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Ch 1I. What Is Economics AboutA. Scarcity Means Having To Make Choices1. Scarcity is present whenever there is less of a good or resource freely available from nature than people would like.2. Choice, the act of selecting among alternatives, is the logical consequence of scarcity.3. Resources are the ingredients, or inputs, people use to produce goods or services.4. Three general categories of resources:(a) Human Resource- the productive knowledge, skill, and strength of human beings.(b) Physical Resource- things like tools, machines, and buildings that enhance our ability to produce goods.(1) human made resources are called capital.(c) Natural Resources- things like land, mineral deposits, oceans and rivers.5. Human ingenuity, discovery, improved knowledge, and better technology have enabled us to produce more goods and services from available resources. B. Scarcity and Poverty Are Not The Same1. Poverty is a subjective concept that refers to a personal opinion of weather someone meets an arbitrary defined level of income.C. Scarcity Necessitates Rationing1. Rationing- allocating a limited supply of a good or resource among people who would like to have more of it.D. Scarcity Leads to Competitive Behavior1. Competition is a natural outgrowth of scarcity and the desire of human beings to improve their conditions.2. Competition is an important ingredient in economic progress.II. The Economic Way of ThinkingA. The Use of Scarce Resource Is Costly, So Decision Makers Must Make Trade-offs.1. “No Free Lunch”- the use of resources to produce one good diverts these resources from the production of another good.2. Opportunity Cost- the highest valued alternative that must be sacrificed as a result of choosing an option.B. Individuals Choose Purposefully- They Try To Get The Most From Their Limited Resources1. Economizing Behavior- choosing the option that offers the greatest benefits at the least possible cost.2. Utility- the benefit or satisfaction that an individual expects from the choice of a specific alternative.C. Incentives Matter- Choice Is Influenced In a Predictable Way By Changes In Incentives1. One of the most important guidepost in economic thinkingD. Individuals Make Decisions On The Margin1. Marginal- difference in the costs and benefits between alternatives.2. Should production be expanded or reduced? That choice should be based on marginal cost.E. Although Information Can Help Us Make Better Choices, Its Acquisition Is CostlyF. Because of Secondary Effects: Economic Actions Often Generate Indirect As Well As Direct Effects1. Secondary Effects- the indirect impact of an event or policy that not be easily and immediately observable.2. Secondary effects can be intended or unintended. G. The Value of a Good or Service Is SubjectiveH. The Test of a Theory Is Its Ability To Predict1. Scientific thinking, developing a theory from basic principles and testing it against events in the real world, is economic thinking.III. Positive and Normative Economics1. Positive Economy- the scientific study of “what is” among economic relationship2. Normative Economics- judgments about “what ought to be”3. Normative economics can’t be proven wrong because they are an opinion. IV. Pitfalls to Avoid In Economic ThinkingA. Violation of The Ceteris Paribus Condition Can Lead One To Draw The Wrong Conclusion1. Ceteris Paribus- means other things constantB. Good Intentions Do Not Generate Desirable OutcomesC. Association Is Not CausationD. The Fallacy of Composition1. Fallacy of Composition- erroneous view that what is true for the individual will also be true for the group.2. Microeconomics- how human behavior affects the conduct of affairs within narrowly defined units.3. Macroeconomics- how human behavior affects the conduct of affairs within highly aggregated markets.Ch 2I. What Shall We Give UpA. Opportunity Cost1. In economics, when we refer to a cost of an action we are referring to its opportunity cost.2. Monetary cost can be measured in terms of dollars and cents.B. Opportunity Cost and The Real World1. Failure to consider opportunity cost leads to unwise decision making.II. Trade Creates Value A. When Individuals Engage In Trade Both Parties Are Better OFFB. By Channeling Goods and Resources To Those Who Value Them Most, Trade Creates Value and Increases The Wealth Created By a Societies Resources.C. Transaction Cost- A Barrier To Trade 1. Transaction Cost- the time, effort, and other resources, needed to search out, negotiate, and complete an exchange.2. By reducing transaction cost, wealth and value are created.D. The Middle Man As a Cost Reducer1. Middleman- a person who buys and sells goods or services or arranges trades.III. The Importance of Property Rights1. Property Rights- the rights to use, control, and obtain benefits from a good or resource.2. Private property rights involve three things:(a) the right to exclusive use of the property(b) legal protection against invasion form other individuals who would seek to use or damage without owners consent. (c) the right to transfer, sell, exchange, or mortgage the property.3. Private owners can gain by employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring the wishes of others.4. Private owners have a strong incentive to care for and properly manage what they own.A. Private Ownership and Markets1. “the extended order”- the tendency for markets to lead perfect strangers from different backgrounds around the world to cooperate with one another.IV. Production Possibility Curve1. Production Possibilities Curve- a curve that outlines all possible outputs that could be produced assuming:(a) a fixed amount of productive resources (b) a given amount of technical knowledge(c) full and efficient use of those resourcesA. Shifting The Production Possibility Curve Outward1. An increase in the economy’s resource base would expand over ability to produce goods and services.(a) Investment- the purchase, construction, or development of resources including physical assets, such as plants and machinery, and human assets, such as better education. 2. Advancements in technology can expand the economy’s production possibility curve:(a)


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FSU ECO 2023 - Chapter 1

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