Chapter 1 Economics is the study of how we make choices under scarcity Scarcity is the concept that there is less of a good freely available from nature than people would like o Ex time money textbooks o Air is not scarce clean air is scarce A Scarcity is not the same as poverty B Scarcity necessitates rationing Rationing allocating scarce goods to those who want them chance o Ex person at front of line might have better In a market economy price is used to ration goods Scarcity leads to competitive behavior Resources an input used to produce an economic good o 1 Human resources human capital Ex lifting boxes intelligence skills speed o 2 Physical resources physical capital Ex buildings pens chairs o 3 Natural resources Capital Human made resources used to produce other goods and services o Ex of human capital Albert Einstein s intelligence 8 guideposts to Economic Thinking o 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 guns military spending or butter food o As an economy produces more guns military spending it must reduce its production of butter food o 2 Individuals are rational they try to get the most from their limited resources Greatest benefit at least possible costs Ex Chick Fil A vs 5 Guys Burger Ex welfare vs education Note what is rational for one person may not be rational for o 3 Incentives matter choice is influenced in a predictable way by changing everyone incentives Ex money game If the reward is higher more people are willing to do it o Ex don t give out the bruised fruit because then the employees will purposely bruise the fruit o Ex prices Individuals make decisions at the margin o Marginal describes the effect of a change in the current situation Ex Olive Garden A All you can eat eat soup salad 7 B Chicken parm all you can eat soup salad 11 o MB Chicken parm what you get extra o MC 4 difference between the two prices Ex Taco Bell A Tacos 1 each drink 50 2 tacos 1 drink 2 50 o B Extra Value Menu 3 tacos 1 drink 3 o MB 1 taco o MC 50 Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs o Ex airport security vs lead clean up A Airport security 50 billion 100 lives B Lead clean up 70 billion 120 lives MC 20 billion MB 20 lives Information helps us to make better choices but is costly o Ex radar detector He wouldn t have gotten pulled over if he had the detector but the detector is costly Beware of secondary effects economic actions generate both direct and indirect effects o Secondary effects the indirect impact of an event or policy that may not be easily and immediately observable Ex fuel efficiency regulations Trade restrictions The value of a good or service is subjective o Because goods are subjective voluntary trade creates value Ex how much would you pay for gum Ex FSU VS ORGEON MOVING GOODS AND SERVICES TO THOSE WHO VALUE THEM MOST IS A PRIMARY SOURCE The test of a theory is it s ability to predict o If real world events are consistent with a theory then the theory is valid Know the difference between positive and normative economic statements o Positive economics the scientific study of what is testable Ex it s 50 degrees outside What makes it positive is because we o Normative economics Judgments about what people think Ought to be can test it It is based off of opinions Ex it s too cold outside This statement is normative because it is based on an opinion POSITIVE ECONOMIC STATEMENTS ARE TESTABLE NORMATIVE STATEMENTS ARE NOT Know the four pitfalls to avoid in economic thinking o 1 Violation of the ceteris paribus principle Ceter paribus in latin other things constant Ex buying eggs o If the price of eggs increases people will buy fewer eggs ceteris paribus nothing else changing chickens die etc For this to be true ceteris paribus must be added o 2 Good intentions do not guarantee desirable outcomes Your intentions could be good but your outcomes could be disastrous results Ex suicide warnings on antidepressant medication o 3 Association is not causation Ex Tiger attack preventing watch Wearing a watch right now and hasn t been attacked by a tiger so it s a tiger attack prevention watch Don t just assume that 1 causes another o 4 Fallacy of composition belief that what is true for one might not be true for all Ex When you get a raise VS when everyone gets a raise 400 wont be good if everyone get s 400 as well because then prices of other things will raise Chapter 2 Understand how voluntary trade creates value and leads to economic progress o Trade creates value because the value of goods is subjective voluntary trade creates value Ex The candy game When students are able to trade for the candy they like the value of it goes up more WHEN INDIVIDUALS ENGAGE IN VOLUNTARY EXCHANGE BOTH PARTIES ARE MADE BETTTER Know the characteristics and 4 incentives of private property rights Private property rights involve 1 The right to exclusive use of the property 2 Legal protection against invasion from other individuals 3 The right to sell transfer exchange or mortgage the property 4 incentives or property rights 1 Incentive to use resources in ways that are considered beneficial to others Ex South Park Cartman s amusement park o He wanted an amusement park to himself The rides started to break down so he had to start letting people in so that he could have money to get the rides fixed Owners bear the cost of ignoring the wishes of others o Ex reselling your textbook 2 Private owners have an incentive to care for and manage what they own Ex Community fridge vs private fridge o Private is well kept compared to community 3 Private owners have an incentive to conserve the future Ex tragedy of the commons overuse these common If he uses all the oil in the fall its going to be bad for him resources in the winter Ex endangered species 4 Private owners have an incentive to make sure their property does not damage your property ex tree falling into neighbor s yard LACK OF PROPERTY RIGHTS LACK OF ECONOMIC PROGRESS Production Possibilities Curve PPC Outlines all possible combinations of total output that could be produced assuming a o 1 Fixed amount of productive resources o 2 Given amount of technical knowledge o 3 Full and efficient use of resources Efficient all of the dots on the curve Unattainable cant quite get that outside of curve Inefficient
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