FSU ECO 2023 - Notes- Chapter 1: The Economic Approach

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Eco2023 Notes- Chapter 1: The Economic Approach4 Learning Goals:1. Identify and list the critical components of economics2. List and provide examples of the 8 guideposts of economic thinking3. Distinguish between 2 types of economic statements4. Avoid making 4 common mistakesImproving standards of living doesn’t just happen by accident- Actually, they don’t have to improve at allWhat Is Economics About?- Economics tries to explain and predict the behavior of consumers, firms, and gov’t.- Historically, mechanisms that have been used to deal with the problem of scarcity:o Forceo Tradition (emphasized past ways, relied on families)o Authority (gov’t and church)o Marketo Combinations of 1-4- Scarcity and Tradeoffso Scarcity requires that some wants remain unfulfilledo Issues of equity, justice, and fairness are embedded with scarcityThe Economic Way of Thinking- Things are not always as they appear to beGuidelines to the economic process:1. There are ALWAYS tradeoffsa. What you give up is the value of your opportunity costb. It’s giving up the next best thing NOT the sum of all you gave up2. Individuals choose purposefully3. Incentives matter********a. As the incentive goes up, you will be more likely to do somethingb. Incentive DOESN’T have to be money4. Think on the margin, not in total or on averagea. Marginal means additional or incrementali. Water/diamond paradoxb. Rule to live by:i. Continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost5. More information leads to better decision-making, but more information is costly to get6. Many choices create a secondary effecta. The primary effect is often immediate and visibleb. The secondary effect usually comes later and is not as visiblei. Example: punch in the arm (primary effect- punch back, secondary effect- bruise)7. Value is subjectivea. Value is determined by the purchaser8. Economic thinking is scientific thinkinga. Economists use data and information generated by people to explain and predict actionsb. Economists “do it with models”Question 1.1: When economists say that people choose rationally, this means peoplerespond in predictable ways to changes in costs and benefits.Positive & Normative Economics- Read essay on BlackboardPitfalls to Avoid in Economic Thinking- Don’t make one of these errors:o 1. Violation of ceteris paribus Ceteris Paribus is Latin for “other things constant” We want to isolate variables so we typically allow only one to change at a time- EX: stomach acheo 2. Good intentions do not necessarily result in good outcomes EX: using someone else’s clickero 3. Association is NOT causationo 4. Fallacy of Composition Assumption: what’s good for the individual is good for the group- Making this assumption is the fallacyEco2023 Notes- Chapter 2Learning Goals:- Define and recognize examples of opportunity costs (on your own)- Discern why voluntary trade creates value- Realize why property rights are key to economic progress- Illustrate the concepts of tradeoffs, opportunity costs, and growth- Recognize that specialization and division of labor lead to higher output levels and living standards- List society’s three questions and specify the kinds of economic organizations(on your own)Two opposing views of trade:1. When people trade, one person gains and the other person losesa. Referred to as a zero-sum game2. When people trade, both parties gaina. Wealth is actually created by tradeTrade Creates Value- Voluntary trade creates wealth and promotes economic progresso Voluntary trade is expected to benefit both parties involved- Potential trades:1. Finished goods exchanged through barter2. Finished goods exchanged for money ****similar3. Businesses buying resources4. Consumers buying products ****- A transaction cost is a monetary or nonmonetary barrier that lowers the benefits of tradeThe Importance of Property Rights- 2 kinds of property rights:1. Common rights- everybody owns it2. Private rights- only one person owns itQuestion (MA): Sam values his boat at $4,000, and Brenda values it at $9,000. If Brenda buys it from Sam for $7,000, which of the following is true? Brenda gains $2,000, Sam gains $3,000.What could reduce the value created from voluntary trade?- Transaction cost- monetary or nonmonetary barrier that lowers the benefits of tradeo EX: surfing the web looking for airline ticketsFoodClothingQuestion: When private ownership of a resource is clearly defined and enforced, theprivate owner will develop and direct their property toward uses that others value highly because the market will generally reward them for doing so.Question: In the fictitious country of Econoland, the government allows private ownership of chicken but not of bison. If the demand for pork and the demand for beef both permanently increased in Econoland, in the long run, we would expect the population of chicken to rise and the population of bison to fall.Incentives created by private property rights:1. Give proper care2. Conserve for the future3. Use resources in ways other people value4. Mitigate possible harm to othersProduction Possibilities Curve (PPC also called PP Frontier)- The PPC can shifto Shift out: growth, produce moreo Shift in: shrink, produce less- On the line is efficient, inside is inefficient, outside is unattainableQuestion: Over time, an increase in a person’s education will shift that person’s production possibilities curve outward.Trade, Output, and Living Standards- Law of Comparative Advantageo Make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost Translation: make something you’re good at, and trade for something you’re not good at!o Importance of Comparative Advantage: Low opportunity costComparative advantageSpecializationDivision of laborVoluntary tradeIncreased wealthQuestion: According to the law of comparative advantage, both individuals and nations will be able to produce a larger joint output if each productive activity is undertaken by the low opportunity cost producer.Question: If Kim can either wash 10 cars or wax 2 cars during a day, and Vince can either wash 17 or wax 2 cars during a day, then according to the law of comparative advantage, their total output can be expanded if Kim specializes in waxing and Vince in washing.Question: Opportunity costs differ among nations primarily because nations


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FSU ECO 2023 - Notes- Chapter 1: The Economic Approach

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