Chapter 1 The Economic approach 4 Learning Goals 02 01 2016 1 Identify and list the critical components of economics What is Economics about Key terms o Scarcity Fundamental concept of economics that indicate that there is less of a good freely available from nature than people would like Scarcity leads to tradeoffs which result in making choices Scarcity and choice are the two essential ingredients of an economic topic Historically mechanisms that have been used to deal with the problem of scarcity Force Tradition emphasized past ways relied on families Authorities government and church Market Combinations of the above Goods are scarce because the desire for them far outstrips their availability rom nature Scarcity require that some wants remain unfulfilled Issues of equity justice and fairness are embedded with scarcity o Resources o Rationing Scarcity forces us to choose among available We will focus on the market process of dealing alternatives with scarcity An input used to produce economic goods Land labor skills natural resources and human made tools and equipment provide examples Throughout history people have struggled to transform available but limited resources into things they would like to have economic goods History is a record of our struggle to transform available but limited resources into scarce goods things we would like to have Every society must have a means to ration scarce resources among competing uses Resources and goods may be rationed in various ways In a market setting price is used to ration goods and resources When price is used the good or resource is allocated to be willing to give up other things in order to obtain ownership rights When price is used to ration goods people have a strong incentive to earn income so they will be able to pay the required price Competition is a natural outgrowth of the need to ration scarce goods Changing the rationing method used by society will change the form of competition but it will not eliminate competitive tactics Economics tries to explain and predict the behavior of consumers firms and government o Economics is about scarcity and the choices we have to make because our desire for goods and services is far greater than their availability from nature Scarcity necessitates rationing o Scarcity makes rationing a necessity o When goods or resources are scarce some standard has to be used to determine who will receive it and who will not Scarcity and poverty are not the same thing o The absence of poverty implies some basic level of need has o An absence of scarcity would imply that all of our desires for goods have been fully satisfied o We may someday eliminate poverty but scarcity will always been met be with use The method of rationing influences the nature of competition o Some alternative rationing devices for price are political status and first come first serve 2 List and Provide Examples of the Eight Guideposts of Economic Thinking The Economic Way of Thinking Key Terms o Opportunity Cost The highest valued alternative that must be sacrificed as a result of choosing an option What you give up is your opportunity cost value of the next best alternative Common mistake opportunity cost is not he sum of everything you give up The highest valued alternative that must be sacrificed is the opportunity cost of the choice Choosing the option that offers the greatest benefit at the least possible cost Trying to get the most benefits for the least cost or effort The subjective benefit or satisfaction a person expects from a choice or course of action o Economizing Behavior o Utility o Marginal Marginal means additional or incimental Rule Continue to engage in the activity as long as the expected marginal benefit is greater than the expected marginal cost Economic reasoning focuses on the impact of marginal changes Decisions will be based on marginal costs and marginal benefits utility In addition to their initial impact economic events often generate secondary events that may be felt only with the passage of time Many choices create a secondary effect The primary effect is often immediate and visible The secondary effect usually comes later and is o Secondary Effects not as visible o Scientific Thinking Economic Thinking is scientific thinking Economists use data and information generated by people to explain and predict actions Eight Guideposts o The use of scarce resources to produce a good or service is always costly there are always tradeoffs Ex Mandatory airbags in automobiles save an estimated 400 lives each year Economic thinking however forces us to ask ourselves if the 50 billion spent on air bags could have been used in a better way perhaps say for cancer research that could have saved more than 400 lives per year The airbags and the cancer research in this situation are tradeoffs The opportunity cost for mandatory air bags is cancer research o Individuals choose purposefully therefore they will economize try to get the most from their limited resources Ex If Joan prefers 50 dollars of chocolate to 50 of vegetables buying the chocolate would be the rational choice for her even though some outside observer might say that Joan is making a bad decision When people weigh the benefits they receive from an activity against its cost they are making a rational choice even though it might not be the choice you or I would make in the same situation o Incentives Matter changes in incentives influence human choices in a predictable way Both monetary and nonmonetary incentives matter Ex If asked what would happen to the number of funerals performed rose how would you explain The Incentives matter postulate would predict that the higher cost would reduce the number of funerals While the same number of people will still die each year the number of funerals will still fall as more people choose to be cremated or buried in cemeteries in other towns o Economic reasoning focuses on the impact of marginal changes think on the margin not in total or on average Ex Students are often heard telling other students that they shouldn t skip class because they have paid to enroll in it Of course the tuition is not a factor relevant at the margin it will be the same whether or not that student attends lass on that particular day The only real marginal considerations are what the student is missing that day a quiz information for the exam etc versus what he or she could do with the extra time by skipping class This explains why even
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