Chapter 1 The Economic Approach Tuesday September 06 2011 11 38 PM Economics The study and use of scarce resources with alternative uses WHAT IS ECONOMICS ABOUT Economics tries to explain predict behaviour of consumers business firms and the government Economics does not furnish a body of settled conclusions immediately applicable to policy It is a method rather than a doctrine an apparatus of the mind a technique of thinking which helps its possessor to draw correct conclusions John M Keynes The economic approach isn t meant to describe the world as any one of us might want it to be or fear that it is or pray that it becomes but rather to explain what it actually is Most of us want to fix or change the world in some fashion But to change the world you first have to understand it From Super Freakanomics Scarcity and tradeoffs Scarcity leads to tradeoffs which in turn leads to decisions o Everything has a tradeoff Economically thinking the decision should be towards the one with the least costly tradeoff We cannot opt out of economic issues and decisions Our only options are to be informed uninformed or misinformed when making our choices Thomas Sowell Historical mechanisms that have been used to reduce scarcity 1 Force i e stealing 2 Tradition emphasis on past ways 3 Authority government and church 4 Market 5 Combination of the above The Economic Way of Thinking Things are not always as they seem i e secondary effects Guidelines 1 There are ALWAYS tradeoffs Tradeoffs opportunity costs only consider the NEXT best option 2 3 Individuals choose purposefully Most benefit for least cost Incentives matter 4 Thinking on the Margin Only continuing to engage in a specific activity if the expected marginal benefit is greater than the expected marginal cost 5 More Information Leads to Better Decision Making Tradeoff more time invested Includes all previous rules of there always being a tradeoff choosing purposefully and marginal thinking I e Only invest more time if worth it 6 Many choices create secondary effects i e rent control Many cities impart rent control to keep it artificially low but many do not see that this can create a shortage o o o 7 Value is subjective 8 Economic thinking is scientific thinking Predictions and explanations made by gathering interpreting data o o Different models are sometimes necessary to explain many aspects of one subject Positive and Normative Economics Pitfalls to avoid in economic thinking 1 Never violate ceteris paribus o o Isolating variables it pertinent to economic analysis Only one must be allowed to change at a time 2 Good intentions do not always lead to good outcomes Rent control 3 Association is not causation https campus fsu edu bbcswebdav users jcalhoun Courses Macro online Module 01 Chapter 01 Freakonomics parenting causation vs correlation wmv 4 Fallacy of Composition At times the fallacy can work When an assumption yields a wrong answer it is a fallacy i e what is good for the individual is good for the group not always true Chapter 2 Some Tools of Economists Wednesday September 21 2011 5 20 PM Trade creates value Two opposing views of trade o When people trade one person gains and the other person looses Zero sum trade o When people trade both parties gain Voluntary trade creates wealth and promotes economic growth With or without production with or without money exchanges voluntary trade is expected to benefit both parties The Importance of Property Rights Two types of property rights Common rights everybody owns it Private rights only one person owns it Private property rights change incentives https campus fsu edu bbcswebdav users jcalhoun Courses Macro online Module 01 Chapter 02 Stossel 2011MECA Private ownership and conservation wmv Incentives changed by property rights Give proper care Conserve for the future Use resources in ways that other people value Mitigate possible harm to others Production possibilities curves Ceteris paribus shows amount of one product possible compared to another usually similar since the common use of a resource is the normal limiting factor Trade Output and Living Standards Law of comparative advantage Make the product good that you have the lowest opportunity cost for and trade for those which you have the highest opportunity costs Make that which you are good at to trade for that which you are not https campus fsu edu bbcswebdav users jcalhoun Courses Macro online Module 01 Chapter 02 Made in America Barre granite in class wmv Low opportunity cost Comparative advantage Specialization Division of labor Voluntary trade Increased wealth The greatest improvement in the productive powers of labour and the greater part of the skill dexterity and judgment with which it is any where directed or applied seem to have been the effects of the division of labour Adam Smith from Wealth of Nations In short divisions of labour maximize the skills set of a person Self sufficiency is the quickest and most absolute way to poverty Explanation if a person is not good at a task then they should not take part in that task Goes back up to making the products you have the lowest opportunity cost for Economic organization https campus fsu edu bbcswebdav users jcalhoun Courses Macro online Module 01 Chapter 02 Macro Chapter 02 content economic organization wmv 1 What to produce 2 How to produce 3 For whom to produce Characteristics of economic systems Traditional Refers mostly to ancient systems Private property rights usually exist Limited trading usually barter trading Minimal use of a price system and currency Market LIKE America s capitalistic economy Private property rights are predominant Extensive trading Heavy emphasis on the price system Command USSR communist Private property right are limited at best Moderate trading not what we define trading as today Limited use of price system prices usually set by individual or group Mixed most economies today Aspects of market and command Economies tend towards market or command but none are 100 Chapter 3 Supply Demand and the Market Process Wednesday September 21 2011 10 11 PM Consumer Choice and the Law of Demand The law of demand The inverse relationship between price and quantity demanded as price goes up quantity demanded goes down Quantity demanded is a specific number it s the number of goods bought It is not represented graphically A demand graph is the graphical representation of ALL the possible amounts of quantity demanded at various price levels Other variables
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