8 Guideposts to Economic Thinking Chapter 1 1 The Use of Scarce Resources is Costly Trade offs Must Always Be Made 2 Individuals Choose Purposefully Then Try to Get the Most From Their Limited Resources Incentives Matter Choice is Influences in a Predictable Way by Changes in Incentives Individuals Make Decisions at the Margin 4 5 Although Information Can Help Us Make Better Choices It s Acquisition Is 3 Costly 6 Beware of the Secondary Effects Economic Actions Often Generate Indirect As Well As Direct Effects 7 The Value of a Good or Service Is Subjective 8 The Test of a Theory Is Its Ability to Predict Chapter 1 Textbook Notes Economics Pages 1 3 Definition the study of human behavior focusing on decision making Origins Adam Smith Father of Economic Science a Scottish moral A How people make choices B philosopher expressed the first economic idea in his book An Inquiry into the Nature and Causes of Wealth of Nations in 1776 Idea of the invisible hand concept 1 wealthier than those in others 2 interest as a creative force Stresses that free exchange and competitive markets harness self Explains why people in different geographic locations are The wealth of a nation lies in the goods and services Competitive markets lead to coordination order and a produced and consumed by people b efficiency without a central authority c The invisible hand or market prices directs individuals towards the productions of goods that are most advantageous to society What is Economics About Pages 4 7 Scarcity and the choices we have to make because our demand for goods C is greater than nature can supply Our desire for goods is virtually unlimited Both individuals and society face a constraint known as scarcity 1 2 which prevents them from being able to fulfill their desires Definition Fundamental concept of economics that Salt Water will never be scarce however all other goods a indicates that there is less of a good freely available from nature than people would like b can be scarce if the conditions are right even time c considered scarce if individuals still want more and it is not freely available in nature Even if a good has been mass produced it can still be 1 Example Apples are scarce Even though they are relatively abundant in the United States people still would like to have more than nature can provide at a given time 3 Definition The act of selecting among alternatives By making a choice we are trading off meeting one desire Scarcity leads to the consequences of choices a b for another To meet one need we must let another go unmet Scarcity Choices and Trade offs provide the basic foundation for 4 economic analysis Resources are the ingredients or inputs that people use to produce goods D and services The ability to do so is limited because of nature s limit on our resources 1 Example Land Labor Skills Natural Resources Human Definition An input used to produce ecomonic goods a Made Tools and Equipment Categories a 2 Example the productive knowledge skill and Human Resources 1 strength of human beings Physical Resources or Capital 1 other goods and services while enhancing our ability to produce in the future 2 Natural Resources Example tools machines and buildings Definition human made resources used to produce b c E Example Land mineral deposits oceans and 1 rivers What is the difference between scarce goods and limited 3 resources a the fact that human desires are not met Scarce goods are the product of limited resources due to b Examples Food Clothing House Hold Goods 1 Education National Defense Time Entertainment Clean Air etc Limited resources are things used to create products 1 Examples Land Natural Resources Machines Physical Resources Animal Resources Technology and Human Resources 4 The ingenuity of humans is often needed to turn the How can a resource be turned into a good a resources into useful products b them productively is equally important Natural resources are important but knowing how to use Scarcity and Poverty Are Not the Same 1 1750 was solitary poor nasty brutish and short According to Thomas Hobbes an English philosopher life in People worked 50 70 hours a week just to obtain the basic a necessities of life b c The degree to which modern technology has allowed us to fulfill Manual labor was the main source of income Animals provided a means of transportation 2 our desires at very low prices is taken for granted 3 Scarcity is an objective concept that describes a factual situation in which the limited nature of our resources keeps us from being able to fulfill our desires for goods and services Definition A fact based on observable phenomena that is a not influenced by differences in personal opinion Poverty is a subjective concept that refers to a personal opinion of 4 whether someone meets an arbitrarily defined level of income Definition An opinion based on personal preferences and a value judgments b means to be poor Expansion Different people have different ideas of what it Example In the U S what is considered poverty 1 would be considered very wealthy if living in Africa People always want more and better goods F Scarcity Necessitates Rationing 1 who will receive the good and who will not When a good or resource is scarce criteria is used to determine c a b on human behavior Rationing is a necessity when it comes to scarcity 1 Definition Allocating a limited supply of a good or resource among people who would like to more of it When price performs the rationing function the good or resource Is allocated to those willing to give up the most other things in order to get it trade off Which method of rationing is used will have an influence 1 In politics those with powerful resources will be able to influence the politicians into making sure that they are the ones who receive the resources 2 In first come first serve the goods are allocated to those that are the fastest to getting in line or those that are willing to spend the longest time waiting in line In a market economy price is usually used to 3 allocate products Whoever is willing to pay the asking price shall receive the good You can tell if a good or resource is scarce by asking if it G c has a selling price If you have to pay for it it is scarce The Method of Rationing Influences the Nature of Competition 1 humans to improve their conditions Competition is a natural outgrowth of scarcity and the desire of a b Competition exists in every economy and every society Rationing effects completion 1 boost
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