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FSU ECO 2013 - Chapter 1

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Chapter 1Is life getting better or worse?- Economics take subjective questions and answer it objectively- What measure should we analyze?- Ex. Life expectancy: If it is going up, then life is getting better than worse?- Ex. Health: healthy lives are better than less healthy, so life is getting better- Ex. Income: more money = better life?- Ex. Education: more education = better life?- Ex. Entertaining = better life?- Changes inio technology, medicine, entertainmentWhat is Economics?- Economics: Study of how we make choices under scarcity - Choice: the act of selecting among alternatives- Selecting among options- Scarcity: The concept that there is less of a good freely available from nature than people would like- Ex. Time, money, clean air- Only because things are scarce is why we have choices- Almost everything is scarce - It is NOT the same thing as poverty- Poverty is a subjective term- What is considered poor in one place may not be poor in another- Scarcity is true regardless and place so it is objective- Rationing: allocating of scarce goods to those who want them- Ex. First come first serve, who you know, and PRICE in a market economy- In a market economy, price is used to ration goods- Scarcity leads to competitive behavior- Competition is a good thing- Because we cant get as much as we want we have to compete - We have to innovate to beat our competitors - Resources: an input used to produce an economic good- 3 types- Human resources (human capital)- Ex. Intelligence, knowledge, speed, endurance, etc- Ex. Einstein’s intelligence- Physical resources (physical capital)- Ex. Manmade materials: building, pencil, laptop- Natural resources- Come from current state in nature- Ex. Land, crude oil, coal, etc- Capital: Human-made resources used to produce other goods and services- physical and human, NOT natural resourcesThe Economic Way of Thinking8 Guideposts - Things are not always as they appear1) Resources are scare, so decision makers must make trade-offs- “There is no such thing as a free lunch”- Just because it is free to you, doesn't mean it is free to the society- Every time you use a resource, that something cannot be used to produce something else- Opportunity cost: highest valued alternative that must be sacrificed when choosing an option- Ex. An hour of your time- Ex. Guns and butter: military money vs social products...every dollar spent on military is every dollar that cant be spent on social products2) Individuals are rational: they try to get the most from their limited resources- They try to maximize benefits at the least possible cost- “What is the least amount of work I can do and still get an A”- If two things cost the same, you'll choose the one that gives you the most benefit. If they are different then you choose the cheapest.- Ex. Red wine vs spiced rum- You are acting rational if you do this. Buying wine if you prefer rum if they both cost the same is irrational.- What is rational for one person may not be rational for everyone- Ex. Smoking cigarettes outweigh the costs for those who smoke; the costs outweigh the benefits for those who don’t smoke3) Incentives matter: choice is influenced in a predictable way by changing incentives- Ex. Money Game (macro style)- People respond to changing incentives- Increases benefits increases actions- Predicting in advance vs seeing afterward- Ex. Lesson from joabs father- Ex. Prices- When price goes down, we buy more- When price goes up, we buy less4) Individuals make decisions at the margin- Marginal: Effect of a change in the current situation- The cost and benefit of adding one more- Ex. Olive garden- All you can eat SSB (soup, salad breadsticks): $6- Chicken parm dinner (chicken parm, SSB): $10- MB: Chicken parm- MC: $4, the extra time working off the calories- If that chicken parm has a greater benefit than the $4 cost, then choose the chicken parm dinner- Cost benefit analysis: one will undergo an action when the marginal benefits outweigh the marginal costs- Ex. Airport security vs lead clean upA) airport security- Cost: 50 billion- Benefits: 100 livesB) lead clean up- Cost: 70 billion- Benefits: 120 livesMB: 20 lives savedMC: 20 billion dollars- CBA: are the 20 lives worth spending 20 billion dollars, then option B.....if not, option A5) Information helps us make better choices; but information is costly- The more information you have, the better decision you can make- It is never worth it to gather ALL the information or perfect information- The smaller it impacts you, the less info you need- Ex. New houses vs new notebook- When buying a house, look through many houses. Negotiate price, gather information until you can make a good decision. Still wont have perfect information because you wont look at every house on the market.- When buying a new notebook, you did not look through all the notebooks. Didn't have someone inspect it. Less worth it to gather all the information.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 or may not be easily and immediately observable - There is something you anticipate which is the direct effect- Something that happens as a result, that you didn't plan on happening- Ex. Drinking- Direct effect: the good feeling- Indirect/secondary effect: getting arrested- Ex. Fuel efficiency regulations: actually causing the cars to be more dangerous- Ex. Trade regulations7) The value of a good or service is subjective- objective: means the same for everyone- Subjective: means different for different people- So because the value is subjective, voluntary trade creates value - Ex. Paying for a pack of gum- Ex. Orange bowl tickets- Moving goods and services to those who value them most is primary source of economic progress8) The test of a theory is its ability to predict- if real world events are consistent of the theory, then the theory is valid- Need to isolate theories and test them numerous times- Ex. Are elephants afraid of mice?~Positive & Normative Economics- Positive: the scientific study of what is- This can be tested- Ex. It is 100 degrees in this room- Ex. The war in iraq is 500 billion dollars- Normative: Judgements about what ought to be- Personal value judgement - This cannot be tested- Ex. It is hot in this room- Ex. We have spent way too much money on the war in iraq~4 Pitfalls to Avoid in economic thinking1) Violation of the ceteris paribus- ceteris


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