Ch 1 The Economic Approach b If this didn t exist the necessity to make a choice wouldn t exist Carina Tenaglia ECO 2023 Class Notes Thursday August 29th Economics is the study of how we make choices under scarcity Joab s definition How to make the most out of our lives 1 Choice The act of selecting among alternatives 2 Scarcity The concept that there is less of a good freely available from nature than people would like a Ex Time money cars etc c Scarcity is NOT the same thing as poverty d Scarcity necessitates rationing i Allocating scarce goods to those who want them ii In a market economy price is used to ration goods iii Scarcity leads to competitive behavior Resources An input used to produce an economic good 1 Human resources human capital education etc 2 Physical resources physical capital machinery tools etc 3 Natural resources things that come from nature ex minerals water Capital Human made resources used to produce other goods and services 8 Guideposts to Economic Thinking 1 Resources are scarce so decision makers must make trade offs no such thing as a free lunch a The highest valued alternative that must be sacrificed when choosing an option 2 Individuals are rational they try to get the most from their limited resources a Greatest benefit at least possible cost b What s rational for one person may not be rational for everyone 3 Incentives matter choice is influenced in a predictable way by changing incentives a Ex money game in class killer seatbelts prices 4 Individuals make decisions at the margin a Marginal describes the effect of a change in the current situation i Ex Drive or Fly 1 Cost benefit analysis one will undergo an action when the marginal benefits outweigh the marginal costs Fly 2 hours 300 Drive 6 hours 60 MC 240 MB 4 hours Time 40 an hour fly Tuesday 9 2 Notes The Economic Way of Thinking 40 an hour drive 41 x 6 246 fly 39 x 6 234 drive ii Ex Supersizing a McDonalds meal iii Ex Ponderosa Buffet all you can eat side bar 7 50 steak w unlimited side bar 9 00 comes down to steak for 1 50 1 Change in cost marginal cost extra 1 50 2 Change in meal marginal benefit steak 5 Information helps us make better choices but is costly a Ex new car vs new pencil 6 Beware of secondary effects economic actions generate both direct indirect effects a Secondary Effect the indirect impact of an event or policy that may not be easily and immediately observable i Ex Yacht tax huge luxury tax cost so high that rich people will likely use money for other purposes direct effect high taxes ii In 1991 this tax devastated the Yacht companies Viking Yachts had to lay off 1500 of 1560 employees 96 1 Secondary effect cost lower middle class jobs 7 The value of a good or service is subjective a Ex FSU football tickets b Ex How much would you pay for a bottle of water right now i Moving of goods and services to those who value them most is a primary source of economic progress 8 The test of a theory is its ability to predict a If real world events are consistent with a theory then that theory is valid Positive vs Normative Economics Positive Economics the scientific study of what is testable Normative Economics Judgments about what out to be not testable Four Pitfalls to Avoid in Economic Thinking Violation of ceteris paribus principle o Ceteris Paribus all other things constant o Ex Buying roses If the price of roses increases people buy fewer roses ceteris paribus True holding everything else constant ceteris paribus Valentine s day rose prices go up and more people buy them The belief that good intentions guarantee desirable outcomes o Ex Endangered species act incentive to cut trees before birds live in them o Child Resistant safety caps more kids poisoned b c of neglect to still take precautions to keep bottles out of kids reach etc o Nirvana Fallacy the logical error of comparing the actual situation with its idealized counterpart rather than the actual alternative Ex Child labor and Sweatshops Usually children workers choose to work in these conditions because they were the best available alternatives over working for less in worse conditions domestically or potentially child prostitution Thursday September 4th Notes Four pitfalls Continued The belief that association is causation o Ex Superstitions o Initials and performance Fallacy of composition the fallacious belief that what is true for one is true for all o Ex Standing at a football game Micro v Macro Microeconomics focuses on how human behavior affects the conduct of affairs within individually defined units such as households or firms the trees within the woods o How nation affects small population like a city Macroeconomics focuses on how human behavior affects outcomes in highly aggregated markets such as the nations market for labor the entire forest o How market affects a nation state Review 1 What is scarcity a Scarcity leads to decision making opportunity cost etc b Scarcity and poverty are not the same thing 2 What are the 8 guideposts to economic thinking 3 Positive v normative economics a Positive testable normative usually opinion not testable 4 What are the 4 pitfalls to avoid in economic thinking Overview How trade creates value Importance of incentives of property rights Production possibilities curve The law of comparative advantage Capitalism v Socialism o Different econ systems how they work no pure system Is trade a zero sum game Not if it is voluntary Coercion Someone will devote resources to make you worse off if you don t comply Ex only one cable service in Tallahassee w bad service and they re the only company you can go to for cable example of voluntary exchange you don t HAVE to get cable Ex IRS says you owe 1 500 this year coerced they will devote resources to making you worse off jail fines etc if you do not pay Trade Creates Value Because the value of a good or service is subjective voluntary trade creates value How trade creates value When individuals engage in voluntary exchange both parties are made better off By channeling goods and resources to those who value hem most trade creates value and increases the wealth created by a society s resources Chapter 2 September 9 2014 Notes How Trade Leads to Economic Progress 1 Gains from specialization and division of labor a It would take forever to make our own clothes food homes from scratch etc 2 Gains from mass production methods a Producing more things cheaply 3 Gains from innovation a New advanced ways technology of doing things b Transfer
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