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TEST 1 Notes Basic Economics o The study of how we make choices under Scarcity o 1 Choice o 2 Scarcity The act of selecting among alternatives The concept that there is less of a good freely available from nature than people would like Example Time Money Cars Etc A Not the same thing as poverty B Necessitates reasoning Rationing o Allocating scarce goods to those that want them o In a market economy price is used to ration goods o Resources C Scarcity leads to competitive behavior When will the world run out of oil An input used to produce an economic good Human Resources Human Capital Manual labor Physical Resources physical capital Manmade machines and tools Natural Resources Land gas oil coal o Capital Human made resources used to produce other goods and 8 Guideposts to Economic Thinking services Such thing as a free lunch Opportunity Cost o 1 Resources are scarce so decision makers must make trade offs No The highest valued alternative that must be sacrificed when choosing an option o Example an hour of your time how you spend your o 2 Individuals are Rational they try to get the most from their limited next 15 resources greatest benefit at least possible cost Note what is rational for one person may not be rational for Example Beer vs Liquor everyone o 3 Incentives Matter choice is influenced in a predictable way by changing incentives o 4 Individuals make decisions at the margin Example Money Game Killer Seatbelts Marginal Describes the effect of change in the current situation o Example All you can eat soup salad and breadsticks 7 Chicken Parm all you can eat soup salad and breadsticks 11 Marginal Benefit Chicken Parm Marginal Cost 4 Cost benefit analysis o One will undergo an action when the marginal benefits outweigh the marginal costs o 5 Information helps us make better choices but is costly o 6 Beware of secondary effects economic actions generate both direct Example Airport Security vs Lead Clean Up Example New Car vs New Pencil and indirect effects Secondary effects The indirect impact of an event or policy that may not be easily and immediately observable o Example Yacht tax Trade Restrictions Candy o 7 The value of a good or service is subjective Moving goods service to those who value them most is a primary source of economic progress Example How much would you pay for a bottle of water right now Positive vs Normative Economics o 8 The test of a theory is its ability to predict If real world events are consistent with a theory then that theory is valid o Positive Economics the scientific study of what is testable o Normative Economics Judgments about what people think out to Ex The government is 18 trillion in debt be not testable Ex the governments spends too much 4 Pitfalls of Economic Thinking o 1 Violation of ceteris paribus principle Ceteris paribus other things constant Ex Buying Roses o 2 Good intentions do not guarantee desirable outcomes o Nirvana Fallacy Ex Endangered species act Child resistant safety caps The logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative o 3 Association is not causation o 4 Fallacy of composition Example Child labor and sweatshops Ex Superstitions Initials and performance Belief that what is true for one might not be true at all Ex Standing at a football game o Focuses on hot human behavior affects the conduct of affairs within individually defined units such as households or firms trees Microeconomics Macroeconomics o Focuses on how human behavior affects outcomes in highly Chapter 2 Tools of the Economist aggregated markets such as the nation s market for labor the forest o Coercion someone will devote resources to make you worse off if you o Trade creates value creates value Because the value of goods is subjective voluntary trade don t comply o 1 When individuals engage in voluntary exchange both parties are o 2 Channeling goods and resources to those who value them most better off increases the wealth created by a society s resources How Trade Leads to Economic Progress o 1 Gains from specialization and division of labor o 2 Gains from mass production methods o 3 Gains from innovation o The process by which some people become rich will make everybody Creation of Wealth richer Ex Bill Gates Transaction Costs o The time effort and other resources needed to search out and o Leaves a role for middleman complete an exchange Middleman a person who buys and sells goods or services or arranges trades A middleman reduces transaction costs Importance of Property Rights o Private property rights include 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property o 1 Incentive to use resources in ways that are considered beneficial to 4 Incentives of Property Rights Owners bear the cost of ignoring the wishes of others o 2 Private owners have an incentive to care for and manage what they others own Ex communal refrigerator vs Your own refrigerator Ex Endangered Species o 3 Private owners have an incentive to conserve for the future o 4 Private owners have an incentive to make sure their property does not damage your property Lack of property rights equals a lack of economic progress Production Possibilities Curve PPC o Outlines all possible combinations of total output that could be produced assuming a 1 Fixed amount of productive resources 2 Given amount of technical knowledge 3 Full and efficient use of resources Efficient A B C Inefficient X Unattainable Y The slope of the curve indicates the amount of one good that must be given up to produce more of the other good The PPC is bowed outward because of the concept of increasing opportunity costs o Slope rise run 4 Factors that shift the PPC o 1 A Change in the economy s resource base o 2 Changes in technology Investment the purchase construction or development of resources However investment requires us to give up consumption goods The more you invest the more you will grow Technology the knowledge available in an economy at any Technology determines the amount of output we can generate given time with our limited resources o 3 A change in the rules under which the economy functions o 4 Changes in work habits Law of Comparative Advantage Ex Working harder can shift curve upwards o The total output of a group of individuals an entire economy or a group of nations will be greatest when the output of each good is


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FSU ECO 2023 - TEST 1 Notes

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