Macroeconomics Chapter 1 THE ECONOMIC APPROACH Is Life Getting Better or Worse Economists try to provide an answer that applies to most of the population When a poll was taken NBC WSJ 36 rated this last decade as Awful 31 as Not Good What Objective Answers Should We Analyze 1 Life Expectancy 2 Health 3 Income 4 Education 5 Entertainment Technology Medicine Entertainment Huge Advancements in What is Economics Economics Choice Scarcity than people would like ex time money is the study of how we make choices under scarcity is the act of selecting among alternatives is the concept that there is less of a good freely available from nature Scarcity 1 2 Scarcity necessitates rationing Is not the same thing as poverty Rationing allocating scarce goods to those who want them In a market economy price is used to ration goods Rationing can be done on a money based first come first serve basis or through connections who you know ex Political world 3 Scarcity leads to competitive behavior Resources An input used to produce an economic good 1 Human resources human capital Ex knowledge energy strength 2 Physical resources physical capital Ex tools 3 Natural resources Ex trees water Capital Human made resources used to produce other goods and services 1 The Economic Way of Thinking Things are not always as they seem The 8 Guideposts to Economic Thinking 1 Resources are scarce so decision makers must make trade offs Also known as the No Such Thing as Free Lunch rule What is used to produce one thing cannot be used to make another thing once consumed Opportunity cost the highest valued alternative that must be sacrificed when choosing an option Ex An hour of your time can be used for studying or leisure Guns and Butter military v social program spending Individuals are rational They try to get the most from their limited resources Ex Red wine v Spiced rum The consumer will choose the good with greatest personal value Ex Welfare v Education note What is rational for one individual may not be rational for everyone Incentives matter Choice is influenced in a predictable way by changing incentives Ex Money and tennis ball game As the value of the bill increased the more willing the crowd was to make as much noise as possible Higher incentive more likely to engage 2 3 4 Individuals make decisions at the margin Marginal describes the effect of a change in a current situation Comparing marginal benefit against the marginal cost Ex Getting a burger and drink for 3 Or Getting a combo meal burger drink and fries for 3 50 The consumer must decide if the marginal benefit is worth the marginal cost Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs Ex Airport Security v Lead Clean up Program Airport Security Lead Clean up Cost 50 Billion 70 Billion Benefit 100 lives 120 lives Marginal Cost MC 20 B Marginal Benefit MB 20 lives Cost benefit analysis Is the extra 20 B worth saving an extra 20 lives Information helps us make better choices but it is costly 5 Ex New house v New notebook 2 Much more time will be given up when the purchase is a larger decision However the consumer will not be able to acquire all information looking at EVERY house on the market because it would be too costly 6 Beware of secondary effects economic actions generate both direct and indirect effects Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable Ex Fuel efficiency regulations Trade restrictions tariffs 7 The value of a good or service is subjective Because goods are subjective voluntary trade creates value Ex Opera tickets some may be willing to pay more based on how valuable the tickets are to them Moving goods and services to those who value them 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 Ex Elephants and the fear of mice Positive vs Normative Economics Positive Economics the scientific study of what is testable ex It s 90 degrees in this room is testable Normative Economics judgments about what ought to be not testable It should be 70 degrees in this room is not testable 4 Pitfalls to Avoid in Economic Thinking 1 Violation of ceteris paribus principle Ceteris paribus other things constant Ex buying eggs However if peoples income increases at the same time this is not necessarily If the price of eggs goes up people will buy less eggs ceteris paribus true Or on holidays such as Easter this will not hold true 2 Good intentions do not guarantee desirable outcomes Ex suicide warning labels led to an increase in the amount of suicides because some who needed the meds chose not to take the meds due to the suicide warning 3 Association is not causation Ex Superstitions Sunspots and economic activity Just because one thing occurs after another doesn t mean it is the cause of the event 3 4 Fallacy of Composition the belief that what is true for one might not be true for all Ex When you get a raise v when everyone gets a raise inflation Microeconomics v Macroeconomics Microeconomics within individually defined units such as households focuses on how human behavior affects the conduct of affairs Macroeconomics aggregated markets focuses on how human behavior affects the outcomes in highly Review What is scarcity What are the 8 guideposts to economic thinking Positive v Normative economics What are the 4 pitfalls to avoid in economic thinking Chapter 2 Trade Creates Value 1 When Individuals engage in voluntary exchange both parties are made better off Opposite example a coerce trade make the trade or be made worse off 2 Channeling goods and resources to those who value them most increases the wealth created by a society s resources Creation of Wealth The process by which some people become rich will make everybody richer Ex Henry Ford the assembly line Made the production of cars cheaper providing more consumers with cars for cheaper value while making money off of his technology Both the consumer and the seller got what they wanted and both parties benefitted Importance of Property Rights Private property right involve 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property The Four Incentives of Property Rights 1 Incentives to use the resource in ways that are beneficial to others Ex South Park
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