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Published byGiles Andrews Modified over 9 years ago
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Chapter 1 1
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Identify the critical components of economics and learn how to use the guideposts of economic thinking. Define opportunity cost. 2
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1776 The Wealth of Nations Wealth ◦ Not about gold or silver ◦ About productivity Self-interest leads to helping others! 3 Who’s your daddy?
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The study of how individuals make choices and use scarce resources We all have unlimited wants but limited resources 4
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Scarcity – there is less of a good freely available from nature than people would like If it has a price, it’s scarce! Choices – always involve trade-offs 5
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Resources – ingredients (inputs) used to produce goods and services ◦ Human resources ◦ Physical (capital) resources ◦ Natural resources 6
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Poverty ◦ Is subjective ◦ We may one day eliminate “poverty” ◦ 2014 FPL: $19,790 family of 3 Scarcity ◦ Is objective ◦ Will always be present ◦ We have limited resources and unlimited wants 7
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Life in 1750 ◦ Life is “solitary, poor, nasty, brutish, and short” – Thomas Hobbes ◦ Work 70+ hr/wk to survive ◦ Life expectancy: 37 years Contrast this with life today 8
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Rationing – allocating a limited supply of a good or resource among people who would like to have more of it Competition for scarce goods always present Method of rationing influences the nature of competition ◦ Price ◦ Government ◦ First-come, first-served 9
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1. The use of scarce resources is costly, so decision makers must make trade-offs ◦ There’s no such thing as a free lunch ◦ Opportunity cost – what is given up to get something 10
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1. The use of scarce resources is costly, so decision makers must make trade-offs ◦ Public elementary school, not free Admission is $0 Costs are higher taxes, less medical care 11
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2. Individuals choose purposefully – they try to get the most from their limited resources ◦ Economizing behavior – choosing the option that offers the greatest benefit at the least possible cost ◦ Utility – The subjective benefit or satisfaction a person expects from a choice or course of action 12
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2. Individuals choose purposefully – they try to get the most from their limited resources ◦ People behave rationally ◦ Rational is not the same as Ethical Safe Healthy 13
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3. Incentives matter – choice is influenced in a predictable way by changes in incentives ◦ ALL ECONOMICS IS BASED ON THIS STATEMENT! ◦ Incentive – a threat of a reward or punishment ◦ Responses to incentives vary 14
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3. Incentives matter – choice is influenced in a predictable way by changes in incentives ◦ Altering incentives alters people’s behavior! The Peltzman Effect, 1975 15
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4. Individuals make decisions at the margin ◦ Marginal – used to describe the effects of a change in the current situation ◦ “marginal” = “additional” ◦ Decisions aren’t all or nothing 16
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4. Individuals make decisions at the margin ◦ Diamond water paradox ◦ Total benefit ≠ marginal benefit 17
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4. Individuals make decisions at the margin ◦ Marginal ≠ average ◦ Average cost = total cost / total produced ◦ Marginal cost = cost of producing an additional unit of a product 18
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4. Individuals make decisions at the margin ◦ Marginal thinking allows us to answer questions like How many times should you visit that buffet? Should you buy that third burger? 19
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4. Individuals make decisions at the margin While waiting in line to buy two burgers at $1.00 each, and a drink for $1.50, Renegade notices that the restaurant has a value meal containing three burgers and a drink all for $4.25. For Renegade, the marginal cost of the third burger would be…? 20
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4. Individuals make decisions at the margin Jordin wants to buy some beer. She can buy five beers for $2 each or she can purchase a six pack for $10.50. What’s the marginal cost of the 6 th beer? 21
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5. Although information can help us make better choices, its acquisition is costly ◦ Gathering information isn’t free ◦ Limited knowledge and uncertainty are common ◦ The bigger the decision, the more resources you’ll use gathering information and “shopping” 22
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6. Beware of the secondary effects: economic actions often generate indirect as well as direct effects ◦ Secondary effect – the indirect impact of an event or policy that may not be easily and immediately observable 23
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6. Beware of the secondary effects: economic actions often generate indirect as well as direct effects ◦ Changes in government policy often alter incentives and have unintended consequences ◦ Example: mortgage lending, payday loans 24
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6. Beware of the secondary effects: economic actions often generate indirect as well as direct effects ◦ Government spending does not create jobs! ◦ Where does the money come from? 25
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7. The value of a good or service is subjective ◦ Preferences differ among individuals ◦ Circumstances can change value 26
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7. The value of a good or service is subjective ◦ Moving goods to those who value them most is a source of economic progress 27
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8. The test of a theory is its ability to predict ◦ Scientific thinking – developing a theory from basic principles and testing it against real world events ◦ Average outcomes instead of anecdotal outcomes 28
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Positive Economics ◦ What is ◦ Can be proven true or false Normative Economics ◦ What ought to be ◦ Cannot be proven true or false 29
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1. Violation of ceteris paribus principle ceteris paribus: other things constant ◦ When the price of ice cream falls, quantity demanded will rise. Ceteris paribus! ◦ Outcomes change when we dont hold all else constant. 31
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2. The belief that good intentions guarantee desirable outcomes 32
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3. Thinking association (correlation) is causation 33
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4. Fallacy of composition: belief that what is true for one is true for all 34
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