ECO 2023 Principles of Microeconomics Chapter 1 The Economic Approach 4 Learning Goals 1 Identify and list the critical components of economics Chapter heading What is Economics About Key terms Scarcity Concept of economics that indicates that there is less of a good freely available from nature than people would like Resource An input used to produce economic good Land labor skills natural resources and human made tools and equipment Rationing Allocating a limited supply of a good or resources among people who would like to have more of it What is economics It is the study of how we individuals make choices under scarcity How are scarcity and choice related Because of scarcity we have to make choices The basic ideas of scarcity and choice along with the trade offs we face provide the foundation for economic analysis How are scarcity and poverty different Scarcity is an objective concept that describes a factual situation in which the limited nature of our resources keeps us from being able to completely fulfill our desires for goods and services Poverty is a subjective concept that refers to a personal opinion of whether someone meets an arbitrarily defined level of income If price is not used as a rationing device what are other alternatives Competition is a natural outgrowth of scarcity and the desire of human beings to improve their conditions 2 List and provide examples of the eight guideposts of economic thinking Chapter heading The Economic Way of Thinking Key terms Opportunity cost The highest valued alternative that must be sacrificed as a result of choosing an option Economizing behavior Choosing the option that offers the greatest benefit at the least possible cost Utility The subjective benefit or satisfaction a person expects from a choice or course of action Marginal It is used to describe the effects of a change in the current situation For example a producer s marginal cost is the cost of producing an additional unit of a product given the producer s current facility and production rate Secondary effects The indirect impact of an event or policy that may not be easily and immediately observable In the area of policy these effects are often both unintended and overlooked Scientific thinking Developing a theory from basic principles and testing it against events in the real world Good theories are consistent with and help explain real world events Theories that are inconsistent with the real world are invalid and must be rejected Eight guideposts 1 The use of scarce resources is costly so decision makers must make trade offs always trade offs Example There are 2 Individuals choose purposely Example they try to get the most from their limited resources 3 Incentives matter monetary and nonmonetary incentives matter Example changes in incentives influence human choices in a predictable way Both Think on the margin not in total or on average 4 Individuals make decisions at the margin Example 5 Although information can help us make better choices its acquisition is costly information leads to better decision making but more information is costly to get Example More 6 Beware of the secondary effects economic actions often generate indirect as well as direct effects Many choices create a secondary effect Example is subjective of a good or service value 7 The Example 8 The test of a theory is its ability to predict Economic thinking is scientific thinking Example 3 Distinguish between two types of economic statements Chapter heading Positive and Normative Economics Key terms Positive economics The scientific study of what is among economic relationships Normative economics Judgments about what ought to be in economic matters Normative economic views cannot be proved false because they are based on value judgment What is the difference between positive and normative economics Positive economics is the what is and normative is the what ought to be Provide an example of each kind of statement A positive economic statement need not be correct it simply must be testable In contrast a normative economic statement can neither be confirmed nor proven false by scientific testing 4 Avoid making four common mistakes Chapter heading Pitfalls to Avoid in Economic Thinking Key terms Ceteris paribus A Latin term meaning other things constant one change is being described recognizing that if other things changed they also could affect the results that is used when the effect of Fallacy of composition Erroneous view that is true for the individual or the part will also be true for the group or the whole Four common mistakes condition can lead one to draw the wrong conclusion 1 Violation of the Ceteris Paribus 2 Good Intentions Do Not Necessarily Result in Do Not Guarantee Desirable Outcomes or Good Outcomes 3 Association Is Not Causation 4 The Fallacy of Composition What s True for One Might Not be True for All
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