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Ch. 1

by: Karina Oms
Karina Oms
GPA 3.9

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chapter 1 notes
Class Notes
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This 27 page Class Notes was uploaded by Karina Oms on Saturday August 29, 2015. The Class Notes belongs to Eco2013 at Florida State University taught by Calhoun in Summer 2015. Since its upload, it has received 90 views. For similar materials see Macroeconomics in Business at Florida State University.


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Date Created: 08/29/15
Macro Chapter 1 The Economic Approach 1 2 3 4 4 Learning Goals Identify and list the critical components of economics List and provide examples of the eight guideposts of economic thinking Distinguish between two types of economic statements on your own Avoid making four common mistakes What Is Economics About Economics tries to explain and predict the behavior of consumers firms and government Steven Levitt amp Stephen Dubner Super Freakonomics The economic approach isn t meant to describe the world as any one of us might want it to be or fear that it is or pray that it becomes but rather to explain what it actually is Most of us want to fix or change the world in some fashion But to change the world you first have to understand it Alfred Marshall Political Economy or Economics l is a study of mankind in the ordinary business of life it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing 39 MVQ bO39i hmUQ39i39 CO ChOOSQ one Scarcity and Tradecffs Scarcity leads to tradeoffs which result in making choices scarciig orces us TO mam dQCiQiOh Historically mechanisms that have been used to deal with the problem of scarcity Force mi quotHam ermnqh Tradition emphasized past ways relied on families Authority government and church Market GODS UWFS Combinations of 14 Scarcity and Tradecffs Scarcity requires that some wants remain unfulfilled Issues of equity justice and fairness are embedded with scarcity Class Perspective We will focus on the market process of dealing with scarcity At times we will compare and contrast with the government or collectivist process Do not confuse the market process as Q being the same as politically conservative jquot The Economic Way of Thinking 1 2 3 4 5 6 7 8 Always have these guidelines in your economic thought process There are always tradeoffs Individuals choose purposefully Incentives matter Think on the margin not in total or on average More information leads to better decision making but more information is costly to get Many choices create a secondaryeff Value is subjective Economic thinking is scientific thinking 1 There are always tradeoffs What you give up is your opportunity cost value of next best alternative Common mistake opportunity cost is NOT the sum of everything you give up ThQrQ 3919 no such hing as or free lunch 2 Individuals choose purposefully mms t value For QWlE39a E i amoum oF errorl Referred to as economizing behaviortry to get the most benefits for the least cost or effort Also known as rational behavior 3 Incentives matter As the incentive goes up you will be more likely to do something or try to and vice versa The incentive doesn t have to be money 4 Think on the margin not in total or on average Marginal means additional or incremental Co OSH Marginal rovonuo IS additional rovonoo Rule to live by Continue to engage in an activity as long as the expected marginal benefit is greater Q than the expected marginal cost q jquot 5 More information leads to better decisionmaking but more information is costly to get Refer back to 1 through 4 1 There are always tradeoffs 2 Individuals choose purposefully 3 Incentives matter 4 Think on the margin 6 Many choices create a secondary effect The primary effect is often immediate and visible The secondary effect usually comes later and is not as visible 7 Value is subjective Beauty is in the eyes of the beholder Value is determined by the purchaser 8 Economic thinking is scientific thinking Economists use data and information generated by people to explain and predict actions Positive and Normative Economics 4 Learning Goals 3 Distinguish between two types of economic statements on your own Please read Essays in Positive Economics by Milton Friedman on Blackboard Q The introduction and Section 1 pages 1 through 3 are relevant you may skip the l39GSt N Pitfalls To Avoid in Economic Thinking Don t make one of these errors 1 Violation of ceteris paribus Ceteris paribus is Latin for other things constant We want to isolate variables so we typically allow only one to change at a time Errors 2 Good intentions do not necessarily result in good outcomes Milton Friedman There is nothing that does so much harm as good intentions Errors 3 Association is NOT causation Errors 4 Fallacy of Composition Assumption what s good for the individual is good for the group Making this assumption when it s false is the fallacy


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