Chapter 1- Economics – the study of how we make choices under scarcity- Scarcity – fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like- The 8 guideposts to economic thinking are:1. Resources are scarce, so tradeoffs must be made2. Individuals are rational: they try to get the most from their limited resources3. Incentives matter4. Individuals make decisions at the margin5. Information helps us make better choices but is costly6. Beware of secondary effects7. The value of a good or service is subjective8. The test of a theory is its ability to predict- Difference between positive and normative economic statement:o Positive economic statements are testableo Normative economic statement are not testable- Four pitfalls to avoid in economic thinking:1. Violation of the ceteris paribus (one thing changes, other things follow; price of houses goes up, less people buy houses) principle2. The belief that good intentions equal desirable outcomes3. The belief that association is causation4. The fallacy of composition – belief that what is true for one is true for the group; NOT TRUEChapter 2- Voluntary trade creates value – people value things differently; what one person wants may be useless to another. This leads to economic progress because trade becomes more frequent and more mutually beneficial, stimulating the economy (the candy game)- 4 incentives of property rights:1. Property owners can gain by employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring the wishes of others2. Property owners have a strong incentive to care for and properly manage what they own3. Property owners have an incentive to conserve for the suture – particularly if the property is expected to increase in value4. Property owners have an incentive to lower the chance that their property will cause damage to the property of others- The Production Possibilities Curve (PPC) is used to demonstrate the most efficient way to make use of one’s resources1. Anything on the PPC is EFFICIENT2. Anything inside the PPC in INEFFICIENT3. Anything outside the PPC is UNATTAINABLE- There are 4 factors that shift the PPC:1. An increase in the economy’s resource base would expand our ability to produce goods and services2. Advancements in technology can expand the economy’s production possibilities3. An improvement in the rules under which the economy functions can also increase output4. By working harder and giving up current leisure, we could increase production of goods and services- Law of Comparative Advantage – individuals, firms, regions or nations can gain by specializing in production of good they can produce the cheapest- 3 questions every economist faces:1. What will be produced?2. How will it be produced?3. For whom will it be produced?- Capitalism vs Socialism: Capitalism tends to work better because is works similarly to natural selection, utilizing the idea of market efficiencyChapter 3- Law of Demand – there is an inverse relationship between the price of a good and the quantity that buyers are willing to purchase; this causes a downward sloping demand curve- Law of Supply – there is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce; this causes an upward sloping demand curve- Consumer Surplus – the difference between the maximum amount the consumers would be willing to pay and the amount that they actually pay- Producer Surplus – the difference between the minimum price suppliers are willing to accept and the price they actually receive- Demand vs Quantity Demanded:- Quantity demanded – a movement along the curve caused by a change in the price of the good in question- Demand – a shift of the curve cause by anything other than the change in price of the quantity demanded- Supply vs Quantity Supplied:- Quantity supplied – a movement along the curve cause by a change in the price of the good in question- Supply – a shift of the curve cause by anything other than the change in price of the good in question- Elastic vs Inelastic:- Inelastic – changes in quantity are not sensitive to changes in price- Elastic – changes in quantity are sensitive to changes in price- SHIFTERS OF DEMAND – there are 4 shifters of demand:1. An increase in Income (I) increases the demand for normal goods & decreases the demand for inferior goods Normal goods: Shrimp, steak, etc. Inferior goods: Ramen, lunch meat, etc.- Normal Goods: I↑ → DNormal ↑- Inferior Goods: I↑ → DInferior ↓2. A change in the number of consumers increases demand:- #Consumers↑ → D↑3. A change in the price of a related good: Substitutes: Beef vs Chicken, etc. Compliments: things that go together – Peanut Butter & Jelly, etc.- Substitutes: Psubstitute ↑ → D ↑- Compliments: Pcompliments ↑ → D↓4. A change in expectations: Expected change in price (a sale, etc.) Expected change in income- Expected Price: Pfuture ↑ → D↑- Expected Income: Ifuture ↑ → D↑- SHIFTERS OF SUPPLY:1. A change in resource price: Presource ↑→ S↓2. A change in technology: Technology ↑ → S↑3. A change in Nature or Politics: Depends on Change4. A change in taxes: Taxes ↑ → S↓- Market Equilibrium:- If there is excess supply, price will fall- If there is excess demand, price will rise- So in equilibrium, there is no excess supply or excess demand- Gives you the equilibrium Price and Quantity- Invisible Hand Principle – the tendency for people (while pursuing their own interests) is to promote the economic well-being of societyChapter 6- The US government has vastly grown over the years1. The government’s percentage of the national GDP has gone from 9.4% in 1930 to 39.7% in 20102. The biggest contributor to government spending is TRANSFER PAYMENTS: Transfer payments: transfers of income from some individuals to other- Social security, unemployment, welfare, etc.- Transfer payments make up nearly half of the government spending- Economics of Voting1. Rational ignorance effect: a rational individual has little or no incentive to acquire information needed to cast an informed vote Marginal benefit of voting: the chance that your vote was the deciding vote multiplied by how much you care that a certain candidate wins Marginal cost of voting: the cost of informing yourself, registering
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