ECO 2013 Macroeconomics Chapter 1 The Economic Approach Is Life Getting Better or Worse NBC and The Wall Street Journal asked people to rate this decade We can use objective measurements to determine if life is getting better or worse 36 said it was awful 31 said it was not good 18 said it was fair 10 said it was good 5 said it was great Life Expectancy Health Income Education Entertainment Transportation Medicine There have been enormous changes in the past 50 100 years that have made life objectively better o This not only includes the method of transportation but also the improvements of each method such as air bags locks on doors aux inputs etc o In the past a saw was a common item in most medical kits now there are surgeries that are performed by robots o Living to 100 is not only attainable but is becoming more common What is Economics Economics is the study of how we make choices under scarcity Choices The act of selecting among alternatives Scarcity The concept that there is less of a good freely available from nature than people would like o Scarcity is not the same thing as poverty but it does necessitate rationing or allocating scare goods for those who want them In a market economy price is used to ration goods If you are willing to pay for it then you can have it Basically economics is the study of how to get the most out of your life 1 P a g e ECO 2013 Macroeconomics The Economic Way of Thinking Eight Guideposts to Economic Thinking 1 Resources are scare so decision makers must make trade offs Opportunity Cost The highest valued alternative that must be sacrificed when choosing an option o Example An hour of your time Every hour you spend doing something is an hour you could spend doing something else o Example Guns and Butter Should the US spend money on its military guns or should it spend on social programs for its citizens butter 2 Individuals are rational so they try to get the most out of their limited resources o Example Welfare vs Education Should we put more money into welfare to help those in need or should we put more money into education to try and break the poverty cycle 3 Incentives matter to rational individuals so choice is influenced in a predictable way by changing incentives o Example Money Game Joab threw increasing amounts of money into the 4 section that made the most noise Individuals make decisions at the margin Marginal Describes the effect of a change on the current situation o Example Taco Bell You want 2 tacos and 1 drink Tacos are 1 00 each and drinks are 0 50 so it would cost 2 50 There is a combo meal that has 3 tacos and 1 drink for 3 00 Marginal Cost 0 50 Marginal Benefit 1 Taco Cost Benefit Analysis One will undergo action when the marginal benefits outweigh the marginal costs 5 Information is costly but it helps us make more informed and better decisions Example New House vs New Notebook It is valuable to research the cost and features of a new house but it would not be worth it to do the same for a new notebook 6 Beware of secondary effects because economic actions can generate both direct and indirect effects Secondary Effects the indirect impact of an event or policy that may not be easily and immediately observable o Example Trade Restrictions If America introduces a tax on foreign goods the other country will be less likely to import American goods 2 P a g e ECO 2013 Macroeconomics 7 The value of a good or service is subjective Because value is subjective voluntary trade creates value o Example Gum How much would you pay for a pack of gum 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 the ability to predict events in the real world If real world events are consistent with a theory then the theory is considered to be valid Positive vs Normative Economics Positive Economics is the scientific study of what is testable Normative Economics are judgments about what people think ought to be Four Pitfalls to Avoid in Economic Thinking 1 Violation of the Ceteris Paribus principle o Ceteris Paribus Holding all other things constant o Example Buying eggs If the price of eggs increases then fewer people will buy eggs ceteris paribus However around Easter the price increases but more eggs are purchased 2 Good intentions do not always guarantee desirable outcomes o Example Antidepressants Suicide warnings on antidepressants cause many people to stop taking their medication in fear that they would be more likely to commit suicide 3 Association is not causation correlation does not equal causation o Example Watches and Tigers I ve never been attacked by a tiger while wearing my watch therefore my watch prevents tiger attacks 4 Fallacy of Composition The belief that what is true for one person might not be true for everyone o Example Raises If you get a raise it s awesome but if everyone gets a raise then you aren t really benefitted Macroeconomics vs Microeconomics Macroeconomics Focuses on ho human behavior affects outcomes in highly aggregated markets such as the nation s market for labor Microeconomics Focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms 3 P a g e ECO 2013 Macroeconomics Chapter 2 Tools of the Economist Trade Creates Value The value of any good or service is subjective and as such it gains value when it is a part of voluntary trade If someone is coerced during this process then then this does not really apply When individuals engage in voluntary trade both parties are made better off Creation of Wealth The process by which some people become rich will make everybody richer This only applies if the wealth is created through innovation and voluntary exchange Example Henry Ford He created a new way of producing the car which allowed more people to be able to afford cars Importance of Property Rights Private property rights involve three main ideas 1 The right to exclusive use of the property 2 Legal protection against the invasion of the property from other individuals 3 The right to sell transfer exchange or mortgage the property There are four main incentives of property rights 1 The incentive to use resources in ways that are considered to be beneficial to others Example Cartman s Amusement Park The owner bears the cost of ignoring the wishes of others Example Selling your textbooks If you choose not to sell them you deny someone the ability to get them cheaper and
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