1 Chapter 1 Economics The study of how we make choices under o the concept that there is less of a good freely available from nature than people would like Not necessitates rationing the same as poverty o Resources an input used to produce an economic good 1 resources intelligence 2 resources productive assets factories tools labor 3 resources coal oil metals etc 8 Guideposts to Economic Thinking 1 Resources are so decision makers must make trade offs o Opportunity Cost sacrificed when choosing an option Ex an hour of your time the valued alternative that must be 2 Individuals are they try to get the most from their limited resources Greatest benefit at the least possible cost oWhat is for one person may not be to everyone 3 matter choice is influenced in a predictable way by changing incentives Ex money game from class 4 Individuals make decisions at the o describes the effect of a change in the current o Analysis one will undergo an action when the situation marginal benefit outweighs the marginal cost 5 helps us make better choices but is costly 6 Beware of Effects economic actions generate both and effects 7 The value of a good service is because of this voluntary trade creates value 8 The test of a theory is its ability to if real world events are consistent with a theory then than theory is valid Positive Economics statements are 2 Normative Economics statements are not 4 Pitfalls to Avoid in Economic Thinking 1 Violation of the Principle o other things equal 2 Good do not guarantee desirable outcomes o Ex suicide warnings on antidepressant medications 3 Association is NOT o Superstitions sunspots and economic activity 4 Fallacy of belief that what is true for one might not be true for all Ex when you get a raise vs everyone gets a raise Chapter 2 Voluntary Trade Creates Value o When individuals engage in voluntary trade both parties benefit o Channeling goods and resources to those who value them most o Ex The Candy Game from class the wealth created by society s resources because the value of goods is Characteristics of Property Rights o Right to use of property o Right to against invasion from other individuals o Right to or property 4 Incentives of Property Rights 1 Use resources in a way that is to others owners bare the cost of ignoring the wishes of others 2 Care for manage what they 3 for the future Tragedy of Commons 4 Make sure their property does not others property Lack of Property Rights lack of progress 3 Productions Possibility Curve PPC outlines all possible combinations of total output that could be produced given 1 Fixed amount of resources 2 Given amount of knowledge 3 and use of resources 2 5 10 alcohol List Efficiency Pts Inefficiency Pts Unattainable Pts textbooks 10 A 5 C B 2 D E Efficiency Points A B E points on the line Inefficiency Points D points below the line Unattainable Points C points above the line Pounds 20 10 15 5 A D B C E 1 0 2 0 3 0 4 0 GPA 4 Factors That Shift the PPC 1 Change in the base 2 Change in 4 3 Change in 4 Change in habits Law of Comparative Advantage total output of a group will be greatest when the output of each good is produced by whoever has the opportunity cost Ex raking leaves Time 10 hrs 4 hrs Wage 4 20 Joab Dad lower opportunity cost of using his time to rake the leaves Joab s Dads opportunity cost is too high for him to waste his time raking the leaves Therefore Joab should rake the leaves Ex Opp Cost 40 80 Joab has a USA Japan Corn 50 20 Corn o c 1 5 car 1 4 car Cars 10 5 Car o c 5 corn 4 corn U S has the absolute advantage they can produce more of both U S should produce corn they give up less cars to make the corn Japan should produce cars they give up less corn to make the cars T Shirts 20 10 J Wow Snookie What does Snookie s wage rate need to be in order for it to be more efficient for her to hang T Shirts 10 20 1 2 x 50 x 25 Wage 50 X The price of an airline ticket from Denver to Washington D C costs 600 A bus ticket costs 150 Traveling by plane takes 6 hours compared with 51 hours by bus Other things constant an individual would gain by choosing air travel if and only if his time were valued at more than a 6 per hour b 8 per hour c 10 per hour d 15 per ho Every Economy Faces 3 Questions 1 will be produced 2 will it be produced 5 3 For will it be produced for Capitalism A method of organization where o Productive Resources are owned o Goods and resources are allocated through market Market Organization parties make their own plans and decisions with the guidance of market price Socialism A system of economic organization where o Ownership and control of the means of production rest with the o Resource allocation is determined by Collective Decision Making relies on sector decision making to resolve basic economic questions Why Capitalism Tends To Work Better than Socialism 1 Capitalism is similar to natural selection It uses the idea of 2 Socialism suffers from an problem GOODS SERVICE MARKET CH 3 LIST the shifters of the Demand Curve 1 Change in a b 2 Change in 3 Change in a 6 b 4 Change in a b 5 Change in 1 A change in 2 A change in 3 A change in 4 A change in The demand curve is sloping because as price quantity buyers are willing to purchase D P Q LIST the shifters of the Supply Curve The supply curve is sloping because as the price of a good or service the quantity suppliers are willing to produce S P Q Quantity Demand a movement along the demand curve caused by a change in price of the good Quantity Supplied a movement along the supply curve caused by a change in price of the good DOUBLE SHIFTS Set up the effects on D and S and combine ex D P Q Means effect is ambiguous this occurs S P Q when the effect is going in different directions P Q Try it 7 1 The price of coffee beans used to make coffee has increased The price of tea a substitute good has increased Given these two effects what can we say about the equilibrium price and quantity of coffee a Equilibrium quantity will decrease equilibrium price will increase b Equilibrium price will decrease the effect on quantity is c Equilibrium price will increase the effect on quantity is d Equilibrium quantity will decrease the effect on price is ambiguous ambiguous ambiguous D P Q S P Q P Q 2 The local government imposes a tax on the production of beer in Tallahassee in an effort …
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