Midterm One Chapter 1 Definitions o Economics The study of how people make choices o Scarcity A good that is NOT so abundant in nature that if the price were zero you could still get as much as you want o Free Good Anything that is so abundant in nature that if the price were zero you could still get as much as you want Examples Salt water dirty air sunlight o Utility How much satisfaction enjoyment you get out of something o Transactions Cost Cost to you of making the transaction beyond co t price Example Buying clothes online VS Going to the store more transaction costs to go to the store o Ceterus Paribus Means all else equal o Tragedy of the Commons Things that are owned by everyone are really owned by no one So there is no incentive to take care of them Concepts o Basic Premise of Economics When something costs more people do it less When something costs less people do it more o Why We Have to Choose Scarcity and priorities o The 4 Major Resources Land L Natural Resources Water fish trees cattle etc Return of land is rent Human Mental or physical Return of labor is wages Labor N Capital K Physical shovel sewing machine etc Return of capital is interest Financial Entrepreneurship Anyone who brings together the other 3 resources produces either a good or service Specialized form of human Return of entrepreneurship is profit o Communism o Capitalism From each according to his ability to each according to his need Arbitary Capricious Based on price Least biased o Positive VS Normative Economics Positive Anything that is testable Example 2 2 14 Normative Someone s judgement opinion Example We shouldn t raise minimum wage Be careful with the word should Example If I exercise more and eat fewer calories I should lose weight This is a positive example because it is testable o The Economic Way of Thinking 1 There is ALWAYS a tradeoff We call that tradeoff our opportunity cost o When you use resources you re always giving up the opportunity to use them in a different way Example Seat belts VS Cancer Statistical Murder 2 Individuals choose purposefully therefore economically Trying to get the most for least If multiple things cost the same you will pick the one you like the best AKA the one that gives you the highest utility 3 Incentives matter People respond to incentives in a predictable way o Example Saying no to a dinner date in Tallahassee but yes to a dinner date to Italy Utility o Example Amanda got a lot of benefit from M M s She was maximizing her utility by controlling her behavior Legislating Morality When government programs had one intended consequence but the actual unintended consequences are very different 4 Economic thinking is marginal thinking People make decisions at the margin Marginal Additional o Example This is what I m going to do how much would the additional cost me 5 Information is a costly good We remain rationally ignorant about some things when the benefit doesn t outweigh the cost of knowing 6 Remember the secondary effects Examples Taxing the number of windows taxing finished buildings more than unfinished buildings These secondary effects were unintended consequences o Pitfalls to avoid in economic thinking Violating the ceteris paribus condition Good intentions do not guarantee good outcomes Example A law for seatbelts for kids on airplanes would cause more people to drive on highways which is more deadly Tragedy of the commons Association is not causation The Fallacy of Composition Just because something is true in the micro sense does not mean it s true in the macro Chapter 2 Definitions o Transaction Cost Anything beyond the price that is a cost to you for acquiring that product o Middleman Makes trade easier Examples Publix Realtor o Cronyism Favoritism shown to old friends without regard for their qualifications as in political appointments to office Also seen in economic stimulus packages Bailouts to those that are too big to fail Concepts o Every economy from free market to command market must answer the following questions What to produce How do we produce it Who gets the output o Tools of the Economist 1 Opportunity Cost The one most highly valued thing Two components Time and money Subjective 2 Trade creates wealth Voluntary Exchange Trade is not a zero sum game both parties are made better off 3 Property Rights Assumes free market non government intervention Includes 3 elements o Rights to exclusive use of property o Legal protection o Right to transfer sell exchange or mortgage the property Good things that result from property rights o Property owners have the incentive to consider the desires of others and lose by NOT considering the rights of others o Incentive to take care of your property to protect the value opposite of what happens with tragedy of the commons o Incentive to conserve o Incentive to be careful with property Example Fence around pool 4 Production Possibilities Curve Shows what is possible to be produced in a given economy based on technology resources etc Things produced in the US are categorized as either investment goods or consumer goods Anywhere on the production possibilities frontier is both possible efficient to produce To have more of one thing you have to have less of the other Possible to produce more of both when moving from inside the curve However inside the curve is a point of inefficiency underemployment what happens when in a recession The curve can always grow with more technology and resources Can be linear or non linear o Linear graphs say resources are equally well suited to produce investment goods as they are to produce consumer goods o Opportunity cost is constant but doesn t have to be 1 1 o Non linear 5 Comparative Advantage In the production of a good or service the entity who produces with the lower opportunity cost has the comparative advantage Absolute Advantage In the production of a good or service the entity who does it better has the absolute advantage o What is better Using the exact same resources the outcome is better OR if the outcome is exactly the same the one who used fewer resources Trade creates wealth How to calculate opportunity cost o Take the number of what you get divide by a number to get 1 Then take the number of what you give up and divide by the same number The resulting ratio is the opportunity cost Example Get 4 4 Give up 1 4 1 Consumption Possibilities Curve CPC o Why trade is good Everyone is better off with higher consumption o How do economists decide what to
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