Owners of ProductionResource AllocationChapter 1What is Economics?- Economics is the study of how we make choices under scarcity- Choice: choice is the act of selecting among alternatives- Scarcity: scarcity is the concept that there is less of a good freely available from nature than we would like- There is not much around for all of us to have as much as we want- Some example are time, money, cars, etc.- Few things are not scare: air (but clean air is scarce)Scarcity- Scarcity is not the same thing as poverty- Poverty is a subjective term- What is considered poor in one place is not poor in another- Can depend on what period you live in- Scarcity necessitates rationing *- Rationing: rationing is allocating source goods to those who want them- There are different ways to ration, based on the people you know, first come first serve, etc.- How you ration a good is how you affect behavior- In a market economy, price is used to ration goods - Scarcity leads to competitive behavior- There is not enough around for all of us to get what we want so we compete- What do we do in the face of scarcity?- We use scare sources as much as we can because of the limited time they are available- However, it also encourages us to find better ways of getting those resources- The “lack” of oil encourages people to find more oil or finding different methods Resources- A resource is an input used to produce an economic good- It is something you use to produce something else3 types of resources:- 1. Human Resources (aka Human Capital)- Ex. Seed, endurance, education, time, strength-2. Physical Resources (Physical Capital)- Ex. Hammer, building, paper, pencil- 3. Natural Resources - come from nature and are NOT handmade- Ex. Gold, oil, land, coal - Ex. A man using his knowledge for the lecture, the land where the building of the classroom is, and the screen used for the powerpoint - Capital: human-made resources used to produce other goods and services- Human Capital: can refer to physical or mental abilities- Ex. Michael Phelps and his physical traits and Bill Gates with his creativity.The Economic Way of Thinking ~- Things are not always what they appear8 Guideposts of Economics1. Resources are scarce, so decision makers must make trade-offs- There is no such thing as a free lunch; even if it is free to you does not mean it was free from society’s perspective...it costed money to get the ingredients- Opportunity Cost: the highest valued alternative that must be sacrificed when choosing an option - Ex. An hour of your time, sleep, however you spend your next twenty dollars (You cannot spend that money anywhere else now)- Ex. Is there a better way to spend money that money that would save more lives than maybe it is a better use of 50 billion dollars on airbags2. Individuals are rational: they try to get the most of their limited resources - We understand that we have to make choices because of scarcity- How do we get the the greatest benefit at the least cost- “What is the least amount of work I can do in the class to still get an A”- What is rational for one person may not be rational for everyone- What do your preferences tell you?- Ex. Some people choose to smoke and some people do not- Cost does not matter to people who enjoy it- To some people the cost does not rationalize the benefits- Different costs and benefits to different people. All rationalized. 3. Incentives matter: choice is influenced in a predictable way by changing incentives - Ex. Putting more money out for free gets more people participating- When the benefit increases, more people will do it. - If the cost of something goes up, less people will do it.- Ex. Killer seat belts: people drive more reckless when they feel more safe while driving....if there were no seat belts everyone would be very cautious while driving - Utility: the subjective benefit you expect to receive- Ex. Amanda trying to maximize her utility potty training for M&Ms4. Individuals make decisions at the margin - Marginal: describes the effect of a change in the current situation- Ex. Ponderosa Buffet: All you can eat = 7.50 Steak 9.00- Marginal Benefits: Steak- Marginal Costs: $1.50 - Ex. Super-sizing your extra value meal - Marginal benefit: more food, more fries, larger drink- Marginal costs: 69 cents, the time spent burning the calories - To drive or fly to Miami- Drive: 8 hours and $100- Fly: 3 hours $400 - MB: 5 hours MC: $300.... So pick to fly only if your minimum value of time is greater than $60/hour- This is called Cost Benefit Analysis: one will undergo an action when the marginal benefits outweigh the marginal costs5. Information helps us make better choices, but it is costly- The more information we have the better decisions we make- We do not always make the best choices- The bigger decision, the more it costs (time wise, etc)- For a car you’ll do research- For a pencil you don't6. Beware of Secondary Effects: Economics actions generate both direct and indirect effects - Secondary Effect: the indirect impact an event or policy that may not be easily and immediately observable - Whenever we make some type of choice, the outcome is direct.- What we do not anticipate is the secondary effect- Ex. Yacht Tax: rich people stopped buying yachts, business had to lay off people, hurt poor middle class rather than help7. The Value of a Good or Service is Subjective - If an item is $1 that does not mean the value is $1 - An $80 price tag could be worth $5 to you - Moving goods and services to those who want them the most is the primary source of economic progress- Ex. FSU football ticket to someone who lives in Texas - Ex. Selling water bottle for $3 when it costs 25 cents8. The Test of a Theory is its Ability to Predict- Pull in date to test rather than assume it is true- If real world events are consistent with that theory, then the theory is valid- Ex. “Red cars get more tickets” ... They actually get less.~Positive VS Normative- Positive: the scientific study of what is- It is testable- “It is 95 degrees in this room” - this can be tested to be true or false- Normative: judgements about what ought to be- This is not testable- They are subjective- “It is so hot in this room” - can not be tested to be true or false4 Pitfalls to Avoid in Economic Thinking1. Violation of the Ceteris Paribus principle- Ceteris Paribus means “nothing else changes”- Must include it in a sentence, if you don’t you violate it- “When the prices of
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