Chapter 1: The Economic Approach Scarcity leads to Tradeoffs which result in us having to make Choiceso Scarcity: less of a good freely available than what people would like Scarcity is NOT the same as povertyo 3 types of Resources Human, Physical, Natural8 Guideposts to Economic Thinking!1. There are Always Trade Offs a. OPPORTUNITY COSTi. The Highest valued alternative that is sacrificedii. NOT the sum of all alternatives2. Individuals Choose Purposefully a. Economizing Behavior= Rational Behaviori. Getting the most benefits for LEAST cost or effort3. Incentives Matter a. As incentives go up, you will be more likely to do something, and vice versa b. Changes in personal costs and benefits will exert a predictable influence on the choices of people4. Individuals Make Decisions on the Margin a. Marginal means Additionalb. I.e. >A producer’s Marginal Cost is the cost of producing one additional unit of a product5. More Info leads to Better Decisions, but Info is Costly to Get 6. Many Choices Create Secondary Effects a. Secondary Effects >> indirect impact of a choice that may not be easily and/or immediately observable7. Value is Subjectivea. Value is determined by the purchaser, therefore may be different from person to person8. Economic Thinking IS Scientific Thinking Positive Economics- “What is” (FACTS)Normative- “What ought to be” (OPINIONS)Pitfalls to Avoid in Economic Thinking1. DON’T violate “Ceteris Paribus” (all things remaining constant)2. Good intentions DO NOT guarantee good or desirable outcomes3. Association IS NOT causation4. The Fallacy of Composition = what’s true for ONE may not be true for ALL or the groupChapter 2: Some Tools of the EconomistTrade Creates Value When 2 parties voluntary exchange, BOTH are made better off.• Transaction Costs: cost of the time, effort, and other resources used to search out, negotiate, and conclude and exchange. • Exchange creates value by moving goods from parties who value them less to parties who value them moreProperty RightsPrivate Property Rights Involves 3 things:1. The right to exclusive use of the property 2. Legal protection against invasion by others without the owner’s permission3. The right to transfer, sell, exchange, or mortgage• Private ownership provides people with a strong incentive to take care of things and develop resources in ways that are highly valued by others!!Production Possibilities CurveShows the maximum amount of any two products that can be produced from a fixed set of resources, and the possible trade-offs in production between them.The slope indicated the amount of one product that must be given up to produce more of another• Points INSIDE the curve are Inefficient (wasted resources)• Points OUTSIDE the curve are Unattainable• Points ON the curve are efficientThe Production Possibilities Curve can shift OUTWARD if:• An increase in economy’s resources• Advancement in technologyo Invention: creation of new products or processeso Innovation: practical and effective adoption of new technologieso Creative Destruction: new products and methods continually replacing old ones• Improvement in rules within the economy• Working harder and giving up current leisureGains from TradeDivision of Labor : method that breaks down production into a series of specific tasks, each performed by a different workerLaw of Comparative Advantageo Total output of a group, an economy, or a group of nations will be greatest when the output of each good is produced by the person with the LOWEST opportunity cost for that good. o In other words, if everyone specializes in a specific product and then just trades with each other, the most wealth will be createdo Self-sufficiency is NOT good.Economic Organization• Capitalism resources are privately owned, goods and resources are allocated through market prices• Socialism ownership and control of the basic means of production rest with the state, and resource allocation is determined by centralized planningChapter 3: Supply, Demand, and the Market ProcessHelpful Information!!!! A change in supply or demand IS NOT a change in QUANTITY supplied or demanded. They are two different things. I.E. change in supply SHIFTS the supply curve, change in QUANTITY supplied is just movement along the supply curve that already exists.Whenever dealing with a change in supply or demand, draw a graph and SHIFT that line to the left (for decrease) or the right (for increase). Note the changes in price and quantity as a result of the shift.The Law of Demand when price rises, quantity demanded falls• Negative Relationship = Negative sloping line/curve on graph• Substitutes : Products that serve similar purposeso An increase in the price of one good, will increase demand for a substitute of that goodChange in Demand vs. Change in Quantity Demanded• Change in QUANTITY Demanded displayed by movement ALONG the demand curveo Occurs because of changes in price • Change in DEMAND displayed by a SHIFT in the entire demand curveo Occurs because of changes in something OTHER than price, such as: Consumer income Consumers in the market Price of Related goods• Complements: products consumed jointly (hot dogs and hot dog buns)o Decrease in price of one= Increase in demand for the other Expectations Demographics Consumer taste and preferencesThe Law of Supply when price rises, quantity supplied rises• Positive Relationship = Positive sloping line/curve on graphChange in Supply vs. Change in Quantity Supplied Works the SAME WAY as Demand vs. Quantity Demanded• Change in QUANTITY supplied displayed by movement ALONG supply curveo Occurs because of changes in prices• Change in SUPPLY displayed by SHIFT in entire supply curveo Occurs due to change in variables OTHER than price, such as: Resource prices Technology Nature Political TaxesHow Supply and Demand Interact!Market Equilibrium- when QUANTITY supplied is equal to QUANTITY demanded• Equilibrium is EfficientHow Markets React to Change in Supply and Demand• When Demand increases, its price increases. Which:1. Motivates consumers to search for substitutes and cut back on purchasing the good2. Motivate producers to supply more of the good• These two things eventually bring the Quantity demanded and supplied back into balanceInvisible Hand Principle market prices coordinate the actions
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