FSU ECO 2000 - SECTION 1- basic economics principles

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1 9 SECTION 1 basic economics principles economics is the science of how individuals make choices under scarcity science developing and testing objective theories individuals a person or group of people choice the act of selecting among alternatives scarcity the concept that there is less of something freely available from nature than people would like it ex time money cars etc scarcity is not the same thing as poverty scarcity necessitates rationing allocating scarce goods to those who want them in a market economy price is used to ration goods scarcity leads to competitive behavior in economics competition is good Resource an input used to produce an economic good 1 human resources human capital tangible qualities as human beings that make us who we are speed endurance etc 2 physical resources physical capital manmade resources 3 natural resources coal gold iron ore natural gas capital human made resources used to produce other goods and services 1 14 Twelve Key Elements of Economics 1 Incentives matter choice is influenced in a predictable way by changing incentives ex Money game people respond to incentives this economic principle influences all people students politicians altruists criminals greatest benefit at least possible cost individuals are rational they try to get the most from their limited resources note what is rational for one person may not be rational for everyone utility the subjective benefit or satisfaction a person expects from a choice or course of action utility is what economists call happiness 2 There is no such thing as a free lunch because resources are scarce trade offs must be made opportunity cost the highest valued alternative that must be sacrificed when choosing an option ex an hour of your time how you spend your next 15 airbags vs what is usually the biggest cost of getting your college degree foregone earnings 3 Decisions are made at the margin marginal describes the effect of a change in the current situation marginal change or additional ex Ponderosa buffet supersizing your extra value meal drive or fly law of diminishing marginal utility as consumption increases the marginal utility derived from additional consumption will eventually decline ex banana eating contest results the diamond water paradox don t confuse total value with marginal value this helps us answer questions about our world 1 why do top pro wrestlers and actors typically make more than top nurses and teachers Their skills are rare and a lot less common so they get paid more 2 Why do people cheat on their spouses Marginal thinking may also be why a stepwise criminal justice punishment system might be more effective than a capital punishment system If you re going 1mph over the limit you might as well go 5mph over and so on Cost benefit analysis when making a decision one compares the marginal benefits and the marginal costs To be economically efficient 1 all actions generating more benefits than costs should be 2 no actions generating more costs than benefits should be undertaken undertaken if it s worth doing it s worth doing imperfectly perfection is not worth achieving playing it too safe isn t always good We could make it perfectly safe to fly in planes no crashes but the money and time it costs to keep it that safe isn t worth it If you make the risk of flying 0 how much more expensive is it gonna be This is why people will choose not to be fully informed when making rational decisions Ex new car v new pencil cost of being perfectly informed is too high 4 Voluntary trade promotes economic progress voluntary vs coerced coercion someone will devote resources to make you worse off if you don t comply ex robbery 1 voluntary trade moves goods to those who value them most 2 trade allows us to produce more by specializing law of comparative 3 advantage A because the value of a good or service is subjective voluntary trade moves goods from people who value them less to people who value them more Ex the candy game 1 21 B trade makes larger output and consumption levels possible because it allows us to specialize in what we do best How much of what you have or use everyday do you make yourself 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 Ex should LeBron James clean his own house C Voluntary Exchange makes it possible for firms to achieve lower per unit costs by adopting mass production methods 5 Transaction Costs are an Obstacle to trade transaction costs the time effort and other resources needed to search out and complete an exchange middleman a person who buys and sells goods or services or arranges trades A middleman supports trade by reducing transaction costs ex real estate agents grocery store ebay brings buyers an sellers together more conveniently 6 Prices bring the choices of buyers and sellers into balance sellers prefer to sell things for higher prices buyers prefer to buy things for lower prices Market prices bring these two conflicting forces into balance 7 Profits direct businesses toward activities that increase wealth Profit an excess of sales revenue relative to the opportunity cost of production a profit occurs only when the value of the good produced is greater than the value of the resources used for its production Loss a deficit of sales revenue relative to the opportunity cost of production Losses are penalties imposed on those who produce goods that are valued less than that resources required for their production The economic philosophy of business failure the mark of your ignorance is the depth of your belief in injustice and tragedy What the caterpillar calls the end of the world the master calls the butterfly Richard Bach 8 People Earn Income by Helping Others The process by which some people become rich will make everybody richer smaller piece for the rest of us he made the pie bigger for everyone Bill Gates doesn t create a bigger piece of the pie for himself and a 1 23 9 Production not just jobs provides the source of high living standards let s boost the economy of those jobs that matters 1 hole digging decree it s not the jobs that matter it s what you get out 2 window breaking bill 1 Agricultural Adjustment Act 1933 2 Car Allowance Rebate System 2009 Does stimulus spending really stimulate Most economists would say no Destruction and jobs that don t produce useful goods and services do not add to economic growth 10 economic


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