Micro Economics Basic Economics Chapter 1 What is economics o Economics is the study of how we make choices under scarcity 1 Choices the act of selecting among alternatives 2 Scarcity the concept that there is less of a good freely available from nature than people would like Not enough to go around so no one can ever get everything they ever want Because there is scarcity that is why there are choices Everyone suffers from scarcity not just the poor Ex time money cars etc Scarcity o Scarcity is not the same thing as poverty o Scarcity necessitates rationing Rationing allocating scarce goods to those who want them How you ration influences behavior o Ration in different ways ex 1st come 1st serve In a market economy price is used to ration goods Leads to competitive behavior Competition is a good thing as it leads to innovation Resources o Resources an input used to produce an economics good 1 Human resources human capital 2 Physical resources physical captital Natural resources o Capital human made resources used to produce other goods and services Combine to make goods and services o Example of human capital Michael Phelps and his gold medals that gives him sponsorships and Bill Gates making Microsoft The Economic way of Thinking o Things are not always as they appear 8 Guideposts to Economics Thinking o 1 Resources are scarce so decision makers must make trade offs no such thing as a free lunch Might be free to you but not to society Opportunity Cost the highest valued alternative that must be sacrificed when choosing an option Ex an hour of your time Ex how you spend your next 15 Ex Airbags vs o 50billion is the cost to put airbags in all the cars but it is estimates that airbags save 400 people a year Is this worth it or should the money be funded elsewhere o 2 Individuals are rational they try to get the most from their limited resources greatest benefits at least possible cost Preferences are subjected Try to get the max benefit with least cost Ex Beer or liquor Note what is rational for one person may not be rational for everyone Ex people who know the consequences of smoking but do it anyway because it makes them happy o 3 Incentives matter choice is influenced in a predictable way by changing incentives Ex killer seatbelts Ex price Where most research and economics is done More people got up for the 10 over the penny because what changed was the incentive benefit o 4 Individuals make decisions at the margin Marginal describes the effect of a change in the current situation Ex Taco Bell o Tacos cost 1 a piece o Drink costs 0 75 o Really want 2 tacos and a drink 2 75 o But the extra deluxe meal has 3 tacos and a drink 3 Marginal Benefit extra taco Marginal Cost 0 25 extra calories self loathing Ex Drive or Fly o Dallas Texas o Can either drive or fly o Drive 14 hours and 100 o Fly 4 hours and 400 Marginal Benefits 10 hours Marginal Costs 300 or 30 per hour Time 30 an hour Fly Time 30 an hour Drive Cost Benefit Analysis one will undergo an action when the marginal benefits outweigh the marginal costs o 5 Information helps us make better choices but is costly ex new car vs new pencil Car in depth research what car best fits your needs goes to various dealers test drive Pencil no research needed 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 not be easily and immediately observable Ex Yacht Tax o Tax on luxury yachts governments wanted to try and tax rich people instead of middle and poor o Rich people just stopped buying yachts and that made the industry decrease Viking yacht company once biggest yacht company in Florida lays off 1 500 of their 1 560 employees or 96 o 7 The value of a good or service is subjective ex FSU Football Tickets a nonfan of football vs a football fanatic a nonfan that somehow gets a ticket can oversell the ticket to the fanatic but the fanatic might find it a good sale cause they really want to see the game o both sides are usually better off with the trade because they both get what they want Moving goods and services to those who value them most is a primary source of economic progress 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 Positive vs Normative Economics o Positive economics the scientific study of what is testable Not if it s true or false just if you can test it if it s true or false Ex its 88 degrees outside o Normative economics judgements about what ought to be not testable Ex it s too hot outside 4 pitfalls to avoid in economic thinking o 1 Violation of ceteris paribus principle Ceteris paribus other things constant Ex if the prices of roses increases people will buy fewer roses ceteris paribus o 2 The belief that good intentions guarantee desirable outcomes o still buy expensive roses on Valentine s day Ex endangered species act o To try and save the woodpecker they made a rule that said if there is a woodpecker housing in the tree you can t knock it down or do anything within 50 feet of it o Instead of this law helping to save the woodpeckers people would knock down the trees at an alarming rate so the bird wouldn t have time to nest there Ex Child resistant safety caps The Nirvana Fallacy Nirvana Fallacy the logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative o Ex child labor and sweatshops Children working there most likely don t have any better alternative so if it was take away they could have a worse alternative such as domestic factory fields and child prostitution that they could be paid even less o 3 The belief that association is causation Ex Superstitions Ex initials and performance Peoples initials influence your performance o Such as if your name has more A s and B s there going to get better grade than someone who has multiple F s in their name Its false o 4 Fallacy of composition the fallacious belief that what is true for one is true for all Micro vs Macro Ex standing at a football game o Microeconomics focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms o Macroeconomics focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor the trees phycology The forest Sociology REVIEW o What is scarcity o What are the 8 guideposts o vs normative
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