Chapter 1 Economics the study of how we make choices under scarcity Scarcity fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like The 8 guideposts to economic thinking are 1 Resources are scarce so tradeoffs must be made 2 Individuals are rational they try to get the most from their limited resources 3 Incentives matter 4 Individuals make decisions at the margin 5 Information helps us make better choices but is costly 6 Beware of secondary effects 7 The value of a good or service is subjective 8 The test of a theory is its ability to predict Difference between positive and normative economic statement o Positive economic statements are testable o Normative economic statement are not testable Four pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus one thing changes other things follow price of houses goes up less people buy houses principle 2 The belief that good intentions equal desirable outcomes 3 The belief that association is causation 4 The fallacy of composition belief that is true for one is true for the group NOT TRUE Chapter 2 Voluntary trade creates value people value things differently what one person wants may be useless to another This leads to economic progress because trade becomes more frequent and more mutually beneficial stimulating the economy the candy game 4 incentives of property rights 1 Property owners can gain by employing their resources in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others 2 Property owners have a strong incentive to care for and properly manage what they own 3 Property owners have an incentive to conserve for the suture particularly if the property is expected to increase in value 4 Property owners have an incentive to lower the chance that their property will cause damage to the property of others The Production Possibilities Curve PPC is used to demonstrate the most efficient way to make use of one s resources 1 Anything on the PPC is EFFICIENT 2 Anything inside the PPC in INEFFICIENT 3 Anything outside the PPC is UNATTAINABLE There are 4 factors that shift the PPC 1 An increase in the economy s resource base would expand our ability to produce goods and services 2 Advancements in technology can expand the economy s production possibilities also increase output 3 An improvement in the rules under which the economy functions can 4 By working harder and giving up current leisure we could increase production of goods and services Law of Comparative Advantage individuals firms regions or nations can gain by specializing in production of good they can produce the cheapest 3 questions every economist faces 1 What will be produced 2 How will it be produced 3 For whom will it be produced Capitalism vs Socialism Capitalism tends to work better because is works similarly to natural selection utilizing the idea of market efficiency Chapter 3 Law of Demand there is an inverse relationship between the price of a good and the quantity that buyers are willing to purchase this causes a downward sloping demand curve Law of Supply there is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce this causes an upward sloping demand curve Consumer Surplus the difference between the maximum amount the consumers would be willing to pay and the amount that they actually pay Producer Surplus the difference between the minimum price suppliers are willing to accept and the price they actually receive Demand vs Quantity Demanded Quantity demanded a movement along the curve caused by a change in the price of the good in question Demand a shift of the curve cause by anything other than the change in price of the quantity demanded Supply vs Quantity Supplied Quantity supplied a movement along the curve cause by a change in the price of the good in question Supply a shift of the curve cause by anything other than the change in price of the good in question Elastic vs Inelastic Inelastic changes in quantity are not sensitive to changes in price Elastic changes in quantity are sensitive to changes in price SHIFTERS OF DEMAND there are 4 shifters of demand 1 An increase in Income I increases the demand for normal goods decreases the demand for inferior goods a Normal goods Shrimp steak etc b Inferior goods Ramen lunchmeat etc i Normal Goods I Demand for normal increases ii Inferior Goods I Demand inferior decreases 2 A change in the number of consumers increases demand a Consumers D 3 A change in the price of a related good o Substitutes Beef vs Chicken etc o Compliments things that go together Peanut Butter Jelly etc Substitutes Price of substitute increases demand increases Compliments Price of compliments increases demand decreases 4 A change in expectations o Expected change in price a sale etc o Expected change in income Expected Price Future price increase demand increases Expected Income Future income increases demand increases Shifters of Supply o A change in resource price Price of resource increases supply decreases o A change in technology Technology increases supply increases o A change in Nature or Politics Depends on change o A change in taxes Taxes increase supply decreases Market Equilibrium If there is excess supply price will fall If there is excess demand price will rise So in equilibrium there is no excess supply or excess demand Gives you the equilibrium Price and Quantity Invisible Hand Principle the tendency for people while pursuing their own interests is to promote the economic well being of society Chapter 6 The US government has vastly grown over the years 1 The government s percentage of the national GDP has gone from 9 4 in 1930 to 39 7 in 2010 2 The biggest contributor to government spending is Transfer Payments Transfer payments transfers of income from some individuals to other Social security unemployment welfare etc Transfer payments make up nearly half of the government spending Economics of Voting 1 Rational ignorance effect a rational individual has little or no incentive to acquire information needed to cast an informed vote Marginal benefit of voting the chance that your vote was the deciding vote multiplied by how much you care that a certain candidate wins Marginal cost of voting the cost of informing yourself registering to vote etc 2 Median voter theory the idea that a vote maximizing politician in a two party system
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