Chapter 1 : the Economic Approach What is economics? The study of human behavior and the choices that we make in the presence of constraintsEconomics is primarily the study of: the choices people make as a result of scarcityScarcity: 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 iti. Types of rationing :1. First come, first serve (inefficient)2. Subjective (arbitrary)3. PRICE (efficient & non-arbitrary)II. CompetitionQ: Are scarcity and poverty the same thing? A: NOResources: anything occurring in nature that is used to produce or create other things.I. NATURAL (ex: water)II. HUMAN (ex: skills)III. 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), orii. Mental II. PHYSICAL – refers to machinery or tools, like factories or hammers, etc.Positive economics: economic statements that can be proven or disprovenI. Objective: FACTS Normative economics: opinions, not necessarily provable or disprovableII. 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 povertya. EX: Poverty in the United States versus in SudanCeteris 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 cost3. INCENTIVES MATTER! 4. Economic thinking is marginal thinking. People make decisions at the margin. a. Marginal : another term for additional5. Information is a costly good.a. Rational ignorance : remaining ignorant about something where the cost of obtaining the knowledge is greater than the benefit of learning it.i. Cost of knowing > benefit of knowingEx: 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 effectsb. Secondary effects : the indirect impact of an event or policy that may not be easily and immediately observable. In the area of policy, these effects are often both unintended and overlooked.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 THINKING1. Violating the Ceteris Paribus (all else equal, other things constant) condition2. Good intentions do NOT guarantee good outcomesa. Remember Secondary Effects3. Association is NOT causation4. 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 1776Chapter 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 offII. 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’thave 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, Moolaguides3. PROPERTY RIGHTS: Assumes free market – non-gov’t intervention.I. Property rights include 3 elements:1. Right to EXCLUSIVE use of property2. Legal protection against others using it without owner’s permission3. 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. 2. Incentive to take care of your property (to protect the value)3. Incentive to conservea. Ex: electric bill at home vs. when you pay4. Incentive to be careful with your propertya. Ex: putting fence up around a pool or salting an icy drivewayi. Private property owners can be held accountablefor damage done to others from THEIR private property4. 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
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