ECO20103 Study Guide Joab Corey CHAPTER 1 Choice the act of selecting among alternatives Scarcity the concept that there is less of a good freely available from nature than people would like Ex time money textbooks Scarcity necessitates rationing Leads to competitive behavior In economics competition is a good thing Rationing allocating scarce goods to those who want them used in a market economy Resource an input used to produce an economic good anything you use Human resources Capital creativity intelligence knowledge endurance etc Physical resource capital manmade tools or machines ex Pens building desk Natural resources oil iron ore coal all is natural and they are never referred to as capital Capital something a human must produce or build to produce something else Examples of human capital Albert Einstein used intelligence to create a lot of great things Chuck Norris used his knowledge strength to create awesome movies quotes etc The economic way of thinking CAREFUL Things aren t always what they appear 8 guideposts to economic thinking 1 Resources are scarce so decision makers must make tradeoffs no such thing as free lunch Just because lunch is free to you does not mean it s free to everyone else opportunity cost highest valued alternative that must be sacrificed when choosing an option Ex An hour of your time in class leads to something you could no longer be doing The highest value sleeping Ex Guns and butter military vs social spending have to make the choice between them 2 Individuals are rational they try to get the most from their limited resources greatest benefit at least possible cost Ex Red wine vs spiced rum you get the one that benefits you the most Ex Welfare vs education NOTE what is rational for one person may not be rational for everyone else 3 Incentives Matter choice is influenced in a predicable way by changing the incentives Ex Money Game noise Ex Lesson about bull fighting from his father Ex Prices when price goes up people willing to buy less when price goes down willing to buy more 4 Individuals make decisions at the margin describes the affect of a change in the current situation Ex Olive Garden A All you can eat soup salad and breadsticks 6 B Chicken parmesan and all you can eat SSB 10 a Marginal Benefit Chicken parmesan b Marginal Cost 4 Ex Taco Bell Tacos 1 each Drink 0 50 each A 2 tacos and 1 drink 2 50 B Extra value meal 3 tacos and 1 drink 3 00 a Marginal Benefit 1 taco b Marginal Cost 0 50 Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs Ex Airport security vs lead clean up Costs Benefits A Airport Security 50 Billion 100 lives saves B Lead clean up 70 billion 120 lives Marginal Cost 20 Billion Marginal Benefit save 20 lives 5 Information helps us make better choices but its costly Ex A new house vs a new notebook effects 6 Beware of secondary effects economic actions generate both direct and indirect Secondary Effects the indirect impact of an event or policy that may not be easily and immediately observable Ex Fuel Efficiency Regulations Ex Trade Restrictions 7 The value of a good or service is subjective a Because all goods are subjective voluntary trade creates value Ex How much would you pay for a pack of gum Ex Orange Bowl Tickets moving goods and services to those who value them the most is a primary source of economic progress 8 The test of a theory is its ability to predict a If real world events are consistent with a theory then that theory is valid Ex Elephant s afraid of mice clip test in a bunch of different ways Positive vs Normative Economics Positive the scientific study of what is a testable fact Ex Its 90 degrees in this room you can test it Normative judgments about what ought to be not testable Ex It s hot in this room what s hot to me may not be hot to someone else 4 Pitfalls to avoid in economic thinking 1 Violation of ceteris paribus principle a Ceteris paribus all other things constant Ex Buying eggs If the price of eggs goes up people will buy less eggs always think ceteris paribus Usually this is true except during Easter time because something else is changing 2 Good intentions do not guarantee desirable incomes 3 Association is not causation Ex Superstitions walk by a black cat then trip the cat did not cause you to trip just association Ex Sunspots and economic activity 4 Fallacy of composition the belief that what is true for one might not be true for all Ex When you get a raise vs when everyone else gets a raise CHAPTER 2 Trade Creates Value Because the value of goods is subjective voluntary trade creates value when individuals engage in voluntary exchange both parties are made better off channeling goods and resources to those who value them the most increases the wealth created by a society s resources Creation of wealth the process by which some people may become rich will make everybody else richer Ex Henry Ford makes cars cheaper more people can buy them Importance of property rights Private property rights involve 1 The right to the exclusive use of property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property Ex Joab s childhood 4 incentives of property rights 1 Incentive to use resources in ways that are considered beneficial to others 2 Private owners have an incentive to care for and manage what they own a Ex communal vs private fridge 3 Private owners have an incentive to conserve for the future a Ex Tragedy of the commons b Ex Endangered species property property rights and development 4 Private owners have an incentive to make sure their property does not damage your lack of property rights lack of economic progress Production Possibilities Curve PPC PPC outlines all possible combinations of total output that could be produced assuming 1 fixed amount of resources productive 2 Given amount of technical knowledge 3 Full and efficient use of resources Ex Point C is inefficient Point E is unattainable 4 Factors that shift the PPC 1 A change in the economies resource base a Investment the purchase constructions or development of resources b However investment requires you to give up consumption goods i Ex Consider the 2 PPC s 2 Changes in technology a Technology the knowledge available in an economy at any given time i Technology determines the amount of output we can generate with our limited resources EX Tanks and buses 3 A change in the rules under which the economy functions
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