Chapter 1 Microeconomics notes

Scarcity - the fundamental economic problem The combination of limited wants and limited resources Everyone experiences scarcity - Ex: Bill Gates & Warren Buffet center1744980Scarcity 00Scarcity 19507202171700Negative (Penalty) 00Negative (Penalty) 40970202209800Positive (Reward) 00Positive (Reward) 2814320226885500 3971925228409500center204216000 335661025603200030537152301240Incentives 00Incentives center2857500Choices 00Choices Economics - A social science that studies the choices made when one is confronted with scarcity & the incentives that influence the choices 102108022225000Incentives matter - The science of decision making “Social Science” – studies human behavior & uses the scientific method to develop theories “Scarcity” is the central issue Making Choices – 3 main questions answered WHAT to produce good and services HOW to produce production method FOR WHOM to produce those willing & able to buy the product Self-interest VS. Social-interest -Do choices made in the self-interest also promote the social-interest? - (Adam Smith) Self-Interest – the choice is best for the decision maker Social-Interest – the choice is best for society as a whole Adam Smith asserted that individuals acting in their self-interest also promote the social interests “butcher, baker, brewer” True in most cases, but there are exceptions… Pesticides used by farmer Better crops BUT hurts the honey bees Globalization Cost of product is lowered BUT outsource jobs cheaper labor (lose jobs in US) Climate Change Air pollution Disappearing rain forest 2 Main Branches of Economics Microeconomics “micro” Small Focuses on individual decisions making units Macroeconomics “macro” Large focuses on the economy as a whole macro topics: US unemployment inflation economic growth Core Economic Concepts Rational Decision Making Scarcity Necessitates choices When a choice is made, there are tradeoffs Tradeoffs – what is given up when a choice is made Rational Choice A choice that uses scarce resources to optimize satisfactions Use of the least amount of resources to achieve an objective Rational choices are made using “cost-benefit” analysis Cost – what MUST be given up Opportunity Cost – the highest valued alterative forgone (2nd choice) Ex: Decision to go to class 1st choice Tradeoffs: Sleep, working out, vacation, eating, hangout w/ friends, watching TV, playing video games (2nd choices opportunity costs) Sunk Cost – a previous purchase or choice (irreversible) Ex: Buy a ticket and see a terrible movie - Purchase of the ticket is a sunk cost Benefits Benefit – What you are WILLING to give up to get something Marginal Decision making – incremental choice Marginal 1 more unit MB Marginal Benefit – The benefit of consuming / producing 1 more unit MC Marginal Cost – the added cost of 1 more unit Rational decision-making Rule If MB > MC, produce / consume 1 more unit product is worth the cost If MB < MC, do NOT choose the next unit. product not worth the cost Positive VS. Normative Statements Positive Statement – a statement of fact that can be verified (tested) Normative Statement – statements of opinion; can’t be tested “should” / “ought to” Correlation VS. Causation Correlation – the direction of change between 2 variables Positive Correlation – when 1 variable rises, another variable rises move in the same direction Negative Correlation – 2 variables move in opposite directions (up / down) Correlated variables are not necessarily cause and affect They can be mutually related to another variable scientist observes increase in sun spot activity, stock market goes up sun spot is not the causation (something else causes both) Post Hoe Fallacy – “after this therefore because of this Fallacy of composition the false assumption that what is good for one is good for all Methods used to determine cause and effect natural experiments statistical analysis experiments Economic Model A simplification of reality to focus upon key variables of interest Economics provides a method for evaluating issues… on a personal level in business getting hired (good decision making) in government people who support you Exam is mostly application use blackboard for resources Quiz Monday look at practice questions 35 multiple points understand PPF Tradeoffs “free lunch” Ch. 1 Scarcity choices tradeoffs opportunity cost 2nd choice (next best choice) Ceteris paribus positive vs normative statement fact vs opinion post hoe fallacy after this therefore because of this fallacy of composition false assumption that what is good for one is good for all rational decision making marginal benefit vs marginal cost if benefit higher than its reasonable cost “have to” benefit “willing”