Chapter 1 Is life getting better or worse Economics take subjective questions and answer it objectively What measure should we analyze Ex Life expectancy If it is going up then life is getting better than worse Ex Health healthy lives are better than less healthy so life is getting better Ex Income more money better life Ex Education more education better life Ex Entertaining better life Changes inio technology medicine entertainment What is Economics Economics Study of how we make choices under scarcity Choice the act of selecting among alternatives Selecting among options Scarcity The concept that there is less of a good freely available from nature than people would like Ex Time money clean air Only because things are scarce is why we have choices Almost everything is scarce It is NOT the same thing as poverty Poverty is a subjective term What is considered poor in one place may not be poor in an other Scarcity is true regardless and place so it is objective Rationing allocating of scarce goods to those who want them Ex First come first serve who you know and PRICE in a market economy In a market economy price is used to ration goods Scarcity leads to competitive behavior Competition is a good thing Because we cant get as much as we want we have to compete We have to innovate to beat our competitors Resources an input used to produce an economic good 3 types Human resources human capital Ex Intelligence knowledge speed endurance etc Ex Einstein s intelligence Physical resources physical capital Ex Manmade materials building pencil laptop Natural resources Come from current state in nature Ex Land crude oil coal etc Capital Human made resources used to produce other goods and services physical and human NOT natural resources The Economic Way of Thinking 8 Guideposts Things are not always as they appear 1 Resources are scare so decision makers must make trade offs There is no such thing as a free lunch Just because it is free to you doesn t mean it is free to the society Every time you use a resource that something cannot be used to produce something else Opportunity cost highest valued alternative that must be sacrificed when choosing an option Ex An hour of your time Ex Guns and butter military money vs social products every dollar spent on military is every dollar that cant be spent on social products 2 Individuals are rational they try to get the most from their limited resources They try to maximize benefits at the least possible cost What is the least amount of work I can do and still get an A If two things cost the same you ll choose the one that gives you the most benefit If they are different then you choose the cheapest Ex Red wine vs spiced rum You are acting rational if you do this Buying wine if you prefer rum if they both cost the same is irrational What is rational for one person may not be rational for everyone Ex Smoking cigarettes outweigh the costs for those who smoke the costs outweigh the benefits for those who don t smoke 3 Incentives matter choice is influenced in a predictable way by changing in centives Ex Money Game macro style People respond to changing incentives Increases benefits increases actions Predicting in advance vs seeing afterward Ex Lesson from joabs father Ex Prices When price goes down we buy more When price goes up we buy less 4 Individuals make decisions at the margin Marginal Effect of a change in the current situation The cost and benefit of adding one more Ex Olive garden All you can eat SSB soup salad breadsticks 6 Chicken parm dinner chicken parm SSB 10 MB Chicken parm MC 4 the extra time working off the calories If that chicken parm has a greater benefit than the 4 cost then choose the chicken parm dinner Cost benefit analysis one will undergo an action when the marginal bene fits outweigh the marginal costs Ex Airport security vs lead clean up A airport security Cost 50 billion Benefits 100 lives B lead clean up Cost 70 billion Benefits 120 lives MB 20 lives saved MC 20 billion dollars CBA are the 20 lives worth spending 20 billion dollars then option B if not option A 5 Information helps us make better choices but information is costly The more information you have the better decision you can make It is never worth it to gather ALL the information or perfect information The smaller it impacts you the less info you need Ex New houses vs new notebook When buying a house look through many houses Negotiate price gather information until you can make a good decision Still wont have perfect information because you wont look at every house on the market When buying a new notebook you did not look through all the notebooks Didn t have someone inspect it Less worth it to gather all the information 6 Beware of Secondary Effects economic actions generate both direct and in direct effects Secondary Effect the indirect impact of an event or policy that may or may not be easily and immediately observable There is something you anticipate which is the direct effect Something that happens as a result that you didn t plan on happening Ex Drinking Direct effect the good feeling Indirect secondary effect getting arrested Ex Fuel efficiency regulations actually causing the cars to be more danger ous 7 8 Ex Trade regulations The value of a good or service is subjective objective means the same for everyone Subjective means different for different people So because the value is subjective voluntary trade creates value Ex Paying for a pack of gum Ex Orange bowl tickets Moving goods and services to those who value them most is primary source of economic progress The test of a theory is its ability to predict if real world events are consistent of the theory then the theory is valid Need to isolate theories and test them numerous times Ex Are elephants afraid of mice Positive Normative Economics Positive the scientific study of what is This can be tested Ex It is 100 degrees in this room Ex The war in iraq is 500 billion dollars Normative Judgements about what ought to be Personal value judgement This cannot be tested Ex It is hot in this room Ex We have spent way too much money on the war in iraq 1 2 3 4 Pitfalls to Avoid in economic thinking Violation of the ceteris paribus ceteris paribus all other things constant Always implying the ceteris paribus statement Ex Elephants are afraid of mice ceteris paribus Ex When the price of eggs goes up people buy less eggs WRONG It may be true some times but not all of the time When the price of eggs goes up
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