Principals of Microeconomics Chapter 1 The Economic Approach Compare Contrast o Bundle of goods you have now vs bundle you had 10 years ago o Improving standards of living What is economics about Scarcity and tradeoffs o Tries to explain and predict the behavior of consumers firms and gov t o Scarcity lead to tradeoffs which in turn results in making choices o Historically mechanisms that have been used to deal with the problem of scarcity Force Tradition emphasized past ways relied on families Authority gov t church Market A combination of any of these four o Every society must have a means to ration scarce resources among competing users resources and goods can be rationed in various ways e g first come first serve In a market setting price is used to ration goods and resources When price is used the good or resource is allocated to those willing to give up other things in order to obtain ownership rights When price is used to ration goods people have a strong incentive to earn income so they will be able to pay the required price o Competition is a natural outgrowth of scarcity changing the rationing method used by society will change the form of competition but it will not eliminate competitive tactics 8 Guidelines in the economic thought process 1 There are always tradeoffs What you give up is our opportunity cost value of next best alternative 2 Individuals choose purposefully Referred to as economizing behavior or rational behavior try to get the most benefits for the least cost or effort 3 Incentives matter As incentives go up you will be more likely to do something or try to and vise versa Incentive does not have to be money 4 Think on the margin not in total or on average Marginal means additional or incremental Marginal benefit additional benefit Marginal cost additional cost Rule to live by continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost 5 More information leads to better decision making but more information is costly to get Refer back to 1 through 4 6 Many choices create a secondary effect The primary effect is often immediate and visible The secondary effect usually comes later and is not as visible 7 Value is subjective Beauty is in the eye of the beholder a k a value is determined by the purchaser Just because price tag says 10 doesn t mean it is actually worth that money 8 Economic thinking is scientific thinking Economists use data and information generated by people to explain Positive and Normative Economics and predict actions o Positive Economic statements involve what is statements among economic relationships o Normative Economic statements judge what ought to be in economic matters Normative statements reflect subjective values they cannot be proven true or false Don t make one of these errors 1 Violation of ceteris paribus other things constant We want to isolate variables so we typically allow only one to change at a time 2 Good intentions do not necessarily result in good outcomes There is nothing more harmful than good intentions 3 Association is not causation Post Hoc Ergo Proctor Hoc 4 Fallacy of Composition Assumption what s good for the individual is good for the group Making this assumption when it s false is the fallacy Chapter 2 Some Tools of the Economist Opportunity Cost o All Choices Have Costs o Opportunity Costs The highest valued activity sacrificed in making a choice occurred when any choice is made they are subjective and vary among persons no such thing as a free lunch o If an option becomes more costly an individual will be less likely to choose o Consider the costs of going to college monetary vs nonmonetary explicit it vs implicit Trade Creates Value o Mutual Gain is the foundation of trade value can be made by exchanges that move goods to individuals who value them more o When you buy something do you actually gain more than the item itself Two Opposing views of trade to as a zero sum game 1 When people trade one person gains and the other person loses Referred 2 When people trade both parties gain wealth is actually created by trade Wealth is actually created by trade Voluntary trade creates wealth and promotes economic progress o With or without production with or without money exchanges voluntary trade is expected to benefit both parties involved o Potential trades Finished goods exchanged through barter Finished goods exchanged for money Businesses buying resources Consumers buying products Trade Creates Value o What could reduce the value created from a voluntary transaction o A transaction cost is a monetary or nonmonetary barrier that lowers the benefits of trade i e sales tax Nonmonetary example when surfing for airline tickets spends time that could be used to do something else o Middleman a person who buys sells or arranges trade to reduce transaction costs The Importance of Property Rights o 2 kinds of Property Rights Common Rights everybody owns it i e National Park Private Rights only one person owns it o Property Rights change the incentives for individuals By using their resources in ways beneficial to others Conserve for the future especially if the value is expected to rise To care and manage what they own Mitigate possible harm to others Private property rights involve the right to exclusive use legal protection against invaders and the right to transfer to another Private Property and Markets o When prvate property rights are protected and enforced permission of the owner is required for use of a resource individuals and firms msut buy or lease it from the owner if they want the resource o Market price is also a strong incentive for private owners to consider the desires of others and to use and develop resources that are valued by others Production Possibilities Curve o PPC also called PP Frontier o Shifting the PPC An increase in the economy s resource base would expand our ability to produce goods and services Advancement in technology can expand the economy s PP An improvement in the rules laws policies By working harder and giving up current leisure Importance of Comparative Advantage o Low opportunity cost comparative advantage division of labor specialization voluntary trade increased wealth o Law of comparative advantage The proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer Trade Output and Living Standards o Self sufficiency is the quickest and most
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