EXAM 1 Chapters 1 3 7 Chapter 1 Economics is the study of how we make choices under scarcity Scarcity the concept that there is less of a good freely available from nature than people would like o Ex Time money cars o There s not enough to go around for people to have as much as they want o Hard to find things that are not scarce air is an exception o Scarcity is not the same thing as poverty Scarcity is an objective term that s true all the time and everywhere Poverty is something that s subjective a person considered poor in one country may not be considered poor in another o Scarcity necessitates rationing b c there s not enough stuff to go around We have to figure out who gets the Ferrari You can ration goods on first come first serve basis political terms price Rationing allocating scarce goods to those who want them In the market economy price is used to ration goods o Scarcity leads to competitive behavior Resources o An input used to produce an economic good Human resources human capital Physical resources physical capital Natural resources o Capital human made resources used to produce other goods and services 8 Guideposts to Economic Thinking o 1 Resources are scarce so decision makers must make trade offs no such thing as a free lunch Opportunity Cost the highest valued alternative that must be sacrificed when choosing an option Ex An hour of your time how you spend your next 15 o 2 Individuals are rational they try to get the most from their airbags vs AIDS research limited resources Greatest benefit at least possible cost What is rational for one person may not be rational for everyone o 3 Incentives matter incentives Choice is influenced by a predictable way of changing Ex Killer seatbelts Belts o 4 Individuals make decisions at the margin Marginal describes the effect of a change in the current situation Ex Supersizing you extra value meal Driving or flying somewhere Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs Ex Drive or Fly Going to miami Drive 8 hours 100 MC 300 MB 5 hours Fly 3 hours 400 Fly not 60 dollars an hour Cost benefit Analysis o 5 Information helps us make better choices but is costly The bigger the decision the more information you re going to want to have Ex New car vs new pencil o 6 Beware of secondary effects economic actions generate both direct and indirect effects Secondary effect may not be easily and immediately observable the indirect impact of an event or policy that ex Trade restrictions Yacht tax o 7 The value of a good or service is subjective Ex FSU football tickets To FSU fans its a lot to other fans its Moving goods and services to those who value them most is a primary source of economic progress o 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 Supply on demand When price goes up people buy less That theory has been proved valid Positive vs Normative economics o Positive economics the scientific study of what is TESTABLE Ex 100 degrees in here o Normative economics TESTABLE judgments about what ought to be NOT What we think is true what we value You can t test Ex It s too hot in here Four Pitfalls to avoid in economic thinking o 1 Violation of ceteris paribus principle Ceteris paribus other things constant As an economists I make the statement when the price of roses increases people buy less roses ceteris paribus however if something else changes and its valentines day then its not true because people still buy roses even if they are overpriced because of valentines day o 2 The belief that good intentions guarantee desirable outcomes Child resistant safety caps More kids ended up getting pills Nirvana Fallacy the logical error of comparing the actual with it idealized counterpart rather than the actual alternative Child Labor and sweatshops You cant compare their o 3 The belief that association is causation real life to what you wanted it to be Ex Superstitions Initials and performance Don t think that because two things happen together One causes the other o 4 Fallacy of composition belief that what is true for one might be true for all Standing up to see a play better if everyone does it too maybe not everyone will be able to see better Chapter 2 Understand how voluntary trade creates value and leads to economic progress o Voluntary vs Coerced paying taxes value o Trade creates value Voluntarily exchanging Coerced if you don t exchange then u will me worse off Ex Not o Because the value of goods is subjective voluntary trade creates When individuals engage in voluntary exchange both parties are made better off By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources o How trade leads to economic progress Gains from specialization and division of labor Trade allows us to focus on what we do best and trade n other stuff Gains from mass production methods Imagine u go to a store and buy a can of tuna It costs 50 it is cheaper to produce things in big quantities Trade allows things to become cheaper The more u open up trade the more you can take advantage Gains from innovation When two groups get together to trade you can learn from each other Trade is not just about items or resources it s about knowledge Know what transaction costs are and understand the importance of middlemen o Transaction costs the time effort and other resources needed to search out and complete exchange o Middleman a person who buys and sells goods or services or arranges trades A middleman reduces transaction costs Know the characteristics and 4 incentives of private property rights o Private property rights 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 o 4 incentives of property rights 1 Incentive to use resources in ways that are considered beneficial to others games what they own Empty lot turn it into a parking lot during football Owners bear the cost of ignoring the wishes of others 2 Private owners have an incentive to care for and manage When you own something you have the incentive to take care of it more 3 Private owners have an incentive to conserve for the future so it lasts longer Popcorn at the movies 4 Private owners have an incentive to make sure property does not damage your property Ex Keeping
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