Macroeconomics Holcombe Fall 2014 Chapter 1 Scarcity Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like Choice The act of selecting between alternatives Resource An input used to produce economic goods Land labor skills natural resources ad human made tools and equipment provide examples Throughout history people have struggled to transform available but limited resources into things they would like to have economic goods Capital Human made resources such as tools equipment and structures used to produce other goods and services They enhance our ability to produce in the future Objective A fact based on observable phenomena that is not influenced by differences in personal opinion Subjective An opinion based on personal preferences and value judgements Scarcity and Poverty are not the same Scarcity Objective Poverty Objective Scarcity means rationing Rationing Allocating a limited supply of good or resources among people who would like to have more of it When price performs the rationing function the good of the resource is allocated to those willing to give up the most other things in order to get it The method of rationing influences the nature of competition Competition Is a natural outgrowth of scarcity and the desire of human beings to improve their conditions Economic Theory A set of definitions postulates and principles assembled in a manner that makes clear the cause and effect relationships 8 guidelines to economic thinking 1 Use of scarce resources is costly so decision makers must make trade offs a There is no such thing as a free lunch Because resources are scarce the use of resources to produce one good diverts those resources from the production of other goods b Opportunity cost The highest valued alternative that must be sacrificed as a result of choosing an option no option is free of cost 2 Individuals choose purposefully they try to get the most from limited resouces a Economizig Behavior Choosing the option that offers the greatest benefit at the least possible cost b The basis for decision maker s value of alternatives Utility the subjective benefit or satisfaction a person expects from a choice or course of action c Rational choice is not the same as a right choice example motorcycle fanatic decides not to wear helmet understands risks of dying but does not like helmet hair and like the wind in his face hair he is thinking rationally according to an economists does not matter whether one finds it right or wrong the motorcyclist thought it through 3 Incentives matter changes in incentive influence human choices in a predictable way Both monetary and nonmonetary incentives matter a As personal cost of an option increases person is less likely to choose it 4 Individuals make decisions at the margin a When making a choice between two alternatives individuals generally focus on the difference in the costs and benefits between alternatives b example 1 50 cheeseburger 1 00 soda OR cheeseburger soda and fries for 3 00 the fries are the marginal benefit the marginal decision is whether it is worth the extra 50 cents to have the fries c Marginal term used to describe the effects of a change in the current situation Example A producer s marginal cost is the cost of producing an additional unit of a product given the producer s current facility and production rate d Additional substitute word for marginal 5 Although info can help us maker better choices its acquisition is costly a TIME needed to gather info is scarce making info costly 6 Beware of Secondary Effects economic actions often generate indirect and well as direct effects these effects are both unintended and overlooked a bad economist will only consider the immediate effects a Example to achieve fuel efficiency automobiles were reduced in size and weight so now they wasted less gas BUT there were more automobile deaths because the cars were not as big and protective 7 Value of a good or service is subjective 8 The test of a theory is its ability to predict a economics thinking is Scientific Thinking developing a theory from basic principles and testing it against events in the real world Good theories are consistent with and help explain real world events Theories that are inconsistent with the real world are invalid and must be rejected Positive economics The scientific study of what is among economic relationships a Pos econ statements involve potentially verifiable or refutable propositions b example if the price of gas goes up People will buy less we can statistically analyze investigate and estimate the correctness of that statement It does not need to be correct It NEEDS TO BE TESTABLE Normative Economics Judgements about what ought to be on economic matters Normative economic views cannot be prove false bc they are based on value judgements ex we should have fewer parking spaces and more green on campus normative Pitfalls to avoid in economic thinking 1 Violation of the ceteris paribus condition can lead one to draw the wrong conclusion a ceteris paribus atin term meaning other things constant that is used when the effect of one change is being described recognizing that if other things changed they also could affect the result Economists often describe the effects of one change knowing that in the real world other things might change and also exert and effect 2 Good intentions fo not guarantee desirable outcomes a example Endangered species act passed by gov to protect animals who are on verge of extinction admirable objective BUT the act allows the gov to regulate the use of individual private property To avoid losing control of their property land owners took steps to make their land less attractive to natural habitiat habitiat for animals now disappears 3 Assocation is not causation a Voodoo doctor does weather dance then winter comes the two events are in conjunctions but it is highly unlikely that one caused the other 4 the fallacy of composition what s true for one might not be true for all a fallacy of composition erroneous view that what is true for the individual is true for the group Micro economics the branch of economics that focuses on how human behavior affects the conducrt of affairs within narrowly defined units such as business households or business firms Macroeconomics the branch of economics that focuses on how human behavior affects outcomes in highly aggregated markets such as markets for labor or
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