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FSU ECO 2000 - Econ Class Notes

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1.9SECTION 1- basic economics principleseconomics is the science of how individuals make choices under scarcity.science: developing and testing objective theoriesindividuals: a person or group of peoplechoice: the act of selecting among alternatives scarcity: the concept that there is less of something freely available from nature than people would like it (ex. time, money, cars, etc) - scarcity is not the same thing as poverty- scarcity necessitates rationing (allocating scarce goods to those who want them; in a market economy, price is used to ration goods) - scarcity leads to competitive behavior; in economics, competition is good! Resource: an input used to produce an economic good 1) human resources (human capital) – tangible qualities as human beings that make us who we are (speed, endurance, etc.) 2) physical resources (physical capital) – manmade resources3) natural resources – coal, gold, iron ore, natural gas; capital: human-made resources used to produce other goods and services 1.14 Twelve Key Elements of Economics #1 Incentives matter – choice is influenced in a predictable way by changing incentives (ex. Money game) people respond to incentives- this economic principle influences all people (students, politicians, altruists, criminals) individuals are rational: they try to get the most from their limited resources. “greatest benefit at least possible cost”note: what is rational for one person may not be rational for everyone. utility: the subjective benefit or satisfaction a person expects from a choice orcourse of action; utility is what economists call happiness #2 There is no such thing as a free lunch – because resources are scarce, trade-offs must be made. 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, airbags vs. ???what is usually the biggest cost of getting your college degree? foregone earnings#3 Decisions are made at the marginmarginal: describes the effect of a change in the current situationmarginal = change or additional ex. Ponderosa buffet, supersizing your extra value meal, drive or flylaw of diminishing marginal utility : as consumption increases, the marginal utility derived from additional consumption will eventually decline. ex. banana eating contest resultsthe diamond – water paradox: don’t confuse total value with marginal value this helps us answer questions about our world:1. why do top pro-wrestlers and actors typically make more than top nurses and teachers? Their skills are rare and a lot less common so they get paid more.2. Why do people cheat on their spouses? Marginal thinking may also be why a stepwise criminal justice punishment system might be more effective than a capital punishment system. - If you’re going 1mph over the limit, you might as well go 5mph over and so on… Cost-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 undertaken2. no actions generating more costs than benefits should be undertaken “if it’s worth doing, it’s worth doing imperfectly” – perfection is not worth achieving; playing it too safe isn’t always good. We could make it perfectly safe to fly in planes, no crashes; but the money and time it costs to keep it that safe isn’t worth it. If you make the risk of flying 0, how much more expensive is it gonna be?? This is why people will choose not to be fully informed when making rational decisions. Ex. new car v. new pencil – cost of being perfectly informed is too high #4 Voluntary trade promotes economic progress voluntary vs. coercedcoercion: someone will devote resources to make you worse off if you don’t comply (ex. robbery) 1. voluntary trade moves goods to those who value them most2. trade allows us to produce more by specializing (law of comparative advantage) 3. ????A. because the value of a good or service is subjective, voluntary trade moves goods from people who value them less to people who value them more Ex. the candy game 1.21 B. trade makes larger output and consumption levels possible because it allows us to specialize in what we do bestHow 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 everything else. Ex. should LeBron James clean his own house? C. Voluntary Exchange makes it possible for firms to achieve lower per-unit costs by adopting mass production methods.#5 Transaction Costs are an Obstacle to tradetransaction costs: the time, effort, and other resources needed to search out and complete an exchange middleman: a person who buys and sells goods or services or arranges trades. A middleman supports trade by reducing transaction costs. (ex. real estate agents, grocery store, ebay) ; brings buyers an sellers together more conveniently #6 Prices bring the choices of buyers and sellers into balance- sellers prefer to sell things for higher prices- buyers prefer to buy things for lower prices Market prices bring these two conflicting forces into balance. #7 Profits direct businesses toward activities that increase wealthProfit: an excess of sales revenue relative to the opportunity cost of production- a profit occurs only when the value of the good produced is greater than the value of the resources used for its production. Loss: a deficit of sales revenue relative to the opportunity cost of production.- Losses are penalties imposed on those who produce goods that are valued less than that resources required for their production.The economic philosophy of business failure: “the mark of your ignorance is the depth of your belief in injustice and tragedy. What the caterpillar calls theend of the world, the master calls the butterfly” – Richard Bach#8 People Earn Income by Helping OthersThe process by which some people become rich will make everybody richer. - Bill Gates doesn’t create a bigger piece of the pie for himself and a smaller piece for the rest of us; he made the pie bigger for everyone. 1.23 #9 Production, not just jobs, provides the source of high living standardslet’s boost the economy! 1. hole-digging decree : it’s not the jobs that matter, it’s what you get outof those jobs that matters2. window-breaking bill 1. Agricultural


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