Chapter 1 Notes- 8/26-9/2
Chapter 1 Notes- 8/26-9/2 Eco2013
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This 5 page Class Notes was uploaded by Danielle Sturgeon on Thursday September 10, 2015. The Class Notes belongs to Eco2013 at Florida State University taught by Calhoun in Summer 2015. Since its upload, it has received 282 views. For similar materials see Macroeconomics in Business at Florida State University.
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Date Created: 09/10/15
Chapter 1 The Economic Approach 1What is economics about a Economics tries to explain and predict the behavior of consumers rms and government bThe choices that we make due to our desire for a certain good or service 2 Scarcity and Tradeoffs a Scarcity a fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like iScarcity leads to tradeoffs which results in making choices iiHow much are you willing to give up for something you desire LHistorical ways to deal with scarcity 1 Force wars traditions authority government and church the market 2Almost always a combination of all four ways ivScarcity requires that some wants remain un lled vssues of equity justice and fairness are embedded within scarcity 1 However scarcity and poverty are not the same a Scarcity objective concept that describes a factual situation in which the limited nature of our resources keeps us from being able to completely ful ll our desires for goods and services b Poverty subjective concept that refers to a personal opinion of whether someone meets an arbitrarily de ned level of income LScarcity makes rationing a necessity rationing is allocating a limited supply of a good or resource among people who would like to have more of it bChoice The act of selecting among alternatives iWhen we make choices we face tradeoffs between meeting one desire or another 1 Ex Do I spend my last hour watching Net ix or studying for my economics test 2To meet one need the other must go unmet LThe basic ideas of scarcity choice and tradeoffs provide the foundation of economics d Resources the ingredients that people use to produce goods and services iOur ability to produce goods depends on which resources are available to us iiThree categories of resources 1 Human resources the productive knowledge skill and strength of human beings 2 Physical resources tools machines and buildings Enhance our ability to produce goods a Commonly referred to as capital 3Natural resources land mineral deposits oceans rivers etc a Usually only useful once humans discover how to best use these resources 3The Economic Way of Thinking aThere are always tradeoffs iWhat you give up is your opportunity cost value of the next best option iiOpportunity cost is not the sum of everything you have given up rather just what your second choice would have been L No such thing as free lunchquot resources are scarce and so the use of resources to produce one good always diverts those resources from the production of other goods b Individuals choose purposefully iReferred to as economizing behavior trying to get the most bene ts for the least cost or effort 1 Also known as rational behavior iiUtility The bene t or satisfaction one expects from a choice LChoice is subjective what is the primary choice for one person might not be a valuable option to another person ivPeople behave rationally to get the best option at the least possible cost Lincentives Matter iChanges in incentives in uence human choices in a predictable way Both monetary and nonmonetary incentives matter iiAs the incentive goes up you will be more likely to do something and vice versa LThe incentives do not have to be money ivEx Store owners know that they can sell off unwanted inventory if they reduce the price because consumers respond to incentives v As an option becomes more costly less is chosen LPeople do not only respond to incentives because they are sel sh or greedy they are motivated by a variety of goals d Individuals make decisions at the margin iAdditional is often used in place of marginal Ex Marginal costis additional cost iindividuas generally focus on the difference in the costs and bene ts between alternatives when making decisions LA marginal decision is whether it is worth it to get more of something or something better ivMarginal is different than average in that it indicates what the change in total cost would be to produce one more unit e More information is more costly but leads to better decision making i People economize on their search for information ii Eventually you decide whether or not it is worth it to search for more information and you make a choice based on the limited information you have already gathered fMany choices create a secondary effect i The primary effect is often immediate and visible I The secondary effect usually comes later and is not as visible 1 Failure to observe secondary effects is one of the most common economic problems 2Sometimes actions change the incentives people face and they respond accordingly creating secondary effects that were not intended gThe value of a good or service is subjective i Beauty is in the eyes of the beholder ii Value is determined by the purchaser iii Something is only worth so much depending on who wants it 1 Ex A baseball fan values a baseball game ticket much more than someone who doesn t like sports hThe test of a theory is it s ability to predict i Economic thinking is scienti c thinking I How useful an economic theory is depends on how well it predicts the future consequences of economic ac on 4Positive and a econo i b in eco i 5 aVioIati i iii iv b Good c Assoc 1 If events in the real world are consistent with a theory the theory has predictive value and is therefore valid Economists use data and information to explain and predict actions Normative Economics Positive Economics The scienti c study of quotwhat isquot among mic relationships Must be testable but does not need to be correct Normative Economics Judgments about quotwhat ought to bequot nomic matters Cannot be proved false because they are based on value judgments Pitfalls to Avoid in Economic Thinking on of Ceteris Paribus Ceteris Paribus meaning quotother things constantquot basically acknowledging that when the effect of one change is being described you recognize that if other things have changed not remained constant those could have affected the results Ex In science class if you are testing whether amount of water affects plant growth you would only change the amount of water If you also changed the plant type you would have to acknowledge that this also could have affected the results Changing variable A changes outcome B as long as everything else stays constant We want to isolate variables so we typically only allow one to change at a time Intentions Do Not Guarantee Good Outcomes Sometimes people are unaware of the secondary effects of their decisions Secondary effects can sometimes make a decision that seemed great at the time back re and become a negative outcome iation is Not Causation iJust because two events happen in conjunction with one another does not mean that they are at all related ii Those who assume this commit a logical fallacy dThe Fa llacy of Composition What s true for one might not be true for all What is true for the individual may not be true for the group Ex If you stand up at a football game you will be able to see better than before But if everyone stands up at a football game you will probably see the same if not worse than when everyone was sitting down