variablesi.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 normal2. The belief that good intentions guarantee desirable outcomesEconomists care about outcomes, not intentions!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 offi.e. Anti-depressant 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 anti-depressant medicationThe Nirvana Fallacy: the logical error of comparing the actual situation with its idealized counterpart rather than the actual alternativei.e. Child labor in sweatshops: in reality the kids, if not working, would be worse off because the alternatives are even worseOptions:$1 a day in a field$2 a day in a Nike Factory (protest would eliminate this option, making the people worse off)Starve to deathTo the locals, these “sweatshops” are the best opportunities they have— Usually the workers voluntarily decide to work thereBig companies would not want to increase
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