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the Economic Approach Chapter 1 What is economics The study of human behavior and the choices that we make in the presence of constraints Economics is primarily the study of the choices people make as a result of scarcity Scarcity when something is not abundant enough in nature so that everyone can have as much as they want for free Free good NO price so abundant that you can get all you want it s freely available in nature Scarce good NOT so abundant in nature that you can get all you want thus it commands a price Scarcity necessitates I Rationing the allocation of a scarce resource among those who want it i Types of rationing 1 First come first serve inefficient 2 Subjective arbitrary 3 PRICE efficient non arbitrary II Competition Q Are scarcity and poverty the same thing A NO Resources anything occurring in nature that is used to produce or create other things I II III NATURAL ex water HUMAN ex skills PHYSICAL ex labor tools factories Capital anything MAN MADE that is used to produce other goods services I HUMAN human capital is experience talent creativity etc i Physical i e labor or ii Mental II PHYSICAL refers to machinery or tools like factories or hammers etc Positive economics economic statements that can be proven or disproven Normative economics opinions not necessarily provable or disprovable I Objective FACTS II Subjective OPINION POVERTY is a SUBJECTIVE concept I One country s opinion of poverty may be worse or better than another country s view of poverty a EX Poverty in the United States versus in Sudan Ceteris Paribus a Latin term for all else held constant or all else equal Statistical Murder when a business or regulator uses limited funds to take an action that saves a LIMITED number of lives instead of an alternative action that would save MORE lives THE ECONOMIC WAY OF THINKING 8 guideposts to Economic thinking 1 There is ALWAYS a tradeoff a That tradeoff is called OPPORTUNITY COST the highest valued option given up when you choose one thing over another or the highest valued alternative that must be sacrificed as a result of choosing an option 2 Individuals choose purposefully therefore economically a Highest utility functionality benefit satisfaction b Lowest cost 3 INCENTIVES MATTER 4 Economic thinking is marginal thinking People make decisions at the margin a Marginal another term for additional 5 Information is a costly good a Rational ignorance obtaining the knowledge is greater than the benefit of learning it remaining ignorant about something where the cost of i Cost of knowing benefit of knowing Ex Many people do not know how to fix their own vehicles because the opportunity cost of learning is larger than simply taking the vehicle to a mechanic 6 REMEMBER the SECONDARY EFFECTS The long term effects a Short sighted ignorant of long term effects b Secondary effects easily and immediately observable In the area of policy these effects are often both unintended and overlooked the indirect impact of an event or policy that may not be 7 The value of a good or service is subjective a What is something worth Whatever someone is willing to pay for it 8 The test or worth of a theory is its ability to PREDICT a Economics IS a science with hypotheses and conclusions PITFALLS TO AVOID in ECONOMIC THINKING 1 Violating the Ceteris Paribus all else equal other things constant condition 2 Good intentions do NOT guarantee good outcomes a Remember Secondary Effects 3 Association is NOT causation 4 The Fallacy of Composition an incorrect view that what is true or good for the individual will also be true or good for the group or the whole Q Who is the father of economics A ADAM SMITH is the FATHER of MODERN ECONOMICS I Smith published The Wealth of Nations in 1776 Chapter 2 Tools of the Economist 1 Opportunity Cost the one most highly valued thing you give up when you choose one option over another Opportunity cost is subjective and involves time money or both 2 Trade CREATES Value I Voluntary Exchange both parties are made better off II Trade creates wealth it is a positive sum game not a zero sum game Transaction costs anything that makes a transaction MORE expensive in terms of dollars or time or aggravation They are barriers to trade I For example say you are at the Tallahassee Mall trying to buy shoes but they don t have your size Their branch store at Governor s Square Mall DOES have the size you wish for But you have to drive all the way over there taking more time and gas money The time and gas money are the transaction cost of making that exchange II The Internet has greatly reduced transaction costs Middleman someone or something that facilitates trade Middlemen reduce transaction costs I They bring together buyers and sellers rather than buyers and sellers having to hunt each other down Ex EBay Moolaguides 3 PROPERTY RIGHTS Assumes free market non gov t intervention I Property rights include 3 elements 1 Right to EXCLUSIVE use of property 2 Legal protection against others using it without owner s permission 3 Right to transfer sell exchange or mortgage the property II Can use property rights as long as you don t infringe on anyone else s property rights III GOOD THINGS that result from having property rights 1 Property owners have the incentive to consider the desires of others and lose by not considering the rights of others Thus strong incentive to use property in a way that benefits society the gov t doesn t need to make you do this Incentive to take care of your property to protect the value 2 3 Incentive to conserve a Ex electric bill at home vs when you pay 4 Incentive to be careful with your property a Ex putting fence up around a pool or salting an icy driveway i Private property owners can be held accountable for damage done to others from THEIR private property 4 Production Possibilities Curve PPC a graph that shows all possible allocations of the most output that can be produced from limited resources of an economy It assumes resource base is fixed technology is fixed and resources are being used efficiently Points A B C reflect different production output possibilities that are efficient Points inside the curve are inefficient Point X Points outside the curve are unattainable Point Y Things that cause the PPC to shift 1 2 Increased of resources Increase in technology a Innovation entrepreneurship 3 More favorable laws incentives 4 Reduced leisure time leads to increased work 5 Law of Comparative Advantage the total output of a group of people


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FSU ECO 2013 - Chapter 1 : the Economic Approach

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