Chapter 1 The Economic Approach Scarcity leads to Tradeoffs which result in us having to make Choices o Scarcity less of a good freely available than what people would like Scarcity is NOT the same as poverty o 3 types of Resources Human Physical Natural 8 Guideposts to Economic Thinking 1 There are Always Trade Offs a OPPORTUNITY COST i The Highest valued alternative that is sacrificed ii NOT the sum of all alternatives 2 Individuals Choose Purposefully a Economizing Behavior Rational Behavior i Getting the most benefits for LEAST cost or effort 3 Incentives Matter a As incentives go up you will be more likely to do something and vice versa b Changes in personal costs and benefits will exert a predictable influence on the choices of people 4 Individuals Make Decisions on the Margin a Marginal means Additional b I e A producer s Marginal Cost is the cost of producing one additional unit of a product 5 More Info leads to Better Decisions but Info is Costly to Get 6 Many Choices Create Secondary Effects a Secondary Effects indirect impact of a choice that may not be easily and or a Value is determined by the purchaser therefore may be different from person to person immediately observable 7 Value is Subjective 8 Economic Thinking IS Scientific Thinking Positive Economics What is FACTS Normative What ought to be OPINIONS Pitfalls to Avoid in Economic Thinking 1 DON T violate Ceteris Paribus all things remaining constant 2 Good intentions DO NOT guarantee good or desirable outcomes 3 Association IS NOT causation 4 The Fallacy of Composition what s true for ONE may not be true for ALL or the group Chapter 2 Some Tools of the Economist Trade Creates Value When 2 parties voluntary exchange BOTH are made better off Transaction Costs cost of the time effort and other resources used to search out negotiate and conclude and exchange Exchange creates value by moving goods from parties who value them less to parties who value them more Property Rights Private Property Rights Involves 3 things Legal protection against invasion by others without the owner s permission 1 The right to exclusive use of the property 2 3 The right to transfer sell exchange or mortgage Private ownership provides people with a strong incentive to take care of things and develop resources in ways that are highly valued by others Production Possibilities Curve Shows the maximum amount of any two products that can be produced from a fixed set of resources and the possible trade offs in production between them The slope indicated the amount of one product that must be given up to produce more of another Points INSIDE the curve are Inefficient wasted resources Points OUTSIDE the curve are Unattainable Points ON the curve are efficient The Production Possibilities Curve can shift OUTWARD if An increase in economy s resources Advancement in technology o Invention creation of new products or processes o Innovation practical and effective adoption of new technologies o Creative Destruction new products and methods continually replacing old ones Improvement in rules within the economy Working harder and giving up current leisure Gains from Trade Division of Labor method that breaks down production into a series of specific tasks each performed by a different worker Law of Comparative Advantage o Total output of a group an economy or a group of nations will be greatest when the output of each good is produced by the person with the LOWEST opportunity cost for that good o In other words if everyone specializes in a specific product and then just trades with each other the most wealth will be created o Self sufficiency is NOT good Economic Organization Capitalism resources are privately owned goods and resources are allocated through market prices Socialism ownership and control of the basic means of production rest with the state and resource allocation is determined by centralized planning Chapter 3 Supply Demand and the Market Process Helpful Information supplied or demanded They are two different things A change in supply or demand IS NOT a change in QUANTITY I E change in supply SHIFTS the supply curve change in QUANTITY supplied is just movement along the supply curve that already exists Whenever dealing with a change in supply or demand draw a graph and SHIFT that line to the left for decrease or the right for increase Note the changes in price and quantity as a result of the shift The Law of Demand when price rises quantity demanded falls Negative Relationship Negative sloping line curve on graph Products that serve similar purposes Substitutes o An increase in the price of one good will increase demand for a substitute of that good Change in Demand vs Change in Quantity Demanded Change in QUANTITY Demanded displayed by movement ALONG the demand curve o Occurs because of changes in price Change in DEMAND displayed by a SHIFT in the entire demand curve o Occurs because of changes in something OTHER than price such as Consumer income Consumers in the market Price of Related goods Complements products consumed jointly hot dogs and hot dog buns o Decrease in price of one Increase in demand for the other Expectations Demographics Consumer taste and preferences The Law of Supply when price rises quantity supplied rises Positive Relationship Positive sloping line curve on graph Change in Supply vs Change in Quantity Supplied Works the SAME WAY as Demand vs Quantity Demanded Change in QUANTITY supplied displayed by movement ALONG supply curve o Occurs because of changes in prices Change in SUPPLY displayed by SHIFT in entire supply curve o Occurs due to change in variables OTHER than price such as Resource prices Technology Nature Political Taxes How Supply and Demand Interact Market Equilibrium when QUANTITY supplied is equal to QUANTITY demanded Equilibrium is Efficient How Markets React to Change in Supply and Demand When Demand increases its price increases Which 1 Motivates consumers to search for substitutes and cut back on purchasing the good 2 Motivate producers to supply more of the good These two things eventually bring the Quantity demanded and supplied back into balance Invisible Hand Principle market prices coordinate the actions of self interested people and direct them toward activities that promote the general welfare Adam Smith is the guy associated with it Market Prices Communicate information about the market to both consumers and producers Coordinate the actions of market participants Motivate economic
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