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ECO 2000 Module 1 Incentives Matter Incentives rewards or penalties that follow our choices o People are less likely to choose something that is more costly o High gas prices of 2008 example people cut out trips car pool gas providers find new ways to mine Politics o Voters pick people that benefit themselves o Politicians pick positions based on what will make them popular No Such Thing As A Free Lunch Scarcity resources are limited but desire is not Due to scarcity we must make trade offs give up one thing for another Opportunity cost everything that is given up to get do one thing There can be shifts in cost but never elimination o Ex free medical care of housing Decisions Are Made At The Margin Marginal additional Action is only taken when benefits outweighs the additional cost This type of thinking is not seen in politics or conversations o Ex not reducing pollution ECO 2000 Module 2 Trade Promotes Economic Progress Why do people trade o Moves good from people who value them less to people who value them more o Makes larger outputs and higher consumption possible because of specialization o Larger outputs possible because of mass production Transaction Costs Are An Obstacle To Trade Transaction Costs o Resources spent on Finding trading partners Finding production information Negotiating trade terms Closing the sale Why do we experience transaction costs o Physical objects Cant get there o Lack of information Cant find sellers or deals o Positional obstacles Taxes tariffs licensing requirements regulations What is the role of middlemen Why do transaction costs matter o Reduce volume of trade and gains it generates o Progress happens with low transaction costs Prices Bring the Choices of Buyers and Sellers into Balance Law of Demand o When a rise in the price of a good makes it more expensive for buyers to purchase they normally choose to buy fewer items o The opposite is true when the price falls Law of Supply o Higher prices will make it more attractive for sellers to provide the good or service o The opposite is true if prices fall Equilibrium o Occurs at the price where the amount demanded by consumers is just equal to the amount sellers are willing to supply o Chart is often used to show price quantity demanded and quantity supplied o Equilibrium is in the middle of the X In a market economy firms will o Search for those opportunities where market conditions are such that they are able to generate revenue sufficient to cover their costs o Continue to produce a good or service only if consumers value it enough to pay prices sufficient to cover per unit costs In a market economy o Buyers and sellers are motivated to Coordinate their actions Cooperate with each other Work together harmoniously o The potential gains from trade are maximized ECO 2000 Module 3 Profits Direct Business Toward Activities That Increase Wealth Why profits and losses are our friend o People are better off if their resources produce highly valued o Less productive use of resources will be discouraged What is the function of profit and loss in a market economy o Profit is a reward for transforming resources into something of o Losses impose disciple on people that they are not producing goods greater value valuable goods People Earn Income By Helping Others Earning income by helping others o People are all very different o Differences in income come from difference that affect value of goods we create o There is a direct link ceteris paribus between helping others in ways that they value and the income we earn Incentives matter again o The direct link between providing others with things they value and our personal earnings provides each of us with a strong incentive to develop our talents and skills Higher income and living standards o income and living standards cannot increase without an increase in the availability of goods that people value Production of Goods and Services People Value Not Just Jobs Provides the Source of High Living Standards It is production of value that really matters not jobs o If jobs equaled high income we could create as many as we wanted Digging holes example Do spending programs create jobs of value o Politicians create spending projects with exaggerated benefits Agricultural Adjustment Act of 1933 2009 Cash for Clunkers Government Support for Ethanol Fuel Production When the government creates jobs o Pay for these jobs with taxes or borrowing o Crowds private sector jobs and spending ECO 2000 Module 4 Economic Progress Comes Primarily Through Trade Investment Better Ways of Doing Things and Sound Economic Institutions What is economic progress Sources of economic growth o Americans produce and earn 30x as much than in 1750 o Investments in productive assets and discovery and development of resources Tools machines human capital minerals Workers produce more with better machines Improvements in technology o Internal combustion engine electricity computers by pass surgeries o Improve work play and well being Improvements in economic organization o The way that activities are organized and the rules o Legal system competitive markets The Invisible Hand of Market Prices Directs Buyers and Sellers Toward Activities That Promote the General Welfare What is the Invisible Hand o Adam Smith The Wealth of Nations claims It is his own advantage indeed and not that society which he has in his view But the study of his own advantage naturally or rather necessarily leads him to prefer that employment which is most advantageous to society He intends only his own gain and he is in this as in many other cases lad by an invisible hand to promote an end which was not part of his intention o The prices determined by competitive markets o Self interested individuals have an incentive to promote prosperity of community o In a free market Markets provide information o Hayek said the primary function of markets is to provide information to both buyers and sellers o Information guides buyers and sellers to make decisions to help everyone get what they want Spontaneous order o Things constantly happen spontaneously to make both consumer and producers better off through exchange o When guided by market prices self interested individuals will move toward activities that will promote the general welfare o This occurs without any central planning Too Often the Long Term Consequences or the Secondary Effects of an Action are Ignored Interest groups and lobbyists propose programs o Exaggerate


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