Chapter 1 The Economics Approach Macroeconomics Test 2 Is life getting better or worse Measure using life expectancy health income education and entertainment What is economics 1 Choice 2 Scarcity the act of selecting among alternatives not enough resources to meet our desires o Not poverty o Necessitates rationing allocating scarce goods to those who want them Resources price is used to ration an input used to produce any economic good o Human capital ex Albert Einstein o Physical capital o Natural resources human made resources used to produce other goods Capital Economic Way of Thinking 8 Guide Points to Economic Thinking 1 Resources are scarce TNSTAAFL must make tradeoffs o Opportunity cost the highest value alternative given up Individuals are rational greatest benefit at the least possible cost o Ex Chickfila vs 5 Guys Welfare vs Education choice is influenced in a predictive way by changing 2 3 Incentives matter incentives o Ex money game 4 Individual make decisions at the margin o Marginal o Cost benefit analysis is greater than marginal cost comparing one option to another and the effects one will undergo an action when marginal benefit Ex airport security vs lead clean up 5 Information helps us make better choices but is costly o Ex buying a house vs buying a notebook 6 Beware of secondary effects economic actions generate both direct and indirect effects o Secondary effects be easily observable the indirect impact of an event or policy that may not o Ex fuel efficiency regulations trade restrictions 7 The value of a good is subjective o Voluntary trade creates value o Moving goods to those who value them most is a primary source of economic progress 8 The test of a theory is its ability to predict o If real world events are consistent with a theory then that theory is valid Positive vs Normative Economics Positive the scientific study of what is testable Normative 4 Pitfalls to avoid in Economic Thinking 1 Violation of ceteris paribus other things remaining constant principle judgements about what people think ought to be not testable o Ex buy eggs 2 Good intentions do not guarantee desirable outcomes o Ex suicide warnings on anti depressants o C H Taxi 3 Association is not causation o Ice cream sales and homicides 4 Fallacy of composition belief that what is true for one might not be true for all o Ex when you get a raise vs when everyone gets a raise Microeconomics vs Macroeconomics Micro focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms trees markets such as the nation s market for labor the forest focuses on how human behavior affects outcomes in highly aggregated Macro Chapter 2 Tools of the Economist Trade creates value Because the value of goods is subjective voluntary trade creates value o Ex candy game When individuals engage in voluntary exchange both parties are made better off Channeling goods to those who value them most increases the wealth created by a society s resources Voluntary trade Creation of Wealth both parties expect to gain The process by which some people become rich will make everybody richer o Ex Henry Ford assembly line Importance of Property Rights Private property rights involve 1 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 4 Incentives of Property Rights 1 Incentive to use resources in ways that are considered beneficial to others o Ex reselling your textbook o Owners bear the cost of ignoring the wishes of others 2 Private owners have an incentive to care for and manage what they own 3 Private owners have an incentive to conserve for the future o Tragedy of the commons 4 Private owners have an incentive to make sure their property does not damage your Outlines all possible combinations of total output that could be produced assuming a property Property Rights and Development Lack of property rights lack of economic progress Production Possibilities Curve frontier 1 Fixed amount of productive resources 2 Given amount of technical knowledge 3 Full and efficient use of resources Slope opportunity cost Inefficient points are INSIDE the frontier Efficient points are ON frontier Unattainable points are OUTSIDE the frontier Lose one unit of food to gain a unit of clothing 4 Factors That Shift the PPC PPF 1 Change in amount of resources available Increasing opportunity cost o Investment the purchase construction or development of resources o However investment requires us to give up consumption goods 2 Change in technology o Technology the knowledge available in an economy at any given time o Technology determines the amount of output we can generate with our limited resources o Ex tanks vs buses 3 Change in the rules under which the economy functions o Ex imposing trade barriers o Ex eliminate the business franchise tax in West Virginia 4 Changes in work habit o Ex working harder can shift the curve outward and vice versa Law of Comparative Advantage The total output of a group of individuals an entire economy or a group of nations will be the greatest when the output is each good is produced by whoever has the LOWEST OPPORTUNITY COST who can do it cheapest o Ex should Bill Gates wash his dishes o Ex U S Japan Corn Cars 50 1 5 car 20 1 4 car 10 5 corn 5 4 corn o U S gives up less cars should focus on corn o Japan gives up less corn should focus on cars Absolute Advantage Can have an absolute advantage in both but can ONLY HAVE A COMPARATIVE can produce the most of a good ADVANTAGE IN ONE Economic Organization Every economy faces 3 questions 1 What will be produced 2 How will it be produced 3 For whom will it be produced Capitalism a system of economic organization where o Productive resources are owned privatively o Goods and resources are allocated through market prices Market organization own plans decisions with the guidance of market prices Socialism a system of economic organization where a method of organization in which private parties make their o Ownership and control of the means of production rests with the state o Resource allocation is determined by centralized planning Collective decision making decision making to resolve basic economic questions the method of organization that relies on public sector Economic Freedom Reliance on Capitalism Measures economic freedom Capitalism Socialism No place is purely capitalist socialist State gov Means
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