ECO2000 STUDY GUIDE EXAM 1 Economics the scientific study of how individuals make choices under scarcity not the same as poverty leads to competition Scarcity is the concept that there is not enough of a good freely available from nature so that people can have as much as they would like This is an objective term very different from poverty There are three types of resources human resources physical resources and natural resources Twelve Key elements of Economics 1 Incentives Matter Choice is influenced in a predictable way by changing incentives Example money game one cent one dollar five dollars Example killer seatbelts Although you wear your seatbelts you become more reckless You might text speed etc If you don t wear seatbelt you become less reckless Example Prices People respond to changes in cost Price goes down we buy more Price goes up we buy less People don t want to work any harder if a company does better because they still are getting the same incentives regardless if company does well This is why companies offer benefits If you do well harder you work you get incentives This economic principle influences all people Example Students on exam days class will be packed vs the Thursday before SB Example Politicians maximizing votes Example Criminals ADT sig Which house will they end up going after Individuals are rational try to get the most from their limited resources Greatest benefit at least possible cost Example Students What s the least I can do to still get an A in the class What is rational for one is not always rational for another Example Smoking cigarettes shock fence some would will do it others will not Utility The subjective benefit or satisfaction a person expects from a choice or course of action Happiness Example Working out eating your favorite food A on a test NOTE This is different for everyone 2 There is no such thing as a Free Lunch Because resources are scarce trade offs must be made NOTE Even if it s free to you someone had to pay for it Opportunity Cost The highest valued alternative that must be sacrificed when choosing an option Example An hour of your time Instead of class what would you be doing Example How you spend your next 15 What you spend 15 on Food Something else you cannot spend that 15 on anything else Example Airbags vs 50 billion vs 400 lives Could we have used that money to save even more lives What is the biggest cost for getting your college degree Time for a job Football players skipping their last year of college to go pro millions of dollars are on the line Maybe some would stay and get their degree others would go pro for the money vs the education 3 Decisions are made at the margin Marginal Describes the effect of a change in the current situation Marginal change or additional Example Ponderosa Buffet all you can eat 7 50 OR all you can eat with Steak 9 00 The Marginal Cost is 1 50 vs the Marginal benefit which is a steak Example Supersizing your value meal Marginal cost is 0 70 vs Marginal benefit which it bigger drink more fries Example Drive or Fly Going to Miami Drive is 8 hours 100 gas Fly 3 hours 400 ticket Marginal Benefit 5 hours vs Marginal cost 300 Time 60 per hour fly Law of Diminishing Marginal Utility As consumption increases the marginal utility derived from additional consumption will eventually decline Example Banana Eating Contest after a couple of bananas utility begins to decrease Diamond Water Paradox Diamonds unnecessary Water necessary When you have a lot of water already available but diamonds are not available you chose diamonds Note Don t confuse total value with marginal value Meaning depending upon how much you have of one or another that s what you chose So why do Pro Wrestlers and Actors make more than school teachers or nurses Because of the actors or athletes talent Not everyone is able to what the actor or athlete can do Marginal Thinking may also be why a stepwise criminal justice system might be more effective than a capital punishment system Example Tickets Example Death Penalty for robbing and Murdering Murdering deserves a much stronger punishment penalty Cost Benefit Analysis When making a decision one compares the marginal benefits and the marginal costs You should only do those things where the marginal benefits outweigh the marginal costs To be Economically Efficient 1 All actions generating more benefits than costs should be undertaken 2 No actions generating more costs than benefits should be undertaken This is why people will rationally choose to not be fully informed when making decisions Example new car vs new pencil Bigger decision more info you re going to retrieve Less Bigger decision pencil just going to buy whatever less research will go into it 4 Voluntary Trade Promotes Economic Progress Voluntary vs Coerced Coercion Someone will devote resources to make you worse off if you don t comply Example Hot dog stand don t want it vs gunman saying give me your wallet with gun to head you will comply A Because the value of the good or service is subjective voluntary trade moves goods from people who value them less to people who value them more Example Candy Game You re not going to trade your candy for something different if you really like the candy you already have B Trade makes larger output and consumption levels possible because it allows us to specialize in what we do best The Law of Comparative Advantage Individuals Economies and Nations should produce that which they can make at a lower opportunity cost and trade for everything else Example Should Lebron James clean his own house Lebron could clean his own house but he could play basketball do commercials ESPN and make a lot of money Every hour he spends cleaning his house is time away from him making money through his profession Example Mowing the lawn Dad s time is worth him doing his job that makes more money than his lawn job C Voluntary Exchange makes it possible for firms to achieve lower per unit costs by adopting mass production methods Example Printing Press Before the machine people would have to physically copy books and it was more money 5 Transaction Costs are an Obstacle to trade Transaction Costs The time effort and other resources needed to search out and complete an exchange Note This leaves a role for a middleman Middleman A person who buys and sells goods or service or arranges trades A middleman reduces transaction costs Example A Real Estate Agent grocery store Walmart is a middle man They do not