ECO 201 Ch 1 What Economics is About 1 How economics relates to your life opportunity cost the salary you earn state of the economy what you do in your first job cost and benefits of the people you date will determine who you will marry housing market determines price you pay for a house scarcity how many friends you have net benefits received in various activities determines happiness utility gained by doing certain things 2 Definition of Economics a Goods Bads good anything from which individual receives utility or satisfaction utility satisfaction received from a good Examples computer car watch TV friendship and love can be tangible or intangible bad anything from which individual receives disutility or dissatisfaction disutility the dissatisfaction one receives from a bad Examples flu nagging People pay to get goods and pay to get rid of bads Somethings are goods for some people and bads for others b resources inputs or factors of production used to produce goods Example cigarettes Four categories of resource i ii iii land natural resources all natural resources such as minerals forests water and unimproved land labor the physical and mental talents people contribute to the production process capital produced goods that can be used as inputs for further production such as factories machinery tools computers and buildings entrepreneurship the talent that some people have for organizing the resources of land labor and capital to produce goods seek new business opportunities and develop new ways of doing things c Scarcity and a Definition of Economics iv scarcity the condition in which our wants are greater than the limited resources available to satisfy those wants wants for goods are infinite but resources are finite economics the science of scarcity the science of how individuals and societies deal with the fact the wants are greater than the limited resources available to satisfy those wants science of exchange d The Counterintuitive in Economics Real output per capita determines if a country is rich or poor Being rich or poor is a result of how a country deals with scarcity The economic and political institutions under which a country operates affect its outcomes Thinking in terms of scarcity s 3 effects i ii the need to make choices chose which wants to satisfy and which not to the need for a rationing device a means for deciding who gets what of available resources and goods dollar price iii competition exists because of scarcity people try to get more of the rationing device Whatever the rationing device people will compete for it a opportunity cost the most highly valued opportunity or alternative forfeited when a choice is made whatever you would have chosen instead b Opportunity Cost and Behavior The higher the opportunity cost of doing something is the less likely it will be done c Benefits and Costs d Decisions Made at the Margin Economists think in terms of both costs and benefits vs one or the other According to economists for more decisions one thinks in terms of additional or marginal costs and benefits not total costs and benefits because most decisions deal with making a small or additional change Marginal is synonymous for additional marginal benefits MB additional benefits the benefits connected with consuming an additional unit of a good or undertaking one more unit of an activity marginal costs MC additional costs the costs connected with consuming an additional unit of a good or undertaking one more unit of an activity decisions at the margin decision making characterized by weighing the additional marginal benefits of a change against the additional costs of change with respect to current conditions 1 3 Key Concepts in Economics ECO 201 Ch 1 What Economics is About e efficiency the condition when marginal benefits equal marginal costs f Economics is About Incentives incentive something that encourages or motivates a person to undertake an action g Unintended Effects When a change is made for better result but has an adverse reaction instead h exchange trade the giving up of one thing for something else Through trade and exchange each person gives up something he values less for something he values more 4 The Market and Government When it comes to economic problems Identify define describe the problem 1 2 Identify the cause of the problem 3 Propose solutions to the problem Market and government are usually either the cause or the solution to the problem 5 Ceteris Paribus and Theory a b ceteris paribus latin term meaning all other things constant or nothing else changes theory model abstract representation of the real world designed with the intent to better understand it Emphasizes the only variables that the theorist believes are the main or critical ones that explain an activity or event All theories are abstractions from reality abstract the process used in building a theory of focusing on a limited number of variables to explain or predict an event omittance of certain variables Giving too much detail could be as bad as giving too little Ask If your theory is correct what do you predict we will see in the world Gives a way to figure out who might be closer to the truth when someone disagrees Minimizes talk and maximizes the chances of establishing who is correct and who is 6 Economic Categories economics is sometimes broken down into different categories according to the type of incorrect questions asked a Positive and Normative Economics positive economics attempts to determine what is deals with cause effect relationships that can be tested normative economics study of what should be deals with value judgements and opinions that cannot be tested b Microeconomics and Macroeconomics microeconomics the branch of economics that deals with human behavior and choices as they relate to relatively small units an individual a firm an industry a single market How does a market work tool microscope discusses single price demand for one good or service Asks What level of output does a firm produce What price does a firm charge for the good it produces How does a consumer determine how much of a good to buy Can government policy affect business behavior Can government policy affect consumer behavior macroeconomics the branch of economics that deals with human behavior and choices as they relate to highly aggregate markets the goods and services market or the entire economy How does the economy work tool telescope discusses the price level total demand for