Chapter 1 The Economic Approach Adam Smith father of economics o o says that wealth is not about gold or silver it is about productivity Invisible Hand Principle self interest leads to helping others you have to figure out how to help people in order to earn money Economics the study of how individuals make choices and use scarce resources dismal science Thomas Malthus o we all have unlimited wants and limited resources o scarcity there is less of a good freely available from nature than people would like if it has a price it s scarce scarcity is objective and will always be present SCARCITY IS NOT POVERTY scarcity always necessitates rationing allocating a limited supply of a good or resource among people who would like to have more of it choices ALWAYS involve trade offs resources inputs used to produce goods and services human resources cannot be separated from the individual skills knowledge that we acquire through experience education physical capital resources machines tools used to build the goods and services natural resources self explanatory water land oil coal etc 8 guideposts to economic thinking the use of scarce resources is costly so decision makers must have trade offs there is no such thing as free lunch opportunity cost what is given up to get something individuals choose purposefully they try to get the most from the least economizing behavior choosing the option that offers the greatest benefit at the least possible cost utility the subjective benefit or satisfaction a person expects from a choice or course of action people behave rationally understand their preferences and try to get the most from their scarce resources to maximize utility o incentives matter choice is influenced in a predictable way by changed in incentives ALL ECONOMICS IS BASED ON THIS STATEMENT incentive a threat of a reward or punishment responses to incentives vary altering incentives alters behavior The Peltzman Effect 1975 good intentions do not guarantee desirable outcomes o individuals make decisions at the margins marginal used to describe the effects of a change in the current situation marginal additional diamond water paradox diamonds do nothing yet are expensive we need water to survive yet it s free total benefit does not equal marginal benefit average cost total cost total produced marginal cost cost of producing each additional unit of product information is costly gathering information isn t free the bigger the decision the more resources you ll use gathering information and shopping beware of the secondary effects secondary effects the indirect impact of an event or policy that may not be easily and immediately observable the value of a good or service is subjective o o o o o o o preferences differ among individuals moving goods to those who value them most is a source of economic progress o the test of a theory is the ability to predict scientific thinking developing a theory from basic principles and testing it against real world events positive economics can be proven true or false negative economics opinionated cannot be proven true or false REMEMBER DO NOT VIOLATE CETERIS PARIBUS GOOD OUTCOMES DO NOT GUARANTEE DESIRABLE OUTCOMES CORRELATION IS NOT CAUSATION WHAT IS TRUE FOR ONE IS NOT TRUE FOR ALL
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