1 ECO2013 1 13 15 Chapter 1 The Economic Approach Is Life Getting Better or Worse What Objective measures should we analyze Life Expectancy Health Income Education Entertainment Changes in Transportation Technology Medicine Entertainment What Is Economics Economics is the study of how we make choices under scarcity 1 Choice The act of selecting among alternatives 2 Scarcity The concept that there is less of a good freely available from nature than people would like Ex Time money textbooks Scarcity A It is not the same as poverty B Scarcity necessitates rationing C Scarcity leads to competitive behavior a Rationing Allocating scarce goods to those who want them b In a market economy price is used to ration goods Resources Resources An input used to produce an economic good 1 Human Resources Human Capital Intelligence Strength Speed Creativity 2 Physical Resources Physical Capital Chair Paper Forklifts man made tool or machinery 3 Natural Resources Lumber Ores land Crude Oil Natural Gas Capital Human made resources used to produce other goods and services Ex Albert Einstein and his intelligence Human Capital Ex Chuck Norris and his awesomeness Human Capital 8 Guideposts to Economic Thinking 2 1 Resources are scarce so decision makers must make trade offs No such thing as a free lunch Opportunity Cost Highest value alternative that must be sacrificed when choosing and option Ex An hour of your time Spending an hour sitting in Joab s lecture If you weren t here you would most likely be using your time to sleep Ex Guns and butter The government makes choices to spend their money on military spending or social spending 2 Individuals are rational They try to get the most from their limited resources Greatest benefit at least possible cost Ex Chick fil A vs 5 Guys burger In economics it is whatever you prefer So if two things cost the same you will choose the one that will give you the greater level of happiness Ex Welfare vs education The government spending money on welfare or education and every dollar they spend on one is a dollar not spent on the other Many opinions Ex Joab choosing to undergo pepper spray training with police He believed the benefits of experiencing it outweighed the costs Note What is rational for once person may not be for the other 3 Incentives Matter choice is influenced in a predictable way by changing incentives Ex Money Game Joab split the class up into groups and said whichever group made the most noise he threw money into that groups area As the amount of money increased groups were more willing to be loud Incentives Matter Ex Economic Lesson from my father Joab s father was a bull fighter once and a bull broke it s leg and his father asked his boss why they dont let the workers have the bull leg for food The boss said that that would create an incentive for the workers to break the bull s leg Be careful of your incentives Ex Prices The higher the price the more willing you are to sell The lower the price the less willing to sell Change in cost and benefits 4 Individuals make decisions at the margin Marginal Describe the effect of a change in the current situation Ex Olive Garden A You can buy the all you can eat soup salad breadsticks 7 B You can also buy the Chicken Parm which comes with the all you can eat soup salad breadsticks 11 Marginal Benefit MB Chicken Parm Marginal Cost MC 4 Ex Taco Bell A 2 tacos and 1 drink 2 50 B 3 tacos and 1 drink 3 00 Marginal Benefit MB 1 taco 3 Marginal Cost MC 0 50 Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs MB MC Ex Airport Security vs Lead Clean up A Airport Security 50 Billion 100 lives B Lead clean up 70 Billion 120 lives Marginal Cost MC 20 Billion Marginal Benefit MB 20 lives Transmitter Question J R PuffnStuff sells bongs blunts pipes and other smoking paraphernalia Mr High all the time needs to buy blunt wraps and a bong He notices that if he buys 9 boxes of blunt wraps at 2 00 per box then the bong cost 1 50 However J R Puffnstuff is running a special where if you buy 10 boxes of blunt wraps then the bong is free Given that Mr High all the time is going to get a bong what is the marginal cost of the tenth box of blunt wraps Answer B 0 50 5 Information helps us make better choices but is costly Ex New House vs New Notebook Before buying a new house you consult with many people before making your purchase You looked at a variety of houses and talked to the inspector etc For the notebook you probably didn t look in depth You put less time in buying a notebook The bigger the decision the more information you re going to gather 6 Beware of secondary effects economic actions generate both direct and indirect effects Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable Ex Can t take animals on subway that you can t fit in bag Was in response to people being big dangerous dogs such as pit bulls onto the subway As a secondary effect some people trained their animals to sit in the bag Ex Fuel efficiency regulations Cars smaller and lighter and use less gasoline they are going to be cheaper and people have incentive to drive more So the actual outcome actually increased traffic fatalities Ex Trade Restrictions If you put a trade restriction on companies in other countries then people in other countries will put trade restrictions or taxes on our companies in retaliation 7 The value of a good or service is subjective Because goods are subjective voluntary trade creates value If you like something it is going to be worth more to you Ex How much would you pay fora pack of gum right now Student bought it for 2 from Joab What if Joab bought if or 0 50 though Did the student make a bad choice No because it was worth more to him 8 The test of a theory is its ability to predict 4 If real world events are consistent with a theory then that theory is valid Testing Theories video elephants afraid of mice No not at all Though myth busters did this same thing and elephants seemed to be uncomfortable Keep in mind these elephants are circus elephants sometimes best to test a variety of ways Positive vs Normative Economics Positive economics the scientific study of what is Testable It s 50 degrees outside Normative economics Judgments about what people think out to be Not testable It s too cold outside or The government spends too much money 4 Pitfalls to avoid in economic thinking 1 Violation of ceteris paribus
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