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Chapter One Getting Started 1 Scarcity our inability to satisfy all our wants a Faced with scarcity we must make choices 2 Economics Defined a Economics the social science that studies the choices that individuals businesses governments and entire societies make as they cop with scarcity the incentives that influence those choices and the arrangements that coordinate them i How do choices end up determining what how and for whom goods and services ii When do choices made in the pursuit of self interest also promote the social get produced interest 3 What How and For Whom a Goods and Services the objects and actions that people value and produce to satisfy human wants i Goods objects that satisfy wants ii Services actions that satisfy wants b What c How i Determines the quantities of corn we grow homes we build and health care services we produce ect i How goods and services are produced ii Machines vs people d For Whom i Depends on the incomes that people earn and the prices they pay for the goods and services they buy ii Economics explains how the choices that individuals businesses and governments make and the interactions of those choices end up determining what how and for whom good and services get produced 4 When Is the Pursuit of Self Interest in the Social Interest a Self Interest and the Social Interest i Self Interest choices that are the best for the individual who makes the decision ii Social Interest choices that are best for the society as a whole 1 Has two dimensions efficiency baking the biggest pie possible and equity sharing the pie in the fairest way possible 5 Core Economic Ideas People make rational choices by comparing costs and benefits Cost is what you must give up to get something Benefit is what you gain when you get something and is measured by what you are willing to give up to get it A rational choice is made on the margin Choices respond to incentives 6 Rational Choice one that uses the available resources to best achieve the objective of the person making the choice a Only the wants and preferences of the person making a choice are relevant to determine rationality b Answers the question What goods and services will get produced and in what quantities The answer is those that people rationally choose to buy 7 Cost What You Must Give Up a Opportunity Cost the best thing that you must give up to get what you want i No matter what you choose to do you make a choice among many alternatives it is the best alternative that you must give up ii Emphasizes that when we make a choice in the face of scarcity we gove up an opportunity to do something else iii Only the best alternative forgone it doesn t include all the expenditures you make iv Past expenditures that can t be reversed are not a part of opportunity cost b Sunk cost a previously incurred and irreversible cost 8 Benefit Gain Measured by What You Are Willing to Give Up a Benefit the gain or pleasure that it brings i Economists measure the benefit of something by what a person is willing to give up to get it 9 On the Margin A choice on the margin is one that adjusts the borders or edges of a plan to determine the best course of action Margin comparing all the relevant alternatives systematically and incrementally a Marginal Cost the opportunity cost of a one unit increase in activity i What you must give up to get one additional unit of it ii Increases as you do more of it b Marginal Benefit the benefit of a one unit increase in an activity i Measured by what you are willing to give up to get that one additional unit of it ii A fundamental feature is that it diminishes c Making a Rational Choice i As long as the marginal benefit exceeds or equals the marginal cost our choice is rational and our scarce resources are used to make us as well off as possible 10 Responding to Incentives a Incentive a reward or penalty that encourages or discourages an action i The choices we make depend on the incentives we face ii A change in the marginal benefit or cost changes the incentives that we face and leads us to change our actions 11 The Mirco and Macro Views of the World a Microeconomics the study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments b Macroeconomics the study of the aggregate effects on the national economy anf the global economy of the choices that individuals businesses and governments make 12 Economics as Social Science a Positive Statements about what is i Say what is currently believed about the way the world operates ii May be right or wrong but we can test it by checking it against the facts b Normative Statements statements about what ought to be i Depend on values and cannot be tested c Unscrambling Cause and Effect i The central idea that economists use to unscramble cause and effect is ceteris paribus ii Ceteris Paribus other things being equal iii Correlation a tendency for the values of two variables to move together in a predictable and related way 13 Economics as a Policy Tool a Personal Economic Policy b Business Economic Policy c Government Economic Policy Chapter 2 The US and Global Economies 1 What Do We Produce a Consumption Goods and Services items that are bought by individuals and used to provide personal enjoyment and contribute to a person s quality of life i Ex Housing SUVs movies skiing lessons doctor ii Largest share and a share that doesn t fluctuate much b Capital Goods goods that are bought by businesses to increase their productive resources recession i Auto assembly lines airplanes oil tankers ii Volume produced fluctuates as the economy cycles from boom to c Government Goods and Services items that are bought by governments i Missiles and weapon systems travel services Internet services police protection roads paper and paper clips d Export Goods and Services items that are produced in one country and sold in another country Airline buys i US exports include airplanes produced by Boeing that Singapore 2 How Do We Produce Goods and services are produced by using productive resources Factors of Production the productive resources that are used to produce goods and services land labor capital and entrepreneurship a Land i All the gifts of nature ii Natural resources iii Minerals energy water air wild plants animals birds and fish iv Some are renewable and some are not b Labor the work time and work effort that people devote to producing goods and services Includes the physical and mental


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FSU ECO 2023 - Chapter 1

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