ECO 2013 Principles of Macroeconomics Chapter 1 The Economic Approach 4 Learning Goals 1 Identify and list the critical components of economics Chapter heading What is Economics About Key terms Scarcity Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like Resource An input used to produce economic goods Land labor capital skills and natural resources are examples Throughout history people have struggled to transform available but limited resources into things they would like to have economic goods Rationing Allocating a limited supply of a good or resource among people who would like to have more of it When price performs the rationing function the good or resource is allocated to those willing to give up the most important other things in order to get it What is economics Economics tries to explain and predict the behavior of consumers firms and government Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses Lionel Robbins How are scarcity and choice related Scarcity leads to tradeoffs which result in making choices Scarcity requires that some wants remain unfulfilled How are scarcity and poverty different Scarcity is an objective concept that describes a factual situation in which the limited nature of our resources keeps us from being able to completely fulfill our desires for goods and services In contrast poverty is a subjective concept that refers to a personal opinion of whether someone meets an arbitrarily defined level of income If price is not used as a rationing device what are other alternatives Mechanisms that have been used to deal with the problem of scarcity include force tradition emphasized past ways relied on families authority gov t or church the market or a combo of all four 2 List and provide examples of the eight guideposts of economic thinking Chapter heading The Economic Way of Thinking Key terms Opportunity cost The highest valued alternative that must be sacrificed as a result of choosing an option Economizing behavior Choosing the option that offers the greatest benefit at the least possible cost Utility The subjective benefit or satisfaction a person expects from a choice or course of action Marginal Term used to describe the effects of a change in the current situation For example a producer s marginal cost is the cost of producing an additional unit of a product given the producer s current facility and production rate Secondary effects The indirect impact of an event or policy that may not be easily and immediately observable In the area of policy these effects are often both unintended and overlooked Scientific thinking Developing a theory from basic principles and testing it against events in the real world Good theories are consistent with and help explain real world events Theories that are inconsistent with the real world are invalid and must be rejected Eight guideposts 1 The use of scarce resources is costly so decision makers must make trade offs Example If you use one hour of your scarce time to study economics you will have one hour less time to watch tv read magazines sleep etc 2 Individuals choose purposefully they try to get the most benefits for the least cost or effort aka economizing behavior Example If a pizza a lobster dinner and a sirloin steak are expected to yield identical benefits for Mary including the enjoyment of eating them economizing behavior implies that Mary will select the cheapest of the 3 alternatives probably the pizza 3 Incentives Matter choice is influenced in a predictable way by changes in incentives Example As the personal benefits from an option increase a person will be more likely to choose it As the personal costs associated with an option increase a person will be less likely to choose it 4 Individuals make decisions at the margin continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost Example It cost 2 50 for a burger and coke but it costs 3 for the value meal which includes burger coke and fries Is the fries worth the extra 50 5 More information leads to better decision making but more information is costly to get Example When you purchase a pair of jeans you might evaluate the quality and prices of jeans at several different stores At some point though you will decide that additional comparison shopping is simply not worth the trouble You will make a choice based on the limited information you already have 6 Many choices create secondary effects Example The immediate effect of an aspirin is a bitter taste in one s mouth The secondary effect which is not immediately observable is relief from a headache 7 The value of a good or service is subjective Example Mike may prefer to have a grass field rather than a parking lot next to his workplace and be willing to bear the cost of walking farther from his car each day Kim on the other hand may prefer the parking lot and the shorter walk 8 Economic Thinking is Scientific Thinking Example Economists use data and information generated by people to explain and predict actions 3 Distinguish between two types of economic statements Chapter heading Positive and Normative Economics Key terms Positive economics The scientific study of what is among economic relationships Positive economic statements involve potentially verifiable or refutable propositions Normative economics Judgments about what ought to be in economic matters Normative economic views cannot be proven false because they are based on value judgments What is the difference between positive and normative economics A positive science may be defined as a body of systemized knowledge concerning what is a normative science is a body of systemized knowledge relating to criteria of what ought to be and concerned therefore with the ideal as distinguished from the actual Positive economics can be confirmed through scientific testing whereas normative economics cannot Provide an example of each kind of statement Normative Statement Business firms should not be concerned with profits Positive Statement If the price of gas rises people will buy less gas 4 Avoid making four common mistakes Chapter heading Pitfalls to Avoid in Economic Thinking Key terms Ceteris paribus A Latin term meaning other things constant that is used when the effect of one change is being described recognizing that if other
View Full Document
Unlocking...