CH 1 The 5 Foundations of Economics
CH 1 The 5 Foundations of Economics ECON 101
Long Beach State
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This 3 page Class Notes was uploaded by Courtney Dycoco on Tuesday February 2, 2016. The Class Notes belongs to ECON 101 at California State University Long Beach taught by Lakpour in Spring 2016. Since its upload, it has received 11 views. For similar materials see Microeconomics in Economcs at California State University Long Beach.
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Date Created: 02/02/16
Main goal: provide you with the tools you need to be able to make your own assessments about the economy Discover how the world works Be an informed citizen How to live your life to the fullest Understand the stock market Make better personal finance decisions Understand social security and health care BIG QUESTIONS 1. What is economics? Scarcity limited nature of society’s resources Nothing is infinite in nature not even air or water Economics the study of how people allocate their limited resources to satisfy their nearly unlimited wants; the study of how people make decisions MICROECONOMICS study the small units of economics (individuals) example: individual choosing to take a job in FL or CA, couple decides to start a family, firm choosing to open another factory, effect of government intervention on a single market MACROECONOMICS study the broader situation; bigger picture; interest rate, unemployment rate, inflation 2. What are the 5 foundations of economics? 1. Incentives matter 2. Life is about tradeoffs 3. Opportunity costs 4. Marginal thinking 5. Trade creates value 1. INCENTIVES MATTER Incentives factors that motivate you to act of exert effort people respond to incentives incentives are everywhere and financial gain often plays a prominent role Positive Incentives tax refunt, pay raise, employee of the month Negative incentives taxes, fail, fees, fines Direct incentives generally easy to recognize example: Straight A’s & you will get $100 Indirect incentives Maybe the child now has been given a direct incentive to cheat! another indirect incentive: don't get involved in extracurricular activities! Unintended consequences unplanned result (usually negative and unwanted) of an incentive example: social safety net most agree that we need a safety net for those without employment of low income, however, what if the money from the safety net is higher than he can make at a job? → indirect incentive to stay on welfare rather than work! Incentives and innovations patents and copyrights incentives to innovate why work hard, bear all costs if someone can steal your idea for profit? Result of a strong patent system? more innovation, since people are rewarded for new popular inventions innovation → economic growth, higher standards of living 2. LIFE IS ABOUT TRADE OFFS With scarcity, decisions incur costs examples: go to theater: do I watch action or romantic comedy? Government face tradeoffs too! spend tax on education on highway? 3. OPPORTUNITY COST The highest valued alternative that must be given up in order to get something else NOT all alternatives, just the next best choice Scarcity → choice → opportunity cost 4. MARGINAL THINKING economic thinking systematically evaluating a course of action requires a purposeful evaluation of available opportunities to make the best decision Marginial thinking evaluate whether the BENEFIT of one more unit of something is greater than the COST example: one more slice of pizza & one more hour of activity “Is college worth it” college & full time job 5. TRADE CREATES VALUE Markets brings buyers and sellers together to exchange goods and services Trade The voluntary exchange of goods and services between two or more parties KEY WORD: VOLUNTARY You don't engage in trade if it makes you worse off, trade only occurs if both parties feel they gain from the trade without trade yOU would have to produce everything you consume comparative advantage = the situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor allows gains from trade to occur Trade controversies- india or china may have a comparative advantage (relative to US) in labor-intensive goods → outsourcing of jobs CONCLUSION: ECONOMICS is the study of how people allocate their limited resources to satisfy nealty unlimited wants THE FIVE FOUNDATIONS OF ECONOMICS 1. Incentives 2. Trade offs 3. Opportunity cost 4. Marginal thinking 5. Trade creates value What can be said about scarcity? scarcity forces us to make choices Which of the following situations illustrates an incentive? Lee gives his children candy if they behave during dinner The opp cost of buying a good is the value of the nextbest alternative you could have purchased With regards to marginal thinking, an individual will do an action if marginal benefits > marginal cost The governor decides to increase funding for education. However, this will mean decreasing funding for infrastructure. This situations illustrates: trade offs
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