the concept that there is less of a good freely available from nature than people ECO2023 Final Exam Study Guide Joab Corey Chapters 1 13 Chapter 1 Economics the study of how we make choices under scarcity choice the act of selecting among alternatives Scarcity would like leads to competitive behavior ex time money cars etc scarcity is not the same thing as poverty scarcity necessitates rationing Rationing allocating scarce goods to those who want them Market economy price is used to ration goods Resources an input used to produce an economic good human capital 1 Human Resources 2 Physical resources physical capital 3 Natural resources Capital human made resources used to produce other goods and services 8 Guideposts to Economic Thinking 1 Resources are scarce so decision makers must make trade offs no such thing as a free lunch Opportunity Cost The highest valued alternative that must be sacrificed when choos ing an option Ex An hour of your time Ex How you spend your next 15 Airbags vs medications 2 Individuals are rational They try to get the most from their limited resources Greatest benefit at least possible cost What is rational for one person may not be rational for everyone Choice is influenced in a predictable way be changing incentives 3 Incentives matter ex killer seatbelts ex prices 4 Individuals make decisions at the margin Marginal describes the effect of a change in the current situation Ex supersizing your extra value meal ex drive or fly Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs 5 Information helps us make better choices but it is costly ex new car vs new pencil Gather more info about the car you want to buy vs a pencil you want to buy 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 eas ily and immediately observable Ex yacht tax Ex trade restrictions Ex FSU football tickets care about football 7 The value of a good or service is subjective diff for each person For an FSU fan it is worth a lot more than for a random person who doesn t Ex how much would YOU pay for a bottle of water right now Moving goods and services to those who value them most is a primary source of economic progress 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 do red cars get more attention and tickets than regular cars Most peo ple believe its true but it was tested and its not true at all according to statis tics Only 3 of tickets come from red cars Positive vs Normative Economics Positive Economics The scientific study of what is testable Ex it is 100 degrees outside that can be tested Normative Economics Judgments about what ought to be not testable Ex It is too hot outside that is not testable 4 Pitfalls to Avoid in Economic Thinking 1 Violation of ceteris paribus principle Ceteris Paribus all things constant Ex buying roses If the price of roses go up less ppl will buy them That is usually true except for Valentines day On Vday when price of roses go up usually even more ppl buy roses 2 The Belief that good intentions guarantee desirable outcomes Ex Endangered species Act Example trying to protect woodpecker and making a law that you cant build around 50 feet of the woodpeckers tree in order to give it peace but it actu ally made it worse for the woodpecker bc then the people who wanted to build would cut down the tree Good intentions worse outcome child resistant caps The Nirvana Fallacy Is the logical error of comparing the actual situation with its idealized counterpart rather than the actual realistic alternative 3 The belief that association is causation 4 The Fallacy of Composition Fallacy of composition The fallacious belief that what is true for one is true for all Ex Standing at a football game If you and only you stand up you will be able to see the game better but if everyone stands up not everyone will be able to see the game better what is true for one is not always true for all Chapter 2 Coercion someone will devote resources to make you worse off if you do not comply Trade creates value value of goods is subjective therefore voluntary trade creates value when individuals engage in voluntary exchange both parties are made better off By channeling goods and resources to those who value them most trade creates value and increases the wealth created by a society s resources ex Candy game Trade leads to economic progress 1 Gains from specialization and division of labor 2 Gains from mass production methods 3 Gains from innovation creation of wealth Rich people make people richer ex Bill Gates Transaction Costs the time effort and other resources needed to search out and complete an exchange Ex Wanting McDonalds late at night you have to get up get dressed drive all the way there wait in line pay use gas etc is it worth the transac tion costs middleman a person who buys and sells goods or services or arranges trades Reduces transaction costs Importance of Property Rights 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals police 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 Ex Empty lot turn into parking lot 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 3 Private owners have an incentive to conserve for the future Ex popcorn at the movies 4 Private owners have an incentive to make sure their property does not damage yours Keeping your dog on a leash to make sure he doesn t hurt anyone lack of property rights lack of economic progress Production Possibilities Curve PPC outlines all possible combinations of total output that could be produced assuming a fixed amount of productive resources given amount of technical knowledge full and efficient use of resources slope of the curve indicates the amount of one good that must be given up to produce more of the other good A PPC is bowed out because of the concept of increasing opportunity cost 4 Factors that Shift PPC 1 A change in the economy s resource base increasing decreasing resources Investment The purchase construction or development of resources 2 Changes in technology The knowledge available in an economy at
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