Micro Chapter 1 The Economic Approach o Economics tries to explain and predict the behavior of consumers What is Economics about firms and government Scarcity and Tradeoffs o Scarcity leads to tradeoffs which results in making choices o Historically mechanisms that have been used to deal with the problem of scarcity 1 Force 2 Tradition emphasized past ways relied on families 3 Authority government and church 4 Market 5 Combinations of 1 4 o Scarcity requires that some wants remain unfulfilled o Issues of equity justice and fairness are embedded with scarcity The Economic Way of Thinking Always have these guidelines in your economic thought process o 1 There are always tradeoffs What you give up is your opportunity cost value of the next best alternative Common mistake opportunity cost is NOT the sum of Referred to as economizing behavior try to get the most everything you give up There is no such thing as a free lunch o 2 Individuals choose purposefully benefits for the least cost or effort Also known as rational behavior Example drug addict o 3 Incentives matter As the incentive goes up you will be more likely to do something or try to and vice versa Incentives doesn t have to be money o 4 Think on the margin not in total or on average Marginal means additional or incremental Marginal benefit is additional benefit Marginal cost is additional cost Rule to live by Continue to engage in an activity as long as the expected marginal benefit is greater than the expected marginal cost o 5 More information leads to better decision making but more information is costly to get Refer back to 1 through 4 1 There are always tradeoffs 2 Individuals choose purposefully 3 Incentives matter 4 Think on margin not in total or on average o 6 Many choices create a secondary effect The primary effect is often immediate and visible The secondary effect usually comes later and is not as visible Micro Chapter 2 Some Tools of the Economist Trade Creates Value Two opposing views of trade o 1 When people trade one person gains and the other person loses o 2 Referred to as a zero sum game Two opposing views of trade o 2 When people trade both parties gain o Wealth is actually created by trade Voluntary trade creates wealth and promotes economic process o With or without production with or without money exchanges voluntary trade is expected to benefit both parties involved o Potential trades 1 Finished goods exchanged through barter 2 Finished goods exchanged for money 3 Businesses buying resources 4 Consumers buying products o A transaction cost is a monetary or nonmonetary barrier that lowers the benefits of trade The Importance of Property Rights 2 Kinds of Property Rights o 1 Common rights everybody owns it o 2 Private rights only one person owns it Property rights change the incentives for individuals Incentives created by private property rights o Give proper care o Conserve for the future o Use resources in ways other people value o Mitigate possible harm to others PPC also called PP Frontier Production Possibilities Curve The PPC can shift o Shift out growth produce more o Shift in shrink produce less Trade Output and Living Standards Law of Comparative Advantage o Make the good for which you have a low opportunity cost and trade for the good for which you have a high opportunity cost o Translation make something you re good at and trade for something you re not good at Importance of Comparative Advantage o Low opportunity cost Comparative advantage Specialization Division of labor Voluntary trade Increased wealth Adam Smith wrote Wealth of Nations The Law of Demand The inverse relationship between price and quantity Self sufficiency is the quickest and most absolute path to poverty demanded when price rises quantity demanded falls o Quantity demanded is a number it is how many units of a good you bought Chapter 3 Supply Demand and the Market Process Ways to express Law of Demand o Words o Table o Math equation P 10 Q Q f Px Py M o Picture
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