Chapter 1Scarcity- less of a good available the npeople would likeResource- input used to produce economic goodRationing- allocating limited number of supply among peopleEconomics is the study of how people make decisions because of scarcity!How are scarcity and choice related? Choice is the consequence of scarcity, being one must select among alternatives How are scarcity and poverty different? Scarcity is an objective concept describing afactual situation whereas poverty is subjective, the personal opinion of someone meeting a level of incomeOpportunity cost- highest valued alternative that must be sacrificedEconomizing behavior- choosing option with highest benefit and lowest costUtility- benefit expected from choiceMarginal- difference in cost and benefits between alternativesSecondary effects- the “after” effects (indirect impact of an event) Ex. Drinking beers may make you happy until the secondary effect of barfing up last nights dinnerEight GUIDEPOST1- The use of scarce resources is costly, so decision makers must make tradeoffsex. Staying in to study for finals instead of going to the strip2- Individuals choose purposefully, try to get the most from limited resourcesEx. Only having five dollars so you go to Wal-Mart and look for best deal3- Incentives matterEx. More likely to get in front of class nd dance if offered extra credit4- Individuals make decisions at marginEx. Value meal includes fries and drink but if you were to buy just a drink andburger you would spend more and get less5- Info is costlyEx. Takes time to look up and compare prices before making purchase and time is scarce resource6- Secondary effects: watch out for themEx. Taking aspirin taste gross but the secondary effect is no headache7- Value of a good is subjectiveEx. “one mans trash is another mans treasure”8- Economic thinking is scientificEx. Economist using data to get statisticsPositive economics- What isNormative economics- What ought to be ** positive can be tested whereas normative can be neither confirmed nor deniedCeteris Paribus- “other things constant” Fallacy of composition- what is good for individual may not be bst for groupFour common economic mistakes- 1- Violating ceteris Paribus (isolate variables!!)2- Good intentions do not always result in good outcomes3- Association in not causation4- Fallacy of compositionChapter 2Transaction costs- any cost you may incur in transaction(shipping, time etc.)What are two important aspects of voluntary exchange?1) both parties are made better off2) Trade creates Value and increases wealthPrivate property rights- Exclusively held by the ownerProperty rights change behavior in four key ways:1) By employing their resources in ways beneficial to others2) Strong incentive to care for the property3) Conserve for the future4) Incentive to lower chance that property will cause any damageProduction possibilities curve- Shows max. amount of any two products that can be produced with a fixed set of resourcesInvestment- Purchase/construction of resources that will epand economy’s resourcesCreative destruction- getting rid of old products to replace with better ones (Ex. Casette tapes to CDs to MP3s)Four factors that could potentially shift PPC outward1) Increases in Economy’s resource base2) Advances in technology3) Improvements in rules under which economy functions4) Working harder/ giving up leisureLaw of comparative advantage- Everyone gains when you produce good that you can produce cheaply and exchange for goods that are expensive to produceIn addition to specialization and division of labor how else is economic progress achieved?1) Mass production2) InnovationMarket organization- private parties make plans and decisions with unregulated pricesCapitalism- Economic system using market organization/ minimal government involvementSocialism- Government owns means of production and decides which goods are producedSociety’s three basic questions1)what will be produced?2) how will it be produced?3) For whom will it be produced?Chapter 3Law of demand- inverse relationship between price of good and quantity buyers are willing to purchaseSubstitutes- products that serve same purposeComplements- products consumed jointlyWHAT IS THE DIFFERENCE BETWEEN DEMAND AND Q DEMANDED?Price change = Change in quantity demanded (shift along curve)Change in onsumer income or price of related goods = change in demand (shift of curve)Factors that cause a change in demand:1) Change of income2) Change in number of consumers3) Change in price of related goods4) Change in expectation5) Demographic changes6) Change in consumer taste or preferencesOpportunity cost of production- sum of producers cost of each resourceLaw of supply- Positive relationship between price and amount of good suppliers will produceFactors that cause a change in supply:1) Change in resource price2) Change in technology3) Elements of nature/political disruption4) change in taxMarket- Concept with forces of supply and demandEquilibrium- Balance between supply and demandEconomic efficiency- All potential gains have been realizedHow market responds to changes in supply and demand**Rise in Demand- Right shift of DPrice and quantity go up**fall in Demand- left shift of DPrice and Quantity go down**Rise in supply- Right shift of SPrice goes down, quantity goes up** Fall of supply- left shift of SPrice goes up, Quantity goes downSimultaneous shift!!D and S rise- Quantity Rises and Price can rise or fallD falls and S rises- Quantity can rise or fall and Price fallsD and S fall- Quantity falls and price can rise or fallD rises and S falls- Quantity can fall or rise and price risesFunctions of Market prices: 1) Prices communicate info to decision makers2) Prices coordinate actions of market participants3) Prices motivate economic playersChapter 4When the price of a resource changes then the price for the goods and services produces with that resource will change in the same direction!When the damnd for a product chances then the demand for the resources used in making that product change in the same directionDeadweight LOSS- DWL- loss of gains from tradePrice ceiling- Puts an upper limit on price, generates a SHORTAGE and deadweight loss ex. Rent controlPrice floor- Puts a lower limit on price; generates a surplus and deadweight loss ex. Minimum wageWhat are common secondary effects of rent controls?1) shortages and black markets2) Future supply of rental houses will decline3) Quality of rental will
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