FSU ECO 2023 - Chapter 1 The Economic Approach

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ECO 2023 Principles of Microeconomics Chapter 1 The Economic Approach 4 Learning Goals 1 Identify and list the critical components of economics Chapter heading What is Economics About Key terms Scarcity The desire for the good far exceeds their availability available in nature Resource materials or assets that are transformed to produce benefit and are then consumed sometimes consumed so much that they become scarce or unavailable Rationing controlled distribution of scarce resources goods or services to protective them from completely running out Way of controlling how much of certain things we use What is economics Economics tries to explain and predict the behavior of consumers firms and government How are scarcity and choice related Scarcity leads to tradeoffs because we don t have everything we want readily available to us we have to trade for things we desire this leads us to make choices over what is most valuable to us Without scarcity we wouldn t have to make choices How are scarcity and poverty different In order to have no scarcity that means everyone s wants and desires have been met this will never happen Poverty on the other hand implies that some level of need has been met this is something we strive to achieve all the time If price is not used as a rationing device what are other alternatives Timing could be another rationing device First come first served Behavior or economic status may be a device certain genders and ages may have an advantage over others All things can somehow be used to decide who gets what products 2 List and provide examples of the eight guideposts of economic thinking Chapter heading The Economic Way of Thinking Key terms Opportunity cost the value of the next best alternative only the highest valued thing not all the things you must forgo Economizing behavior making a decision to gain a specific benefit for the least possible cost Utility decisions based on marginal costs and marginal benefits Marginal the difference between the costs and benefits Secondary effects the effect that is usually unseen until it happens usually a negative side effect Scientific thinking economists use data and information generated by people to explain and predict actions Eight guideposts 1 There are always tradeoffs Example There is no such thing as a free lunch to attend a few lunch you will be missing out on doing something else or you may have to decide if the food offered is good food 2 Individuals choose purposefully Example People try and get the most benefits for the least cost or effort 3 Incentives matter Example As the incentive goes up you are more likely to do something Dancing in front of a class of 400 hundred people for free You wouldn t do it but for money the more money you are offered the more likely you are to do it 4 Think on the margin not in total or on average Example Marginal cost is additional cost Continue to engage in an activity as long as the marginal benefits are greater than the marginal cost Same goes for deciding when to break up with someone Only do it if the costs are worse than the benefits 5 More information leads to better decision making but more information is costly to get Example Car Fax Buying a car is a big deal and it s important to look into all the details before purchasing one it is worth it to spend days researching On the other hand researching what flavor yogurt is better may not be worth your time 6 Many choices create a secondary effect Example Installing baby carriers into airplanes may sound like a good idea but if parents now have to buy an extra plane ticket for their child to fly they are more likely to drive instead There is a much higher risk of dying in a car accident then plane accident What seems like a good idea may also lead to a bad outcome 7 Value is subjective Example Beauty is in the eye of the beholder and one man s trash is another man s treasure Value depends on the person who is buying the item if the item is worth a lot to you you ll spend more on it 8 Economic thinking is scientific thinking Example Economists use data and information generated to explain and predict actions 3 Distinguish between two types of economic statements Chapter heading Positive and Normative Economics Key terms Positive economics a testable hypothesis that can be proved either true or false Normative economics an opinion based statement of what ought to be What is the difference between positive and normative economics One can be tested and one can t be Provide an example of each kind of statement Positive Example Red cars get more traffic and speeding tickets Normative Example The drivers of red cars should be men 4 Avoid making four common mistakes Chapter heading Pitfalls to Avoid in Economic Thinking Key terms Ceteris paribus other things constant Fallacy of composition assuming that s what is good for an individual is good for the group and being false Four common mistakes 1 Violation of ceteris paribus 2 Good intentions do not necessarily lead to good outcomes 3 Association is not causation 4 Fallacy of composition ECO 2023 Principles of Microeconomics Chapter 2 Some Tools of the Economist 6 Learning Goals 1 Define and recognize examples of opportunity costs Chapter heading What Shall We Give Up Key term Opportunity cost the highest valued activity sacrificed in making a choice They are subjective meaning they vary amongst people LeBron James would have incurred a large opportunity cost from going to college What is your opportunity cost of going to college Making money and not spending money on college is a big cost students need to decide if it s worth it Some students decide on school because of a relationship is it more important to stay at home with a loved one or travel off on your own Can opportunity costs be objectively measured Why or Why not subjective it all depends on what the person thinks things are worth For some people a diamond earring is worth hundreds of dollars and for others it s not worth a dime because they are always No 2 Discern why voluntary trade creates value Chapter heading Trade Creates Value Key term Transactions costs the time effort and other resources needed to search out negotiate and consummate an exchange They can reduce our ability to produce gains from potential exchange What are the two important aspects of voluntary exchange 1 Voluntary trade creates value 2 Without voluntary trade countries wouldn t trade for goods at which they have a high opportunity cost and


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FSU ECO 2023 - Chapter 1 The Economic Approach

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