Chapter 1 What is Economics Economics is the study of how we make choices under scarcity Choice choice is the act of selecting among alternatives Scarcity scarcity is the concept that there is less of a good freely available from nature than we would like There is not much around for all of us to have as much as we want Some example are time money cars etc Few things are not scare air but clean air is scarce Scarcity Scarcity is not the same thing as poverty Poverty is a subjective term What is considered poor in one place is not poor in another Can depend on what period you live in Scarcity necessitates rationing Rationing rationing is allocating source goods to those who want them There are different ways to ration based on the people you know first come first serve etc How you ration a good is how you affect behavior In a market economy price is used to ration goods Scarcity leads to competitive behavior There is not enough around for all of us to get what we want so we com pete What do we do in the face of scarcity We use scare sources as much as we can because of the limited time they are available However it also encourages us to find better ways of get ting those resources The lack of oil encourages people to find more oil or finding different methods Resources A resource is an input used to produce an economic good It is something you use to produce something else 3 types of resources 1 Human Resources aka Human Capital Ex Seed endurance education time strength 2 Physical Resources Physical Capital Ex Hammer building paper pencil 3 Natural Resources come from nature and are NOT handmade Ex Gold oil land coal Ex A man using his knowledge for the lecture the land where the building of the classroom is and the screen used for the powerpoint Capital human made resources used to produce other goods and services Human Capital can refer to physical or mental abilities Ex Michael Phelps and his physical traits and Bill Gates with his creativity The Economic Way of Thinking Things are not always what they appear 8 Guideposts of Economics 1 Resources are scarce so decision makers must make trade offs There is no such thing as a free lunch even if it is free to you does not mean it was free from society s perspective it costed money to get the in gredients Opportunity Cost the highest valued alternative that must be sacri ficed when choosing an option Ex An hour of your time sleep however you spend your next twenty dollars You cannot spend that money anywhere else now Ex Is there a better way to spend money that money that would save more lives than maybe it is a better use of 50 bil lion dollars on airbags 2 Individuals are rational they try to get the most of their lim ited resources We understand that we have to make choices because of scarcity How do we get the the greatest benefit at the least cost What is the least amount of work I can do in the class to still get an A What is rational for one person may not be rational for everyone What do your preferences tell you Ex Some people choose to smoke and some people do not Cost does not matter to people who enjoy it To some people the cost does not rationalize the benefits Different costs and benefits to different people All rational ized 3 Incentives matter choice is influenced in a predictable way by changing incentives Ex Putting more money out for free gets more people participating When the benefit increases more people will do it If the cost of something goes up less people will do it Ex Killer seat belts people drive more reckless when they feel more safe while driving if there were no seat belts everyone would be very cautious while driving Utility the subjective benefit you expect to receive Ex Amanda trying to maximize her utility potty training for M Ms 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 7 50 Steak 9 00 Marginal Benefits Steak Marginal Costs 1 50 Ex Super sizing your extra value meal Marginal benefit more food more fries larger drink Marginal costs 69 cents the time spent burning the calories To drive or fly to Miami Drive 8 hours and 100 Fly 3 hours 400 MB 5 hours MC 300 So pick to fly only if your minimum value of time is greater than 60 hour This is called Cost Benefit Analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Information helps us make better choices but it is costly The more information we have the better decisions we make We do not always make the best choices The bigger decision the more it costs time wise etc For a car you ll do research For a pencil you don t 6 Beware of Secondary Effects Economics actions generate both direct and indirect effects Secondary Effect the indirect impact an event or policy that may not be easily and immediately observable Whenever we make some type of choice the outcome is direct What we do not anticipate is the secondary effect Ex Yacht Tax rich people stopped buying yachts business had to lay off people hurt poor middle class rather than help 7 The Value of a Good or Service is Subjective If an item is 1 that does not mean the value is 1 An 80 price tag could be worth 5 to you Moving goods and services to those who want them the most is the primary source of economic progress Ex FSU football ticket to someone who lives in Texas 8 1 Ex Selling water bottle for 3 when it costs 25 cents The Test of a Theory is its Ability to Predict Pull in date to test rather than assume it is true If real world events are consistent with that theory then the theory is valid Ex Red cars get more tickets They actually get less Positive VS Normative Positive the scientific study of what is It is testable It is 95 degrees in this room this can be tested to be true or false Normative judgements about what ought to be This is not testable They are subjective It is so hot in this room can not be tested to be true or false 4 Pitfalls to Avoid in Economic Thinking Violation of the Ceteris Paribus principle Ceteris Paribus means nothing else changes Must include it in a sentence if you don t you violate it When the prices of roses increase people buy less roses This is a viola tion When the prices of roses increase people buy less roses ceteris paribus The previous statement is wrong because the amount of people buy ing roses may stay the same when prices go up on a day like Valen tines …
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