ECONOMICS MICRO 8 26 14 Office hours Thursday 11 1215 2 315 Weds 8 10 1 4 8 28 14 Chapter 1 The Economic Approach Economics The study of how we make choices under scarcity Choice The act of selecting among alternative Scarcity The concept that there is less of a good freely available from nature than ppl would like Ex Time money cars etc Scarcity is not the same thing as poverty Scarcity necessitates rationing Scarcity leads to competitive behavior Competition is good Rationing Allocating scarce goods to those who want them Resources An input used to produce an economic good 1 Human resources Human capital Things like our speed skill endurance Albert Einsteins intelligence Chuck Norris awesomeness 2 PHysical resources Physical capital manmade tools and objects we can use to make resources pencils tools etc 3 Natural resources coal oil natural gas etc used to make resources Capital Human made resources used to produce other goods and services EIGHT 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 choosing 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 easily and immediately observable Ex yacht tax Ex trade restrictions 7 The value of a good or service is subjective diff for each person Ex FSU football tickets care about football 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 people believe its true but it was tested and its not true at all according to statistics 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 What is too hot What is too hot for one person is not true for another FOUR 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 If the price of roses increases people will buy fewer roses ceteris paribus 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 actually 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 safety caps Trying to put a childproof cap on pill bottles but instead now parents don t feel the need to keep pills high on cabinets and out of reach of children and now keep it on regular shelves so kids either figured out how to open them bc they were always around or parents would forget to put caps on bc they weren t worried and then kids got into them The Nirvana Fallacy Is the logical error of comparing the actual situation with its idealized counterpart rather than the actual realistic alternative Ex Child and labor sweatshops People try to protest sweatshops because they think these kids should be outside playing and having fun but in reality these kids in poor places if they weren t working in sweatshop their real alternative would be no job and probably homeless At least with the sweatshop they are making some type of money The real alternative is worse than that 3 The belief that association is causation Ex Superstitions Believing that if you break a mirror you have bad luck so the reason for all your bad luck is because broke the mirror not usually true Wearing your lucky pair of underwear and winning the game thinking it was the underwear that caused the win Initials and performance Thinking that students who have lots of A s and B s in your initials you are more likely to get As and Bs than if you have Fs in your name not true 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 DIFFERENCES BETWEEN MICROECONOMICS AND MACROECONOMICS Microeconomics Focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms the trees more about individuals individual firms Macroeconomics Focus on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor the forest more about economic systems and companies REVIEW FOR CHAPTER 1 What is scarcity What are the 8 guideposts to economic thinking Positive vs Normative economics What are the 4 pitfalls to avoid economic thinking CHAPTER 2 SOME TOOLS OF ECONOMISTS How trade creates value The importance and incentives of property rights The production possibilities curve The law of comparative advantage Capitalism vs Socialism Voluntary vs Coerced trade Is trade a
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