Eco2023 Notes Chapter 1 The Economic Approach 4 Learning Goals Identify and list the critical components of economics 1 2 List and provide examples of the 8 guideposts of economic thinking 3 Distinguish between 2 types of economic statements 4 Avoid making 4 common mistakes Improving standards of living doesn t just happen by accident Actually they don t have to improve at all What Is Economics About Economics tries to explain and predict the behavior of consumers firms and Historically mechanisms that have been used to deal with the problem of gov t scarcity o Force o Tradition emphasized past ways relied on families o Authority gov t and church o Market o Combinations of 1 4 Scarcity and Tradeoffs o Scarcity requires that some wants remain unfulfilled o Issues of equity justice and fairness are embedded with scarcity The Economic Way of Thinking Things are not always as they appear to be Guidelines to the economic process 1 There are ALWAYS tradeoffs a What you give up is the value of your opportunity cost b It s giving up the next best thing NOT the sum of all you gave up 2 3 Individuals choose purposefully Incentives matter a As the incentive goes up you will be more likely to do something b Incentive DOESN T have to be money 4 Think on the margin not in total or on average a Marginal means additional or incremental i Water diamond paradox b Rule to live by i Continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost 5 More information leads to better decision making but more information is costly to get 6 Many choices create a secondary effect a The primary effect is often immediate and visible b The secondary effect usually comes later and is not as visible i Example punch in the arm primary effect punch back secondary effect bruise 7 Value is subjective a Value is determined by the purchaser 8 Economic thinking is scientific thinking and predict actions b Economists do it with models a Economists use data and information generated by people to explain Question 1 1 When economists say that people choose rationally this means people respond in predictable ways to changes in costs and benefits Positive Normative Economics Read essay on Blackboard Pitfalls to Avoid in Economic Thinking Don t make one of these errors o 1 Violation of ceteris paribus Ceteris Paribus is Latin for other things constant We want to isolate variables so we typically allow only one to change at a time EX stomach ache o 2 Good intentions do not necessarily result in good outcomes EX using someone else s clicker o 3 Association is NOT causation o 4 Fallacy of Composition Assumption what s good for the individual is good for the group Making this assumption is the fallacy Eco2023 Notes Chapter 2 Learning Goals Define and recognize examples of opportunity costs on your own Discern why voluntary trade creates value Realize why property rights are key to economic progress Recognize that specialization and division of labor lead to higher output Illustrate the concepts of tradeoffs opportunity costs and growth levels and living standards List society s three questions and specify the kinds of economic organizations on your own Two opposing views of trade 1 When people trade one person gains and the other person loses a Referred to as a zero sum game 2 When people trade both parties gain a Wealth is actually created by trade Trade Creates Value Voluntary trade creates wealth and promotes economic progress o Voluntary trade is expected to benefit both parties involved Potential trades 1 Finished goods exchanged through barter 2 Finished goods exchanged for money similar 3 Businesses buying resources 4 Consumers buying products A transaction cost is a monetary or nonmonetary barrier that lowers the benefits of trade The Importance of Property Rights 2 kinds of property rights 1 Common rights everybody owns it 2 Private rights only one person owns it Question MA Sam values his boat at 4 000 and Brenda values it at 9 000 If Brenda buys it from Sam for 7 000 which of the following is true Brenda gains 2 000 Sam gains 3 000 What could reduce the value created from voluntary trade Transaction cost monetary or nonmonetary barrier that lowers the benefits of trade o EX surfing the web looking for airline tickets Question When private ownership of a resource is clearly defined and enforced the private owner will develop and direct their property toward uses that others value highly because the market will generally reward them for doing so Question In the fictitious country of Econoland the government allows private ownership of chicken but not of bison If the demand for pork and the demand for beef both permanently increased in Econoland in the long run we would expect the population of chicken to rise and the population of bison to fall Incentives created by private property rights 1 Give proper care 2 Conserve for the future 3 Use resources in ways other people value 4 Mitigate possible harm to others Production Possibilities Curve PPC also called PP Frontier The PPC can shift o Shift out growth produce more o Shift in shrink produce less On the line is efficient inside is inefficient outside is unattainable o d F o Question Over time an increase in a person s education will shift that person s production possibilities curve outward h i n g C l o t Trade Output and Living Standards Law of Comparative Advantage o Make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost Translation make something you re good at and trade for something you re not good at o Importance of Comparative Advantage Low opportunity cost Comparative advantage Specialization Division of labor Voluntary trade Increased wealth Question According to the law of comparative advantage both individuals and nations will be able to produce a larger joint output if each productive activity is undertaken by the low opportunity cost producer Question If Kim can either wash 10 cars or wax 2 cars during a day and Vince can either wash 17 or wax 2 cars during a day then according to the law of comparative advantage their total output can be expanded if Kim specializes in waxing and Vince in washing Question Opportunity costs differ among nations primarily because nations have different endowments of land labor skills capital and technology Self sufficiency is the quickest and most absolute path to poverty Question When voluntary trade
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