UNIT 1Chapter 1Economics is the study of how we make choices under scarcityScarcity: The concept that there is less of a good then available from nature that people would like.Ex. Time, money, textbooks*not to be confused with povertyResources used to produce economic goods:Human (human *capital)Physical (physical *capital)Natural resources*Capital: manmade resources used to produce other goods and services.The 8 guideposts to economic thinking:1. Resources are scarce, so tradeoffs must be madei. Opportunity Cost: highest valued alternative that must be sacrificed when choosing an option.1. Ex: An hour of your time to be in classThe highest valued alternative would be: Sleep2. Individuals are rational: They try to get the most from their limited resources. “Great benefits at the least possible cost.”i. Ex. What is the highest grade I can get with the least amount of work?ii. Remember: what is rational for one person may not be rational for everyone.3. Incentives matteri. Ex. Macro money game- as the incentive grew, so did yelling.ii. Ex 2. Economic lesson from bull-fighting father- if bulls were injured they would be killed…were not given to the workers because the owner didn’t want bulls to intentionally get hurt.4. Individuals make decisions at the margina. Marginal: Change in current situation (describes the effect)i. Ex. Olive Garden- AYCE S,S,BS @ $6 vs Chicken parm + AYCE @ 10$.1. For option 2: Marginal Benefit: chicken parmMarginal Cost: $4… is chicken parm worth 4$ to you?b. Cost benefit analysis: one will undergo an action when the marginal benefits outweigh the costs.5. Information helps us make better choices but is costlya. Ex. New house vs. New notebooki. One takes a lot of work and research, while the other is a one store small decision.6. Beware of secondary effectsa. Secondary Effect: the indirect impact of an event of policy that may not be easily & immediately observable.i. Ex. Fuel effieciency regulations: made cars smaller and lighter, which created more fatal accidents.7. The value of a good or service is subjectivea. Voluntary trade creates value.b. Moving goods and services to those who VALUE THEM is a PRIMARY source of economic progress.8. The test of a theory is its ability to predicta. Ex. Elephants: trained (circus) vs wildKnow the difference between positive and normative economic statements:positive economic statements are testablenormative economic statements are not.Normative- Think Not (N- N)The four pitfalls to avoid in economic thinking:1. Violation of the ceteris paribus principleCeteris paribus: other things held constantEx. Buying eggs: price increases, people will buy less. Yet, around Easter this is untrue, you must keep everything else constant.2. The belief that good intentions equal desirable outcomesEx. Suicide warning on antidepressant meds.3. The belief that association is causationa. Ex. Superstitions4. The fallacy of compositiona. Belief that what is true for one might not be true for all.Chapter 2Understand how voluntary trade creates value and leads to economic progressChanneling goods and resources to those who value them most increases the wealth created by a society’s resources.Know the characteristics and 4 incentives of private property rights:The right to exclusive use of propertyLegal protection against invasion from other individualsThe right to sell, transfer, exchange or mortgage the property4 incentives:to use resources in ways that are considered beneficialprivate owners can care for & manage what they ownconserve for the futureto make sure their property does not change yours*Lack of property rights= lack of economic progress.Understand the concept of the Production Possibilities Curve (PPC).PPC: outlines all the possible combinations of total outputs that could be produced assuming:Fixed amount of productive resourcesGiven amount of technical knowledgeFull & efficient use of resourcesEfficient pointsInefficient pointsUnattainable pointsHow much is produced at certain pointWhat is given up when moving from one point to anotherKnow the four factors that shift the production possibilities curveA change in economy’s Resource baseChanges in TechnologyChange in Rules under which the economy functionsChange in Work habitsEx. Working harder can shift curve outward…or working less can shift curve inward.Ready To Rage WednesdayThe law of comparative advantage: the total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the LOWEST OPPORTUNITY COST—(Whoever does it cheaper!)Know the 3 questions that every economy faces1. What are we gonna produce?2. How will it be produced?3. How much to produce?Capitalism: productive resources are owned privately & goods and resources are allocated through market prices.Market Organization: private parties make their own plans & decisions with the guidance of market prces.Ex. Candy game: People traded candy based on what THEY WANT (private property)Socialism: ownership & control of the means of production rest with the state & resource allocation is determined by centralized planning. (such as collective decision making)Collective decision making: relies on public sector decision making to resolve economic problems.Ex: Candy Game- T.A.’s & Joad passed out candy based on what THEY THOUGHT the class would want.**Capitalism works better then socialism because:Capitalism is similar to natural selection- it uses the idea of market efficiencySocialism suffers from an INFORMATION problem.Chapter 3Understand the law of demand and why demand curves are downward slopingThere is an inverse (negative relationship) between the price & the quantity that buyers are willing to purchase.Therefore, results in downward slope. **Think: Demand always Down (D-D)Know how to calculate consumer surplus and be able to find it using a graph.Consumer Surplus: The difference between the max amount a consumer would pay & the amount that they ACTUALLY pay.The area below the demand curve but above the price.Remember: Area- 1/2 BH & when calculating go all the way to the max value, then subtract.Know the difference:change in quantity demanded: a movement along the curve caused by a change in the price of the good.With Quantity always Think PRICEchange in demand: a shift of the curve caused by anything other than the change in price of the good in questionKnow the shifters of demand:Change in Consumer
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