ECO2013 Midterm 1 Dr Holcombe CH 1 Key Terms Scarcity Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like Choice The act of selecting between alternatives Resource An input used to produce economic goods Land labor skills and 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 Capital Human made resources such as tools equipment and structures used to produce other goods and services They enhance our ability to produce in the future Objective A fact based on observable phenomena that is not influenced by differences in personal opinion Subjective An opinion based on personal preferences and value judgments Rationing Allocating a limited supply of good or resources among people who would like to have more of it When price performs the rationing function the good of the resource is allocated to those willing to give up the most other things in order to get it The method of rationing influences the nature of competition Competition Is a natural outgrowth of scarcity and the desire of human beings to improve their conditions Economic Theory A set of definitions postulates and principles assembled in a manner that makes clear the cause and effect relationships Micro economics the branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly defined units such as business households or business firms Macroeconomics the branch of economics that focuses on how human behavior affects outcomes in highly aggregated markets such as markets for labor or consumer products 4 broad categories of resources 1 Land natural resources 2 Labor human resource mental or physical 3 Capital physical man made or financial 4 Entrepreneurship brings together all of the above 4 Returns incomes generated from above 1 Land charge rent 2 Labor wages 3 Capital charge interest 4 Entrepreneurship make profit Communism allocating by need Capitalism allocating by price 8 guidelines to Economic thinking 1 There is ALWAYS a trade off Because of scarcity we need a way to ration these resources a Opportunity cost highest value thing you give up when you decide to do b When you use resources you give up the opportunity to use them in a c Cronyism concentrated money and power given to friends of the one thing over another different way government Cuba 2 Individuals choose purposefully therefore economically a We try to get the most for the least b The basis for a decision maker s alternatives is based on utility c Utility the subjective benefit or satisfaction a person expects from a choice or course of action i Highest utility for the lowest cost is desired d Rational choice isn t always the right choice i Motorcyclists can not wear a helmet because they don t like helmet hair economists still say this is a rational choice 3 Incentives Matter a People respond to incentives in predictable ways b Ex does FSU want us to park in handicapped spots How do we know Fines disincentives As personal cost of an option increases person is less likely to choose it c 4 Economic thinking is marginal thinking a People make decisions at the margin living incrementally b When making a choice between two alternatives individuals generally focus on the difference in the costs and benefits between alternatives c Marginal term used to describe the effects of a change in the current situation 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 d Additional substitute word for marginal 5 Information is a costly good a Rational ignorance cost of knowing is greater than the benefit b TIME needed to gather info is scarce making info costly c Ex we research a lot more when buying a car vs buying a pen 6 Remember Secondary Effects a EX requiring passengers to purchase extra seat for baby to make them safe is a lot more expensive so families choose to drive instead Risk of car accident is a lot higher than risk of plane crash so ultimately child is less safe in the car Airlines did not implement new policy 7 Value of a good or service is subjective 8 The test of a theory is it s ability to predict a Economic thinking is 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 b Positive economics The scientific study of what is among economic relationships propositions i Positive economic statements involve potentially verifiable or refutable 1 Ex if the price of gas goes up People will buy less We can statistically analyze investigate and estimate the correctness of that statement It does not need to be correct it NEEDS TO BE TESTABLE ii Normative Economics Judgments about what ought to be on economic matters Normative economic views cannot be prove false bc they are based on value judgments iii ex we should have fewer parking spaces and more green on campus normative Pitfalls to avoid in Economic Thinking 1 Violating the ceteris paribus condition control variables avoid drawing the wrong conclusion a ceteris paribus is a Latin term meaning other things constant that is used when the effect of one change is being describes Recognizing that is other things changes they could also affect the result b Economists often describe the effects of one change knowing that in the real world other things might change and also change effect 2 Good intentions do not always guarantee good outcomes keeping in mind a One of the great mistakes is to judge policies and programs by intentions secondary effects rather than results 3 Association is not causation 4 The fallacy of composition a EX Umbrellas do not cause rain they are associated with rain a What is true for one is not necessarily true for all CH 2 Three essential questions 1 What are we going to produce 2 How are we going to produce it 3 Who gets it Tools needed to answer 1 Opportunity cost 1 highly valued alternative 2 Trade creates value in and of itself 3 Property Rights a Voluntary exchange b Barriers to trade reduce wealth Countries with free trade have more prosperous economies c By channeling goods and resources to those who value them
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