Chapter 1 Know the definition for scarcity o The concept that there is less of a good freely available from nature than people would like Know the 8 economic guideposts to economic thinking o 1 Resources are scarce so decision makers must make trade offs No such thing as a free lunch May be free to you but not free to society o 2 Individuals are Rational they try to get the most from their limited resources Greatest benefit at the least possible cost o 3 Incentives Matter choice is influenced in a predictable way by changing incentives o 4 Individuals make decisions at the margin Marginal describes the effect of a change in the current situation Ex Ponderosa Buffet AYCE side bar 7 50 AYCE side bar AND steak 9 00 Marginal Cost 1 50 Marginal Benefit Steak o If that steak is worth the 1 50 to you you ll get it o 5 Information helps us make better choices but is costly Ex New Car vs New Pencil You do more research and studying to find a car than you would for a new pencil o 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 be easily and immediately observable o 7 The value of a good or service is subjective 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 Ex Red cars get more tickets 4 Pitfalls to Avoid in Economic Thinking o 1 Violation of Ceteris Paribus Ceteris Paribus other things constant o 2 The belief that good intentions guarantee desirable outcomes Ex Child Restraint Caps o 3 The belief that association is causation Just because x and y happen together doesn t mean x causes y o 4 Fallacy of Comparison the fallacious belief that what is true for one is true for all Ex Standing at a football game o The Nirvana Fallacy The Nirvana Fallacy The logical error of comparing the situation with its idealized counterpart rather than the actual alternative Ex Child Labor and Sweatshops Chapter 2 Trade Creates Value o Because the value of goods is subjective voluntary trade creates value o 1 When individuals engage in voluntary exchange both parties are made better Ex Candy Game off o 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 The Creation of Wealth o The Creation of Wealth The process of which some people become rich Advanced the technology world and helped everyone become everyone will become rich Ex Bill Gates 4 Incentives of Property Rights richer Ex Empty Lot o 1 Incentives to use resources in ways that are considered beneficial to others If you had an empty lot on FSU s campus what would you use it for Parking of course It will make you profit o 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 If the check oil were to come on in the rental car you wouldn t take it to get it checked Ex Berry s Bikes o 3 Private Owners Ex Popcorn at the movie s Economics teacher that instead of buying one large bag he would buy two bags One for him one for his girlfriend o 4 Private owners have an incentive to make sure their property does not damage Ex Tight parking spot and not wanting to hit any other cars you re Production Possibilities Curve PPC o PPC outlines all possible combinations of total output that could be produced your property cautious assuming a 1 Fixed amount of productive resources 2 Given amount of technical knowledge 3 Full and efficient use of resources Straight Line PPC 7 6 5 4 3 2 1 0 d o o F 0 1 2 4 5 6 3 Clothing When you gain 1 unit of clothing you lose 1 unit of food 1 1 1 Shifters of the PPC o 1 Change in the economy s resource base o 2 Changes in technology Technology the knowledge available in an economy at any given time o 3 A change in the rules under which the economy functions o 4 A change in work habits Law of Comparative Advantage 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 produced by whoever has the lowest opportunity cost Economic Organization o Everyday economy faces 3 questions 1 What will be produced 2 How will it be produced 3 For whom will it be produced o Socialism a system if organization where 1 Ownership and control of the means of production rest with the state 2 Resource allocation is determined by centralized planning Collective decision making the method or organization that relies on public sector decision making to resolve basic economic questions o Capitalism a system of economic organization where Productive resources are owned privately Goods and resources allocated through market prices Market Organization a method of organization in which private parties make their own plans and decisions with the guidance of market prices o Why Capitalism tends to work and why socialism does not 1 Capitalism is similar to natural selection It uses the idea of market efficiency 2 Socialism suffers from an information problem In socialism one person one small group makes decisions for the whole country In capitalism you just make decisions for yourself Your own preferences Chapter 3 The Demand Curve Consumer Surplus o Law of Demand there is an inverse negative relationship between the price of a good and the quantity that buyers are willing to purchase Ex Price of product goes up demand purchases go down Resolves in a downward slope o Consumer Surplus the difference between the maximum amount consumers would be willing to pay and the amount that they actually pay A girl may be willing to pay 200 for diamonds but if it s 150 at the store they ll get it for the 150 this is their consumer surplus o Consumer surplus is the are below the demand curve but above the price Ex What happens if the price falls Rises Price Consumer Surplus Price Consumer Surplus Demand vs Quantity Demanded o A change in quantity demanded A movement along the curve Caused by a change in the price of that good Increase in quantity demanded movement down the curve to the right Decrease in quantity demanded movement up the curve to the left o A change in demand A shift of the entire curve Cause by a change in anything that affects demand other than the price of the good Increase in demand curve shifts right Decrease in demand curve shifts left Shifters of Demand decisions o 1 Change in consumer income the money you have can influence your A
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