ECO2023 Test 1 Chapter 1 The Economic Approach Scarcity less of a good freely available than what people would like o NOT the same as poverty Scarcity leads to Tradeoffs which result in us having to make Choices Mechanisms used to deal with scarcity o Force o Tradition o Authority government church etc o Market Scarcity requires that some wants remain unfulfilled o Makes rationing a necessity Rationing Allocating a limited supply of a good or resource among people who would like to have more of it Rationing can be done through price government factors social status political standing or can be done on a first come first serve basis Resource An input used to produce economic goods 3 types o Human Physical Natural 8 Guideposts to Economic Thinking 1 There are Always Trade Offs a Opportunity Cost The highest valued alternative that must be sacrificed as a result of choosing an option i NOT the sum of all alternatives Just the cost of the next best thing 2 Individuals Choose Purposefully a Economizing Behavior Choosing the option that offers the greatest benefit at the least possible cost i Economizing Behavior Rational Behavior b Utility The subjective benefit or satisfaction a person expects from choice or course of action i Often influences what an individual chooses 3 Incentives Matter vice versa a As incentives go up an individual will be more likely to do something and b Changes in personal costs and benefits will exert a predictable influence on the choices of people 4 Individuals Make Decisions on the Margin a Marginal Term used to describe the effects of a change in the current situation i Ex Marginal cost is the cost of producing one additional unit b I e A producer s Marginal Cost is the cost of producing one additional unit of a product 5 More Info leads to Better Decisions but Info is Costly to Get 6 Many Choices Create Secondary Effects a Secondary Effects indirect impact of an event or policy that may not be easily and or immediately observable i Often unintended and overlooked 7 Value is Subjective person to person 8 Economic Thinking Scientific Thinking a Value is determined by the purchaser therefore may be different from a Scientific Thinking Developing a theory from basic principles and testing it against events in the real world Positive Economics Scientific study of what is in economic relationships o Ex If the price of gasoline rises people will buy less gasoline Can be statistically researched and proved Normative Economics Judgments about what ought to be in economic subjects FACTS OPINIONS o Ex Political party preferences in individuals Pitfalls to Avoid in Economic Thinking 1 DON T violate Ceteris Paribus a Other things constant 2 Good intentions DO NOT guarantee good or desirable outcomes 3 Association IS NOT causation 4 The Fallacy of Composition what s good for an individual may not be good for the group Chapter 2 Some Tools of the Economist Opportunity costs cannot be objectively measured because they depend on how the decision maker values their options Trade Creates Value o 2 important aspects of Voluntary Exchange 1 When individuals engage in voluntary exchange both parties are made better off 2 By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources Transaction Costs cost of the time effort and other resources used to search out negotiate and conclude an exchange o Transaction costs decrease the benefit of voluntary exchange because the cost of information transportation and other elements of transaction costs will sometimes be so great that potential gains from trade will be unrealized Property Rights Private Property Rights Property rights that are exclusively held by an owner and protected against invasion by others Private property rights involve 3 things 1 The right to exclusive use of the property 2 Legal protection against invasion by others without the owner s permission 3 The right to transfer sell exchange or mortgage Private property rights change behavior in 4 key ways 1 Private owners can gain by employing their resources in ways that are beneficial to others and they can bear the opportunity cost of ignoring the wishes of others 2 Private owners have a strong incentive to care for and properly manage what they own 3 Private owners have an incentive to conserve for the future particularly if the property is expected to increase in value 4 Private owners have an incentive to lower the chance that their property will cause damage to the property of others Production Possibilities Curve PPC Shows the maximum amount of any two products that can be produced from a fixed set of resources and the possible trade offs in production between them The slope indicates the amount of one product that must be given up to produce more of another Points INSIDE the curve are Inefficient wasted resources Points OUTSIDE the curve are Unattainable Points ON the curve are efficient 4 Factors can potentially shift the PPC outward 1 An increase in economy s resources a Expands ability to produce goods and services b Investment The purchase construction or development of resources 2 Advancement in technology a b Invention creation of new products or processes Innovation practical and effective adoption of new technologies i Entrepreneur Individual who introduces new products or improved technologies and decides which projects to undertake c Creative Destruction new products and methods continually replacing old ones Improvement in rules within the economy 3 4 Working harder and giving up current leisure a Expands ability to produce goods and services Gains from Trade Division of Labor method that breaks down production into a series of specific tasks each performed by a different worker Law of Comparative Advantage Individuals firms regions or nations can gain by specializing in the production of goods that they produce cheaply or at a low opportunity cost and exchanging them for goods they cannot produce at a low opportunity cost o In other words if everyone specializes in a specific product and then just trades with each other the most wealth will be created Self sufficiency is NOT good Aside from Specialization and Division of Labor economic progress can be achieved in 2 other ways 1 Gains from mass production methods a Trade promotes economic progress by making it possible for firms to lower their per unit costs with mass production 2 Gains from innovation a Trade makes it
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