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FSU ECO 2013 - CH1 Economic approach

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Macro notes:CH1 Economic approachA. Is life getting better or worse?i. Life expectancy, Health, Income, Education, EntertainmentB. What is economics? – The study of how we make choices under scarcityi. Choice: act of selecting among alternativesii. Scarcity: concept that there is less of a good freely available in nature than people would like of that good. Scarcity necessitates rationing1. Ex: time, money, textbooksiii. Rationing: is allocating goods to those that want them. 1. A market economy rations goods by price. C. 8 Guideposts to economic thinkingi. Resources are scarce, so decision makers must make trade offs (no such thing as a free lunch)1. Opportunity cost: the highest valued alternative that must be sacrificed when choosing an optiona. Ex: an hour of your timeb. Ex guns or butterii. Individuals are rational: they try to get the most from their limited resourcesa. Ex: red wine vs spiced rumb. Ex: welfare vs educationiii. Incentives matter: choice is influenced in a predictable way by changing incentivesa. Ex: money game: macro styleb. Ex: economic lesson from fatherc. Ex Pricesiv. Individuals make decisions at the margin1. Marginal: describes the effect of a change in the current situationa. Ex: olive gardenb. Ex: trip to taco bell2. Cost benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costsa. Ex: airport security vs lead cleanupv. Information helps us make better choices, but it is costlya. Ex: new house vs new notebookvi. Beware of secondary effects: economic actions generate both direct and indirect effects1. Secondary effects: the indirect impact of an event or policy that may not be easily and immediately observablea. Ex: fuel efficiency regulationsb. Ex: trade restrictionsvii. The value of a good or service is subjective: because goods are subjective, voluntary trade creates valuea. Ex: pack of gumb. Moving goods and services to those who value them most is a primary source of economic progressviii. The test of a theory is its ability to predicta. If real world events are consistent with a theory then that theory is validD. More on economics:i. Positive economics: the scientific or testable study of what isii. Normative economics: judgments about what ought to be; not testableE. 4 Pitfallsi. Violation of ceteris paribus1. Ceteris paribus: other things constantii. Good intentions do not guarantee desirable outcomesa. Ex: suicide warnings on antidepressantsiii. Association is not causationa. Ex: superstitions or sunspotsiv. Fallacy of composition: belief that what is true for one might not be true for alla. Ex: when you get a raise vs everyone getting a raiseCh. 2 Tools of the economistA. Trade creates value: because the value of goods is subjective, voluntary trade creates valuea. Ex the candy gameb. Creation of wealthi. Process by which some people become rich will make everyone richera. Ex Henry fordB. Property rightsi. The right to exclusive use of the propertyii. Legal protection against invasion from other individualsiii. The right to sell, transfer, exchange, or mortgage the propertyb. 4 incentives of property rightsi. Incentive to use resources in a ways that are considered beneficial to othersa. Ex: South Park: Cartmen’s amusement parkb. Reselling your textbookii. Private owners have an incentive to care for and manage what they owna. Ex: communal refrigerator vs your own refrigeratoriii. Private owners have incentive to conserve for the futurea. Tragedy of the commonsb. Endangered species pg 27iv. Private owners have an incentive to make sure their property does not damage your propertyc. Lack of property rights = lack of economic progressC. Production possibilities curvea. Outlines all possible combinations of total output that could be producedi. Assumes:1. Fixed amount of productive resources2. Given amount of technical knowledge3. Full and efficient use of resourcesii. Know:1. Efficient Points- along the curve2. Inefficient points- inside the curve3. Unattainable points outside the curve4. How much is produced at a certain point5. What is given up when moving from one point to anotherb. 4 factors that shift the PPCi. A change in the Economy’s resource base1. Investment: the purchase, construction, or development of resoures that requires us to give up consumption goodsa. Two PPCS pg 31ii. Changes in Technology1. Technology: the knowledge available in an economy at any given time.a. Determines the amount of output we can generate with our limited resourscesb. Ex: tanks and busesiii. A change in the rules under which the economy functionsa. Ex: imposing trade barriersb. Eliminate the business franchise tax in WV (pics of cities around river)iv. Changes in work habbitsa. Working harder can shift curve outwardb. Working less can shift curve inwardc. Law of comparative advantagei. The total output of a group of individuals, an entire economy, or a group of nations will be the greatest when the output of each good is produced by whoever has the lowest opportunity cost1. Ex: should mike tyson be his own body guard?2. Jersey shore: who should hang the shirtsD. Economic Organization:i. What will be producedii. How will it be producediii. For who will it be producedb. Capitalism: a system of economic organization where:i. Productive resources are owned privatelyii. Goods and resources are allocated through market pricesc. Market organizationi. A method of organization in which private parties make their own plans and decisions with the guidance of market pricesd. Socialism: a system of economic organization where:i. Ownership and control of the means of production rest with the stateii. Resource allocation is determined by centralized planningiii. Collective decision making: the method of organization that relies on public sector decision making to resolve basic economic questionse. Why capitalism tends to work and socialism does not:i. Capitalism is similar to natural selection, It uses the idea of market efficiencyii. Socialism suffers from an information problemE. Review:i. What are the 4 incentives of property rightsii. Indentify the points on the PPC curveiii. What are the four factors that shift the PPC curveiv. What is the law of comparative advantagev. What are the three questions every economy facesvi. Know the difference between capitalism and socialism1. Also know why capitalism worksCh. 3 Supply, Demand, and the Market ProcessA. Demanda. Law of Demand: there is an inverse (negative relationship


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