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FSU ECO 2023 - Chapter 1

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Chapter 1- Economics is the study of how we make choices under scarcity.- Scarcity- the concept that there is less of a good freely available from nature than people would like. o Ex. Time, money, cars,o There’s not enough to go around, for people to have as much as they want. o Hard to find things that are not scarce (air is an exception)o Scarcity is not the same thing as poverty Scarcity is an objective term that’s true all the time and everywhere. Poverty is something that’s subjective, a person considered “poor” in one country, may not be considered “poor” in another.o Scarcity necessitates rationing  b/c there’s not enough stuff to go around. We have to figure out who gets the “Ferrari”. You can ration goods on: first come, first serve basis, political terms, price.- . Rationing- allocating scarce goods to those who want them- In the market economy, price is used to ration goods.o Scarcity leads to competitive behavior- Resourceso An input used to produce an economic good Human resources (human capital) Physical resources (physical capital) Natural resourceso Capital: human-made resources used to produce other goods and services.- 8 Guideposts to Economic Thinkingo 1. Resources are scarce so decision makers must make trade-offs (no such thing as a free lunch) Opportunity Cost: the highest valued alternative that must be sacrificed when choosing an option.- Ex. An hour of your time, how you spend your next $15, airbagsvs. AIDS researcho 2. Individuals are rational: they try to get the most from their limited resources. “Greatest benefit at least possible cost” What is rational for one person may not be rational for everyoneo 3. Incentives matter:  Choice is influenced by a predictable way of changing incentives.- Ex. Killer seatbelts. Beltso 4. Individuals make decisions at the margin Marginal: describes the effect of a change in the current situation- Ex. Supersizing you extra value meal- Driving or flying somewhere. Cost- benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs- Ex. Drive or Fly- Going to miami- Drive 8 hours $100- Fly 3 hours $400- Fly?- MC: $300- MB: 5 hours - $60 dollars an hour ß---- Cost-benefit Analysis:o 5 Information helps us make better choices, but is costly. The bigger the decision the more information you’re going to want to have. Ex. New car vs. new pencilo 6. Beware of secondary effects: economic actions generate both direct and indirect effects Secondary effect: the indirect impact of an event or policy that may not be easily and immediately observable- ex. Trade restrictions. Yacht taxo 7. The value of a good or service is subjective:  Ex. FSU football tickets. To FSU fans its a lot, to other fans its not.  Moving goods and services to those who value them most is a primarysource of economic progress.o 8. The Test of a theory is its ability to predict. If real world events are consistent with a theory, then that theory is valid.- Ex. Supply on demand. When price goes up people buy less. That theory has been proved valid.- Positive vs. Normative economicso Positive economics: the scientific study of what is (TESTABLE) Ex. 100 degrees in hereo Normative economics: judgments about what ought to be. (NOT TESTABLE) What we think is true, what we value. You can’t test. Ex. It’s too hot in here.- Four Pitfalls to avoid in economic thinkingo 1. Violation of ceteris paribus principle Ceteris paribus : other things constant- As an economists I make the statement: “when the price of roses increases, people buy less roses, ceteris paribus” however if something else changes, and its valentines day… then its not true, because people still buy roses even if they are overpriced because of valentines day.o 2. The belief that good intentions guarantee desirable outcomes Child resistant safety caps. More kids ended up getting pills Nirvana Fallacy: the logical error of comparing the actual with it idealized counterpart rather than the actual alternative.- Child Labor and sweatshops. You cant compare their real life towhat you wanted it to be.o 3. The belief that association is causation Ex. Superstitions. Initials and performance. Don’t think that because two things happen together. One causes the other.o 4. Fallacy of composition: belief that what is true for one might be true for all. Standing up to see a play better…if everyone does it too, maybe not everyone will be able to see better. Chapter 2- Understand how voluntary trade creates value and leads to economic progress o Voluntary vs. Coerced Voluntarily exchanging Coerced: if you don’t exchange then u will me worse off. Ex. Not paying taxes.o Because the value of goods is subjective, voluntary trade creates value. o Trade creates value When individuals engage in voluntary exchange, both parties are made better off By channeling goods and resources to those who value them most, trade creates value and increases the wealth created by a society’s resources.o How trade leads to economic progress Gains from specialization and division of labor- Trade allows us to focus on what we do best, and trade n other stuff. Gains from mass production methods- Imagine u go to a store and buy a can of tuna. It costs .50. it is cheaper to produce things in big quantities. Trade allows things to become cheaper. The more u open up trade, the more you can take advantage.  Gains from innovation- When two groups get together to trade, you can learn from each other. Trade is not just about items or resources, it’s about knowledge. - Know what transaction costs are and understand the importance of middlemeno Transaction costs: the time, effort and other resources needed to search out and complete exchangeo Middleman: a person who buys and sells goods or services or arranges trades. A middleman reduces transaction costs.- Know the characteristics and 4 incentives of private property rights.o Private property rights involve: 1. The right to exclusive use of the property 2. Legal protection against invasion from other individuals 3. The right to sell, transfer, exchange, or mortgage the property.o 4 incentives of property rights 1. Incentive to use resources in ways that are considered beneficial to others- Empty lotturn it into a parking lot during football games- Owners bear the cost of ignoring the wishes of


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