Chapter 1 02 01 2016 FREE GOOD so abundant in nature with no cost and limitless Dirty air sunlight and salt water Why do we have to choose SCARCITY not so abundant in nature cannot have as much of it and there is price involved Limited needs with unlimited desires and limited quantities of resources RESOURCES anything used to produce a thing production o LAND natural resources Timber iron copper Rivers oceans Animals o LABOR human labor mental or physical labor o CAPITAL physical manmade items or financial items Trucks factories bulldozers o ENTREPRENUERSHIP specialized form of human capital Rockefeller Mark Cuban Fred Smith FedEx Factors of production Income generated by LAND is RENT Income generated by LABOR is WAGES Income generated by CAPITAL is INTEREST Income generated by ENTREPRENUERSHIP is PROFIT Because of Scarcity society must ration by First come first serve inefficient Subjective tallest prettiest arbitrary Lottery style chance random Communism arbitrary capricious o From each according to his ability to each according to his need Capitalism is based on PRICE efficient and non arbitrary 8 Guideposts to Economic Thinking 1 There are always trade offs i OPPURTUNITY COST the highest valued option given up when you choose one thing over another EX Choosing to skip class to sleep for an extra 1 hr a Your opportunity cost is missing class in order to sleep for an extra hour b ONLY ONE THING CAN BE YOUR HIGHEST VALUED ALTERNATIVE 2 Individuals choose rationally purposefully i Choose the item activity thing with the highest personal value utility and lowest cost 3 Incentives matter i Cost matters ii iii iv v If the cost INCREASES people will want LESS If the cost DECREASES people will want MORE If the benefit INCREASES people will want MORE If the benefit DECREASES people will want LESS EX Parking at FSU a Students have an incentive to leave their houses 30 minutes earlier than their class to find parking in order to not miss an exam b People have an incentive to follow laws so he or she does not have to pay a fine to the government 4 Marginal Thinking i MARGINAL THINKING the difference between two ii Difference between total costs benefits VS marginal alternatives costs benefits EX All you can eat buffets You can have unlimited food for 8 The first plate you make has a total cost of 8 but 20 value to you Each plate there on after has a total cost of 0 since you don t have to pay any new fee but the value of the food to you will decline the more full you become Eventually the next plate of food will be worth less than not eating another plate When that happens your marginal benefit your satisfaction outweighs the marginal cost of the food 5 Information is costly i EX Pay to read the newspaper pay for cable to watch the news RATIONAL IGNORANCE remaining ignorant about something where the cost of obtaining the knowledge is greater than the benefit of learning it a EX Some high school graduates choose not to go to college because the cost of obtaining a college degree is greater than getting a job 6 Secondary Effects i EX divorce rates 7 The value to a good or service is subjective i Something is worth whatever someone is willing to pay for it EX Park vs Parking Garage a FSU could buy a lot and build a park to improve campus appearance or FSU could build a parking lot to improve parking on campus b Those who value appearance will choose the park c Those who value parking will choose the parking garaging d The value of the park and parking garage are subjective to those who want those items 8 The test of a theory is it s ability to predict i Scientific way of thinking Pitfalls to avoid in economic thinking A Violating ceteris paribus a CETERIS PARIBUS all other things constant B Good intentions do not guarantee good outcomes a EX passing a law to reduce taxes on unfinished buildings in order for more building to occur in the country The country now looks poor due to lack of infrastructure because the country lowered taxes on unfinished buildings now no one wants to finish their buildings in order to pay less taxes C association is not causation a every time it rains I see folks with umbrellas WRONG Because it is raining I see people with umbrellas Rain causes people to buy umbrellas Umbrellas are associated with rain D The FALLACY OF COMPOSITION a Just because something is good for the individual does NOT mean it is true for the group EX people standing at a football game If one person stands to get a better view no one cares If everyone stands to get a better view everyone else must stand in order to see and even then some may not be able to Chapter 2 02 01 2016 MORTGAGE no financial capital to build a business Negotiate with the bank to get a loan for a building The building is 1 million but the bank will only give you 850 000 You have to pay the bank monthly in order to get the deed back from the bank after you pay off the loan The deed is collateral for the money loan TRADGETY OF THE COMMONS EX gum on the sidewalk I OPPURTUNITY COST one most highly valued alternative 1 Opportunity cost is subjective inefficient 2 time and money 3 One thing not multiple things II Every economy free market to command market must answer these questions 1 What to produce 2 How do we produce it i Labor vs Capital 3 Who gets the output i In a free market use price as dedicating factor A Trade creates value o Voluntary exchange Trade is NOT a zero sum game Positive sum both better off due to voluntary trade Paper clip video Trade creates wealth take something not valuable to one and giving it to someone who values it o TRANSACTION COSTS barriers to trade o MIDDLEMEN reduce the cost of trade and increase value EX Real estate agents III Things that reduce trade 1 Trade barriers i TARIFFS 1 Tires made in China are taxed in the US to protect the US domestic economy ii QUOTAS limit trade to how much you can import 1 Loose wealth between two countries who can not trade because price INCREASES and income DESCREASES iii EMARGO no trade made 2 buy all American campaigns 3 occupational licensing 4 taxes and subsides 5 standards CAF standard corporation average fuel economy Private Property Rights A Assumes a free market no government intervention B Property rights include 3 elements 1 Right to exclusive use of property 2 Legal protection against others using it without owners permission 3 Right to sell exchange transfer or mortgage the property C Use property as long as you don t infringe on anyone else s
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