Microeconomics Chapter 1 The Economic Approach What is economics Economics is the study of how we make choices under scarcity 1 Choice the act of selecting among alternatives 2 Scarcity the concept that there is less of a good freely available from nature than people would like EX time money cars etc Scarcity Scarcity is not the same thing as poverty Scarcity necessitates rationing allocating scarce goods to those who want them o Rationing o In a market economy price is used to ration goods o Scarcity leads to competitive behavior o EX apple tree the apples on the ground are being taken first because they re the easiest for producers to obtain for their consumers they are cheap as the apples on the ground start running out consumers are worried of running out but producers go to the first branches for more apples and just charge more as they run out again the apples become more and more expensive as producers go higher up on the tree may have to switch to an alternative source if gets to expensive relates to obtaining oil Resources Resources an input used to produce an economic good 1 Human resources human capital Bill Gates his creativity intelligence Michael Phelps his talent strength 2 Physical resources physical capital 3 Natural resources resources available to us by nature oil coal human made resources used to produce other goods and services Capital 8 Guideposts to Economic Thinking 1 Resources are scarce so decision makers must make trade offs no such thing as a free lunch EX someone handing out free pizza isn t free because the products used to make the pizza Opportunity cost cannot be used again and cost something to someone option the highest valued alternative that must be sacrificed when choosing an EX choosing to come to Micro class for an hour cannot be used for anything else like sleeping EX how you spend your next 15 if spent on food the next alternative like buying a DVD is your opportunity cost 2 Individuals are rational they try to get the most from their limited resources Greatest benefit at the least possible cost EX beer or liquor 1 case of beer vs 1 bottle of liquor at 15 each choose liquor if want to Utility get more drunk if you prefer beer over liquor than get the beer preference is subjective things give you the equal amount of utility then you pick the one that s the cheapest the happiness that deciphers the product you choose if prices are all equal if 2 3 Incentives matter choice is influenced in a predictable way by changing incentives EX money game set out a penny who wants it vs a 10 EX killer seatbelt would you answer a call text if a dagger was protruding out of the steering wheel if you answered your phone EX potty training a child to where everytime they use the bathroom they get their favorite candy 4 Individuals make decisions at the margin Marginal describes the effect of a change in the current situation EX Ponderosa Buffet all you can eat side dish bar for 7 50 or a steak dinner plus the all you can eat side bar for 9 the marginal cost is 1 50 and the marginal benefit is the steak supersizing your extra value meal at McDonalds marginal cost is 0 69 calories self loathing and the marginal benefit is a bigger drink and more fries EX going to Miami drive 8 hours for 100 or fly 3 hours for 400 marginal cost to fly versus drive is 300 and the marginal benefit of flying is 5 hours divide 300 by 5 which 60 so if your value of time is more than 60 an hour then you should fly if it is less than 60 then you should drive marginal costs one will undergo an action when the marginal benefits outweigh the Cost benefit analysis 5 Information helps us making better choices but is costly EX new car vs new pencil would test drive several cars before decided to pay that much money for a new one would not test out a pencil since it s not worth that much EX voting for the next president your one vote doesn t mean that much because its one vote among millions so you re less likely to pour in your valuable time into politics and deciding who s a better candidate Secondary effect 6 Beware of secondary effects economic actions generate both direct and indirect effects immediately observable the indirect impact of an event or policy that may not be easily and EX Yacht tax luxury tax to get tax dollars from rich people but the secondary effect is that rich people no longer want to buy yachts and would rather buy something else with their money then the people who build the yachts lose their jobs which effects the middle class EX Trade restrictions say many Americans are interested in buying their cars from Japan car producers within the US put trade restrictions so that Americans have to buy cars within America to boost the industry instead of Japan Japan may be buying resources from the US but once they realize less cars are being exported from them they will put trade restrictions on their imports from the US didn t create jobs just shifted them 7 The value of a good or service is subjective EX FSU football tickets if someone in Wisconsin has a ticket to a game at FSU and knows the ticket would be more valuable to a student in Tallahassee then he can sell the ticket to the student at whatever value he thinks the ticket will be worth not what the ticket is listed at EX how much would you pay for a bottle of water right now Moving goods and services to those who value them most is a primary source of economic progress 8 The test of a theory is its ability to predict If real world events are consistent with a theory then that theory is valid Theories must be tested numerous times in order to be considered true Test Theories Positive vs Normative Economics Positive economics false but we can test it to see what it is o EX it is 98 degrees in this room Normative economics based on our own opinions not testable o EX it is too hot in this room 4 pitfalls to avoid in economic thinking 1 Violation of ceteris paribus principal the scientific study of what is testable factual that may be true or judgments about what ought to be or what we think should be true Ceteris paribus EX buying roses if the price of roses goes up people will buy less roses ceteris paribus all other things constant if you don t say ceteris paribus then it could include other changes like it becoming Valentines Day which would make the statement false 2 The belief that good intentions guarantee desirable outcomes EX endangered species act rare woodpecker going extinct so environmentalists passed a
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