What is Economics?Economics does not have to be like Farris BullerEconomics is the study of how we make choices under scarcityScarcityThe condition that arises because the available resources are insufficient to satisfy wantsResources are scarce when the collective desires of a society for the resources exceed the amount of the resources available in natureTwo comments:1. Scarcity requires more than physical limitation2. Scarcity is not the same thing as a shortageWhat do economists study?Everything… (almost)“economic” variables and behavior- prices, employment, production, profits, labor supply, consumption and savings, housing, international trade, auctions“Non-economic” variable behavior- marriage, gender, fertility, crime, discrimination, health, politics and voting.The economic way of thinkingScarcity necessitates rationingRationing:Allocating scarce goods to those who want them.1. In a market economy- price is used to ration goods2. Scarcity leads to competitive behaviorChoice:Scarcity necessitates choice:If a resource is scarce, there is not enough of it to satisfy all of our desires for itTherefore, we must choose how the resource will be usedIndividuals always have choices about the use of scarce resourcesIndividuals have “wants”. They do not have “needs”There are no true “necessities”Resources: an input used to produce an economic good1. Human resources (human capital)2. Physical resources (physical capital)3. Natural resourcesCapital: Human-made resources used to produce other goods and services.Ceteris ParibusConclusion about the effect of a variable require other things unchangedTo determine the effect of a change in one variable on another variable requires that other things remain constant.Ceteris Paribus means “other things remain the same”Guideposts to Economic Thinking1. Resources are scarce so trade-offs must be made(No such thing as a free lunch)(Opportunity) Costthe opportunity cost of something is the highest-valued alternative forgoneChoice and Opportunity Cost:When we choose to use a resource in a particular way, we simultaneously choose not to use it in an alternative wayThe opportunity cost of our choice is the value of the thing we choose not to due with the same resource.Money is NOT an opportunity cost2. Individuals are rational: they try to get the most from their limited resources.“greatest benefit at least possible cost”beer, liquor, wine** what is rational for one person may not be rational for everyone!**3. Incentives matter:choice is influenced in a predicable way by changing incentivespeople are rationalthey choose so as to maximize the net gain from each and every activityin choosing how to use scarce resources, they respond to incentives.4. Individuals make decisions at the marginEconomic thinking is marginal thinkingChoices are made “at the margin”. In economics, “at the margin” means“Small or incremental”, small changes from what you are currently doing.Cost-benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs5. Information helps us make better choices, but is costly6. Beware of secondary effects: economic actions generate both direct and indirect effectsSecondary effects: the indirect impact of an event or policy that may not be easily and immediately observable.Yacht tax, trade restrictions7. The value of a good or service is subjective:ex. FSU Football Ticketsex. How much would you pay for a bottle of water right now??8. The test of a theory is its ability to predictThe Economic ApproachPositive economics:The scientific study of what is (testable)Normative economics:Judgments about what ought to be (not testable)Pitfalls to Avoid1. Violation of ceteris paribus principle2. The belief that good intensions guarantee desirable outcomes3. The belief that association is causationcause and effect relationshipsmethodological fallacy: Correlation does not imply causationcorrelation is the tendency for the values of two variables to move in a predictable and related way.There are four possible explanations for any observed correlationCause and effectReverse causationOmitted variablesSpurious correlationDo red cars get more speeding tickets?4. Fallacy of composition: belief that what is true for one might not be true for allstanding at a football gameThe Economic ApproachMicroeconomics: focuses on how human behavior affects the conduct of affairs within individually defined units such as household or firmsMacroeconomics: Focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor.Trade and ValueHow trade creates value…1. When individuals engage in voluntary exchange both parties are better off2. By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources.Transaction Costs:The time, effort and other resources needed to search out, negotiate and complete an exchangeHigh transaction costs lead to a barrier to tradeEx. You had to pay a quarter for each candy tradeMiddlemanTransaction cost leave room for a middle.A person (group) who buys/sells goods or services or arranges trades.Middleman can reduce transactions costsProperty RightsProperty Rights Involve1. Rights to exclusive use of a property2. Legal protection against invasion from other individuals3. Right to sell, transfer or mortgage the propertyFour incentives of property rights1. Incentive to use resources in ways that are considered beneficial to others(the owners bear the cost of ignoring the wishes of others)2. Private owners have an incentive to care for an mange their property3. Private owners have an incentive to conserve for the future4. Private owners have an incentive to make sure their property does not damage your propertykeeping your dog on a leashProduction Possibilities CurvePPCThe boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available resources and the state of technologyThe PPC is a valuable tool for illustrating the effects of scarcity and its consequencesAvailable resourcesLand: both raw land and natural resources taken from the landCapital: Machines, tools, other equipment, buildings, and business inventoriesLabor Force: All people willing and able to work weather they are currently employed or unemployedIncreases (decreases) in the available resources increase
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