ECO 2013 Chapter One 1 What is economics The study of human behavior in the presence of constraints a How is that different from Psychology or Sociology i Economics the study of human behavior and the choices that we make ii Sociology the study of human behavior when there are no choices to make b Constraints society s norms money parents time i Why do we have constraints 1 Scarcity not enough of a good freely in nature as we would like ii Where do constraints come from 1 Needs limited 2 Desires limited 3 Resources LIMITED i Natural iron ore oceans rivers land ii Human knowledge experience talent iii Physical tools machinery factories c Resources anything used to produce other goods and services 2 Scarcity v Poverty Scarcity Poverty a Positive v Normative Economics i Positive a FACT scarcity ii Normative OPINION poverty b Objective v Subjective i Objective scarcity ii Subjective poverty i e arbitrary income account c Scarcity necessitates i Rationing allocating a scarce resource among those who want it 1 Types of rationing a First come first served inefficient b Subjective prettiest tallest shortest arbitrary c PRICE efficient non arbitrary ii Competition 1 By price promotes income generation 2 Makes us better off better cheaper faster 3 The Economic Way of Thinking a ALWAYS a tradeoff i We call the tradeoff our Opportunity Cost 1 The highest value option given up when you choose one thing over another a Coming to class b c Lunch Spouse 2 When you use resources you re always giving up the opportunity to use them in a different way a Building a 24 million Performing Arts Center at FSU Opp Cost AIDS research to local Tallahassee Hospital Individuals choose purposefully therefore economically trying to get the most for the least i Highest utility lowest cost Does FSU want you parking in handicapped spaces how do you Incentives Matter know NO and because then they have to give you a 250 ticket and a spot is lost for someone truly handicapped b c i People respond to incentives in a particular way ii Cost goes up benefit goes down and vice versa d Economic Thinking is marginal thinking i People make decisions at the margin How will this new additional thing change me 1 In economics marginal refers to a The change of difference between two alternatives b Man made resources as opposed to natural resources c The satisfaction a consumer receives from a good d Holding everything else constant in the analysis 2 EX Buying cars Do a cost benefit analysis a Buying your first car analyze costs and benefits of getting a 1st car against having 0 cars b Buying a second car once have 1 already analyze cost and benefits of having a 2nd car NOT HAVING 2 CARS e Information is a costly good i Because info is costly we don t always make the smartest decision regardless of whether we have perfect all info ii Rational Ignorance remaining ignorant about something where the cost of obtaining the knowledge is greater than the benefit of learning it f Remember the secondary effects i ADFC payments that increased the divorce rate ii Increases in the money supply that give people more income but eventually result in higher inflation iii Taxing the of windows in a homes iv Taxing finished homes more than unfinished homes 4 Pitfalls to Avoid in economic thinking a Violating the ceteris paribus condition i Ceteris paribus all else equal other things constant ii If you forget this it can lead to erroneous conclusions 1 You know that income is growing in the U S but you notice that people are buying fewer radios How can that be MP3 players 2 If two things are changing at once predicting is much more difficult b Just because something seems like a good idea doesn t mean it is good intentions do not guarantee good outcomes i FAA regulations to require all children to wear safety belts requiring their own seat ii AFDC benefits that increase the divorce rate iii remember secondary effects c Association is not causation i Every time it rains I see folks with umbrellas Conclusion umbrellas cause rain ii Is it just correlated because it happens at the same time or is it causation then must find order of causation d The Fallacy of Composition just because something is good for one doesn t make it good for all Just because something is true for the micro individual doesn t mean it s true for the macro group i One farmer has a bumper crop and his income rises ALL farmers have a bumper crop I leave work early to beat the rush EVERYONE leaves early for work ii ECO 2013 Chapter Two 1 3 questiones every economy has to answer a What do you produce b How do you produce c Once produced who gets it 2 Tools of the Economist a Opportunity Cost i Time AND money ii OC are subjective no one can tell us our true OC gov t spending your money iii Failure to consider OC poor policy Performing Arts Center b Trade Creates Value wealth i Voluntary Exchange 1 Trade is NOT a zero sum game both parties in voluntary exchange are made better off field trip bagged lunch 2 Trade creates wealth by taking something that was NOT as valuable from one and giving to someone who values it more highly ii Transactions Costs barrier to trade 1 Internet has greatly reduced transaction costs and increased trade and value a Trade barriers i Tariffs ii Quotas limits trade because only allowed to produce certain amount of item iii Embargos no trade whatsoever Buy American campaign b c Occupational licensing d Subsidies taking tax from some to subsidize others e Standards CAF standard Corporate avg fuel economy auto fleet must adhere to this standard 54 5 mpg by 2025 iii Middlemen Reduces costs of trade increases value iv Anything that reduces trade reduces wealth creation c Property Rights in a free market i Assume free market non gov t intervention ii Don t infringe on anyone else s property rights 1 Ex can use your car but not to run over neighbor s cat or flower 2 Ex can drive a motorcycle as long as the muffler noise is not ear garden splitting iii Includes 3 elements 1 Right to exclusive USE of property 2 3 Right to transfer sell exchange or mortgage the property Legal protection against others using it without owner s permission iv Good things that result from having Property Rights 1 Property owners have the Incentive to consider the desires of others and lose by NOT considering the rights of others if not increased OC a Using neutral colors when you paint the interior of your home b Making your yard beautiful higher selling price c Therefore strong incentive
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