Chapter 1 Scarcity Choice Resource o Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like o The act of selecting among alternatives o We make trade offs when we make choices o An input used to produce economic goods Land labor skills natural resources and human made tools and equipment provide examples Throughout history people have struggled to transform available but limited resources into things they would like to have economic goods o Because of the scarcity of the resources we have our ability to produce goods and services are limited o Types of resources Human resource Physical Natural Skill knowledge strength Buildings tools machinery Oceans rivers land Capital o Human made resources used to produce other goods and services They enhance our ability to produce in the future Scarcity and poverty are not the same o Just because resources are limited does not mean that you are poor o I e survivor contestant who paid over 125 for chocolate and peanut butter o Objective A fact based on observable phenomena that is not influenced by differences in personal opinion Scarcity o Subjective An opinion based on personal preferences and value judgments Poverty Scarcity necessitates rationing o Rationing Allocating a limited supply of a good or resources among people who would like to have more of it When price performs the rationing function the good or resources is allocated to those willing to give up the most over things in order to get it When a resources is scarce some sort of rationing must be made but The method of rationing influences the nature of competition who makes the decision is up to human behavior o Competition is a natural outgrowth of scarcity and the desire of human o The criteria used to ration scarce goods and resources will influence the beings to improve their condition competitive techniques employed Price first come first serve Economic theory o A set of definitions postulates and principles assembled in a manner that makes clear the cause and effect relationships Eight guideposts to economic thinking o 1 The use of scarce resources is costly so decision makers must make trade offs There is no such thing as a free lunch Opportunity cost The highest valued alternative that must be sacrificed as a result of choosing an option Every decision made has an opportunity cost o 2 Individuals choose purposefully they try to get the most from their limited resources Economizing behavior Choosing the option that offers the greatest benefit at the least possible cost Result of purposeful or rational decision making Utility The subjective benefit or satisfaction a person expects from a choice or course of action o 3 Incentives matter changes in incentives influence human choices in a predictable way Both monetary and nonmonetary incentives matter When an option becomes more attractive people will be more likely to choose it When the payoff derived form a choice increases people will be more likely to choose it o 4 Individuals make decisions at the margin 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 Difference in the costs and benefits between alternatives o 5 Although information can help us make better choices its acquisition is costly Although information helps us make better choices the time needed to gather it is scarce making information costly to acquire People will economize their search for information o 6 Beware of the secondary effects economic actions often generate indirect as well as direct effects 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 o 7 The value of a good or service is subjective Preferences differ between people People value goods differently o 8 The test of a theory is its ability to predict Scientific thinking Developing a theory from basic principles and testing it against events in the real world Good theories are constant with and help explain real world events Theories that are inconsistent with the real world are invalid and must be rejected How useful an economic theory I depends on how well it predicts the future consequences of economic action Not an exact science because people react and respond in different Positive economics ways Normative economics o The scientific study of what is among economic relationships o Involve potentially verifiable or refutable propositions o Judgments about what ought to be in economic matters Normative economic view cannot be proven false because they are based on value judgments o Depends on the philosophical view Violation of ceteris paribus condition can lead one to draw the wrong conclusion o Ceteris paribus Latin term meaning other things constant that is used when the effect of one change is being described recognizing that if other things changed they also could affect the result Economist often describe the effect of one change knowing that in the real world other things might change and also exert an effect Good intentions do not guarantee desirable outcomes o Secondary effects can be negative even though the intention of the policy was good I e safety belts for children on planes Association is not causation o Statistical association alone cannot establish causation between two things The fallacy of composition what s true for one might not be true for all o Fallacy of composition Erroneous view that what is true for the individual or the part will also be rue for the group the whole Standing up at a football game Chapter 2 Opportunity cost o The choice to do one thing is at the same time a choice not to do something else options o Subjective because they depend on how a decision maker values his or her Can never be directly measured o Decision maker is the only person who can properly evaluate the options and decide which is the best choice given his or her preferences and current circumstances Opportunity cost in the real world o I e going to college vs going to work now Trade creates value o Value is subjective so it sis wrong to assume that a particular good or service has a fixed objective value just because it exists o Two important aspects of voluntary exchange 1 When individuals engage
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