Chapter 1 Is life getting better or worse Economically Objective measures o o o o Life expectancy Increasing o Health Income Education Entertainment More advanced medical technology Average income is higher than decades ago even after the recession Record number of people getting college degrees This one is pretty damn obvious Look at Transportation Computers and technology o o o Medicine What is Economics Economics How we make choices under scarcity Choice The act of selecting among alternatives Scarcity The concept that there is less of a good freely available from nature than people would like o o Necessitates rationing Time money textbooks Rationing allocating scarce good to those who want them Through first come first serve price or who you know Price is used to ration goods and service is a market economy o Scarcity leads to competitive behavior Recourses an input used to produce an economic good o Human resources human capital intelligence athletic ability Chuck Norris s awesomeness etc Physical resources physical capital tool used to make something o o Natural resources gas water trees etc Capital human made resources used to produce other goods and services Economic Way of Thinking things are not always as they appear 1 Resources are scarce so decision makers much make trade offs a There is no such thing as a free lunch the resources are being used for your lunch b Opportunity cost the highest valued alternative that must be sacrificed when choosing an option i Guns and butter military vs civilian spending 2 3 Individuals as rational people try to get the most out of their limited resources greatest benefit at the least cost Incentives matter choice is influenced in a predictable way by changing incentives ECO 2013 Final Study Guide 1 4 Individuals make decision at the margin a Marginal describes the effect of change in the current situation i ii Taco bell 2 tacos and a drink cost 2 75 or a value meal with 3 tacos and a drink for 3 The marginal benefit is the third taco the marginal cost is 0 25 Airport security costs 50 million and saves 50 lives lead clean up costs 70 million and save 52 lives Marginal benefit is 2 lives marginal cost is 20 million b Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal cost Information help us make better choices but information is costly 5 6 Beware of secondary effects economic actions generate both direct and indirect effects a Secondary effect in indirect impact of an event or policy that may not be easily and immediately observable i Fuel efficiency standards lighter cars not as safe more traffic fatalities 7 The value of a good or service is subjective a Voluntary trade creates value b Moving goods and service to those who value then most is a primary source of economic 8 The test of a theory is its ability to predict if real world events are consistent with a theory then progress the theory I valid Positive VS Normative Economics 4 Pitfalls to Avoid in Economic Thinking 1 Violation of ceteris paribus principle a Ceteris paribus all else constant b Positive Economics a scientific study of what is testable Normative judgments about what people think out to be not testable If the price of eggs increases people buy less eggs but what about Easter remember all else is constant including time 2 Good intentions do not guarantee desirable outcomes a Cab restrictions raise number of accidents and lowers the number of cabs on the road b Warning labels on antidepressant s actually caused a raise in suicide rates 3 Association is not causation just because x and y happen together x does not necessarily cause y a Superstitions 4 Fallacy of composition belief that what is true for one might not be true for all a Standing up at a football game b 400 check for everyone in a stimulus package Micro focuses on how human behavior affects the conduct of affairs within individually defined Macro focuses on how human behavior affects outcomes in highly aggregated markets such as Micro vs Macro units 1 tree o o the nation s market for labor The whole forest Chapter 2 ECO 2013 Final Study Guide 2 Trade Creates Value Because the value of goods is subjective voluntary trade creates value When individuals engage in voluntary exchange both parties are made better off Channeling goods and resources to those who value them most increases the wealth created by a society s resources Candy game o The process by which some people become rich will make everyone richer Creation of Wealth o Henry Ford Importance of Private Property Rights What they are 1 Right to exclusive use 2 3 The right to sell transfer exchange or mortgage the property Legal protection against invasion from other individuals Incentives of Property Rights 1 The incentive to use resources in ways that are beneficial to others Owners bear the cost of ignoring the wishes of others Resell or burn your textbooks 2 Owners tent to have the incentive to care for and manage what they own Work vs home refrigerator 3 Private owners have the incentive to conserve for the future Tragedy of the commons Sharing an oil well or a pasture 4 Private owners have the incentive to make sure that their property does no damage others property Property Rights Progress Lack of Property Rights Less Economic Progress Production Possibility Curve PCP 1 A fixed amount of productive resources 2 A fixed amount of technical knowledge 3 Full and efficient use of resources Outlines all possible combinations of total output that could be produced assuming ECO 2013 Final Study Guide 3 Shifters of PPC 1 Change in resources base Investment the purchase construction or development of resources Requires us to give up consumption of goods 2 Change in technology Technology the knowledge available in an economy at a given time Determines the amount of output we can generate with our limited resources Unattainable points can become attainable 3 Change in the rules under which the economy functions Imposing trade barriers 4 Change in work habits Law of Comparative Advantage The total output of a group of individual an entire economy or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost US Corn Opportunity Cost Cars Opportunity Cost 10 5 Corn 5 4 Corn 50 1 5 Car Japan 20 1 4 Car US should produce corn Japan should produce cars And then trade Economic Organization Every Economy has 3 questions to answer 1 What will be produced 2
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