pter 1 Basic Economics Cha What is Economics o Economics is the study of how we make choices under scarcity Scarcity the concept that there is less of a good freely available from nature than people would like Not enough to freely go around so that everyone can have all they want Without scarcity there would be no choices Ex time money cars etc o A Scarcity is not the same thing as poverty Even if you have an abundance of money there is still a scarce Scarcity amount of money Poverty is subjective What may be considered poverty in the US is not considered poverty in a different country o B Scarcity necessitates rationing Rationing is allocating scarce goods to those who want them Ex First come first serve In a market economy price is used to ration goods if you have the money you get it This causes people to work and make money Scarcity leads to competitive behavior Competition is important Natural Selection How do we maximize the use of scarce resources Eight Guideposts to Economic Thinking o 1 Resources are scarce so decision makers must make trade offs No such thing as a free lunch Opportunity Costs the highest valued alternative that must be sacrificed when choosing an option Ex an hour of your time How you spend your next 15 o 2 Individuals are Rational they try to get the most from their limited resources Greatest benefit at the least possible cost Ex Do I need to get the book for this class Ex Beer or liquor Note what is rational for one person may not be rational for everyone Ex smoking cigarettes o 3 Incentives Matter choice is influenced in a predictable way by changing incentives Ex Killer Seatbelts Accidents fatality rates have increased with seatbelts 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 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 Ex Going out to a party and then getting arrested o 7 The value of a good or service is subjective Ex FSU Football Tickets If you re a student fan of a different university a ticket to a FSU game doesn t really matter to you 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 Positive vs Normative Economics o Positive Economics the scientific study of what is testable Ex It s 100 degrees out You can test the temperature to see if its accurate o Normative Economics judgments about what ought to be not testable Ex It s too hot outside Some people may think it some may not It is not testable 4 Pitfalls to Avoid in Economic Thinking o 1 Violation of Ceteris Paribus Ceteris Paribus other things constant Ex Buying Roses If the price of roses increase people buy fewer roses This accurate except for around Valentine s Day Around that time rose prices are high and people still buy them The proper way to state this is If the price of roses increase people buy fewer roses ceteris paribus o 2 The belief that good intentions guarantee desirable outcomes Ex Child Restraint Caps 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 3 a day 2 a day 1 a day Sweat Ship Domestic Factory Fields In these countries working in a sweat shop is great considering their alternative options o 3 The belief that association is causation Just because x and y happen together doesn t mean x causes y Ex Superstitions o 4 Fallacy of Comparison the fallacious belief that what is true for one is true for all Ex Standing at a football game If everyone stands up everyone can see better False the short people now can t see Resources an input used to produce and economic good Anything we use through something else Ex Cake made up of eggs flower etc 1 Human Resources Human Capital someone who can invent a new product score a touchdown etc Ex Bill Gates 2 Physical Resources Physical Capital man made tools to produce Ex lumber hammers nails 3 Natural Resources Things that come from nature Ex oil Capital human made resources used to produce other goods and Resources services Chapter 2 Some Tools of the Economics Trade Creates Value o Because the value of goods is subjective voluntary trade creates value Ex Candy Game o When individuals engage in voluntary exchange both parties are made better off How Trade Leads to Economic Progress o 1 Gains from specialization and division of labor o 2 Gains from mass production methods o 3 Gains from innovation Transaction Costs o Transaction Cost The time effort and other resources needed to search out and complete and exchange Ex McDonald s in bed The cost of getting out of bed and getting to McDonald s o This leaves the role of the middleman Middleman a person who buys and sells goods or services or arranges trades A middle man reduces transaction costs Ex Door step delivery real estate agent grocery stores Importance of Property Rights o Private Property Rights Involve 1 The 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 Ex Joab s neighbor charging them to pay to walk through 4 Incentives of Property Rights her property others Ex Empty Lot o 1 Incentives to use resources in ways that are considered beneficial to 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 Tragedy of the Commons Ex Overfishing in the sea If you don t get all the fish someone will Ex Overgrazing When land has to be shared farmers end up
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