ECO 2023 What is scarcity The concept that there is less of a good freely available from nature than people would like Ex time money cars etc a Scarcity is not the same thing as poverty b Scarcity necessitates rationing a Rationing allocating scarce goods to those who want them b In a market economy price is used to ration goods c Scarcity leads to competitive behavior What are the 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 The highest valued alternative that must be sacrificed when choosing an option Ex An hour of your time Ex if you spend 15 on something you can t spend that money on something else Individuals are rational they try to get the most from their limited resources Greatest benefit at least possible cost Ex Beer or liquor that are equal prices you purchase whichever you prefer Note What is rational for one person may not be rational for everyone 3 Incentives matter choice is influenced in a predictable way by changing incentives Ex money game people ran faster to get higher amounts of money 4 Individuals make decisions at the margin Marginal describes the effect of a change in a current situation Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs Review example flying takes 8 hours 600 driving takes 38 hours 300 What is the minimal value of your time in order to fly MB 30 hours MC 300 time 10 hour 5 Information helps us make better choices but is costly Ex New car vs new pencil 6 Beware of secondary effects economic actions generate both direct and indirect effects Secondary effect the indirect impact of an event or policy that may not be easily and immediately observable Ex Yacht tax indirect hurts the middle and lower class Ex Trade restrictions Ex eating candy 7 The value of a good or service is subjective depends how much you want it Ex FSU Football Tickets Ex How much would you pay for a bottle of water right now Moving goods and services to those who value them most is a primary source of economic progress 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 Ex red cars don t actually get in more accidents despite popular belief Positive vs Normative economics Positive economics the scientific study of what is testable Ex When we increase minimum wage poverty rates decrease Normative economics Judgments about what ought to be not testable Ex We should increase minimum wage What are the 4 pitfalls to avoid in economic thinking 1 Violation of ceteris paribus principle all other things constant If the price of roses increases people will buy less roses ceteris paribus o On valentines day prices go up and people buy more roses 2 The belief that good intentions guarantee desirable outcomes Child resistant safety cap o In reality people put their medicine bottles in easier to reach places because they were more trusting of the safety caps Also people left the caps off bc they didn t feel like fighting with it Nirvana Fallacy the logical error of comparing the actual situation with its idealized counterpart what you hoped would happen rather than the actual alternative ex If sweatshops didn t exist 3 Association is not causation Ex tiger attack preventing watch 4 Fallacy of composition belief that what is true for one might not be true for all Ex when you get a raise Vs when every one gets a raise One person stands at a football game they can see better if everyone stands then no one can see Know how trade creates value and leads to economic progress Because the value of goods is subjective voluntary trade creates value Middlemen support trade by reducing transaction costs bring buyers and sellers together or help to make more transactions happen Understand the process of wealth creation through voluntary transactions don t hate Bill Gates for being rich he made the world better How trade creates value 1 When individuals engage in voluntary exchange both parties are made better off 2 By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources How trade leads to economic progress 1 Gains from specialization and division of labor 2 Gains from mass production methods 3 Gains from innovation What are the 4 incentives of property rights 1 Incentive to use resources in ways that are considered beneficial to others Ex Empty lot Owners bear the cost of ignoring the wishes of others 2 Private owners have an incentive to care for and manage what they own Ex How do you drive a rental car compared to your own car 3 Private owners have an incentive to conserve for the future Ex Popcorn at the movies or tragedy of the commons 4 Private owners have an incentive to make sure their property does not damage your property Ex Keeping your dog on a leash Be able to read a PPC graph and identify the points A B C efficient points D inefficient point E Unattainable point The slope of the curve indicates the amount of one good that must be given up to produce more of the other good Slope rise run A PPC is bowed outward because of the concept of increasing opportunity costs What are the four factors that shift the PPC curve 1 A change in the economy s resource base Investment the purchase construction or development of resources However investment requires us to give up consumption goods Ex Consider the two PPCs 2 Changes in technology Technology the knowledge available in an economy at any given time Technology determines the amount of output we can generate with our limited resources 3 A change in the rules under which the economy functions Ex Reducing Trade Barriers Ex The Jim Crow laws 4 Changes in work habits Ex working harder can shift curve outward Ex working less can shift curve inward What is the law of comparative advantage 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 produced by whoever has the lowest opportunity cost Ex Should LeBron James clean his own house Ex Who should mow the lawn What are the three questions every economy faces 1 What will be produced 2 How will it be produced 3 For whom will it be produced Know the difference between capitalism and socialism and why capitalism works Socialism a system of economic organization where 1 Ownership and control of the means of production
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