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FSU ECO 2000 - Basic Economic Principles

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January 10, 2011Is Life Getting Better or Worse?Objective measures to analyze:Life expectancyHealthIncomeEducationEntertainmentLife is getting BETTERThe Study of EconomicsEconomics is the science of how individuals make choices under scarcityScience: developing and testing objective theoriesIndividuals: a person or group of peopleChoice: the act of selecting among alternativesScarcity: the concept that there is less of something freely available from nature that people would like (i.e. time, money, cars, etc.)ScarcityAlmost everything is scarce!Air is not scarce=is not a choice; although clean air may be scarce1. Not the same thing as poverty!Scarcity=objectivePoverty=subjective2. Necessitates rationingRationing: allocating scarce goods to those who want themIn a market economy, price is used to ration goods3. Leads to competitive behavior= good! Allows for productivity and better goods and a range of pricesSimilar to Darwin’s Natural Selection theoryWhat do we do in the face of scarcity?When will the world run out of oil? NEVERFirst get the apples from the floor (cheapest), then when those run out, grab them from the first branches (more expensive), then when those run out, go to the next level of branches (even more expensive), etc.As oil becomes more scarce, the prices will rise to a point where people will no longer want to spend that much and will begin to search for alternativesResourcesResources: an input to produce an economic good; something used to make something elseHuman resources (human capital): intelligence, strength, etc.Physical resources (physical capital): man-made objectsNatural resources: oil, land, etc.Capital: human-made resources used to produce goods and services (ONLY human resources and physical resources!)Twelve Key Elements of EconomicsUsing the economic way of thinking, things are not always as they appear!January 12, 2011#1 Incentives MatterIncentives matter: choice is influenced in a predictable way by changing incentivesi.e.: the money game; the safer they make cars, the more reckless people drive—> the more accidents—> more fatalitiesInfluences ALL people (even altruists)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 everyonei.e. beer vs. liquor @ same price— will choose one based on preference. If indifferent and prices vary, will go with cheaper optionUtility: the subjective benefit or satisfaction a person expects from a choice or course of action (happiness!)Cannot compare it across people (i.e. pain tolerance on scale from 1-10)#2 There is No Such Thing as a Free LunchBecause resources are scarce, trade-offs must be madeEven if it’s free to you, it is no free to society! (took people and money to produce the product)Opportunity cost: the highest valued alternative that must be sacrificed when choosing an option (2nd best option)i.e. an hour of your time, how you spend your next $15“With every choice you rick the life you would have had; with every decision, you lose it.”- Richard BachFailure to understand this is one of the biggest mistakes made in economic reasoning#3 Decisions are Made at the MarginMarginal: describes the effect of a change in the current situationChange or additionali.e. Supersizing your extra value meal (only $0.59 difference); drive or flyLaw of Diminishing Marginal Utility: as consumption increases, the marginal utility derived from additional consumption will eventually declineAs you comsume more of something, your happiness about it goes downi.e. hearing your favorite song over and over in the beginning and you enjoy it, but after a couple months of hearing it, you’re sick of it and it no longer makes you happyJanuary 19, 2011Diamond-Water Paradox: water is more readily available (although more essential) and is there for cheaper than diamonds which are rare to come by (even though they’re are not essential to our existence) and are therefore more expensiveWhatever is less abundant (no matter its essentiality to us) will always have a higher monetary valuei.e. entertainers get paid more than teachers and nursesLook at chart in notebookMarginal thinking may also be why a stepwise criminal justice punishment system (punishment gets worse with level of the crime) might be more effective that a capital punishment system (death penalty for small crimes)There would be no incentive to stop someone from committing horrible crimes because the stakes would be the sameCost-Benefit Analysis: when making a decision one compares the marginal benefits and the marginal costsTo be economically efficient:1. All actions generating more benefits than costs should be undertaken (Benefits > Costs = Go)2. No actions generating more costs than benefits should be undertaken (Benefits < Costs = Stop)People will rationally choose to not be fully informed when making decisionsi.e. When buying a new car: will do research for the best deal and the best car for you (big purchase)i.e. When buying a pencil: no research may be undertaken because the cost of the pencil is very small (small purchase)#4 Voluntary Trade Promotes Economic ProgressCoercion: Someone will devote resources to make you worse off if you do not complyi.e. Hot dog guy selling hot dogs (voluntary)i.e. Gunman asking for your wallet (coercion)A) Because the value of a good or service is subjective, voluntary trade moves goods from people who value them to less people who value them morei.e. class candy exchangeJanuary 24, 2011B) Trade makes larger output and consumption levels possible because it allows us to specialize in what we do best (i.e. spend time doing your occupation)How much of what you have or use everyday do you make yourself?The Law of Comparative Advantage: Individuals, economies and nations should produce that which they can make at a lower opportunity cost and trade for something elseThis way, you maximize what you havei.e. Should LeBron James clean his own house although he can probably do it the best and the fastest (absolute advantage)?—NO! If he does, that’s time he’s not using to do things that will make him a lot of money (make commercials, practice basketball)Who should mow the lawn?Wage per hourHoursCostBob$55$25Bob’s Dad(Comparative Advantage!)$202$40T-ShirtsWageDJ Pauly D (Comparative Advantage!)20$50The Situation10Cheaper for The Situation to do the work than Pauly D if The Situation’s wage is


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