ECO 2023 Midterm 1 Chapters 1-3

Scarcity

our inability to satisfy all of our wants. What you can afford to buy is limited by your income.

Incentive

a reward that encourages an action or a penalty that discourages one

Economics

the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.

Microeconomics

the study of the choices the individuals and business make the way these choices interact in markets and the influence of governments.

Macroeconomics

the study of the performance of the national economy and the global economy.

Two Big economic questions

1. how do choices end up determining what, how, and for whom goods and services are produces?

2. Do choices made in the pursuit of self interest also promote the social interest?

goods and Services

the objects that people value and produce to satisfy wants.

Goods

Physical objects

Services

tasks performed for people

What?

what is produced varies across countries/ changes over time.

How?

described by the technologies and resources we use

Factors of Production

The productive resources used to produce goods and services.

Land, Labor, Capital, Entrepreneurship

Land

"Gifts of Nature" used to produce goods and services. Natural Resources; ex: oil, water, gas, coal, air

Labor

The work time and work effort that people devote to producing goods and services. Includes: physical and mental efforts of all the people who work.

quality of labor depends on...

human capital

Human Capital

The knowledge and skill people obtain from education, on job training, and work experience. expands overtime.

Capital

the tools, machines, instruments, buildings, and other constructions that business use to produce goods and services

Entrepreneurship

the human resource that organizes land labor and capital. The drive of economic progress.

For Whom?

who consumes the goods and services depends on the income that people earn.

Which factor of production earns the most income?

Labor

We can get a sense of who consumes the goods and services produced by looking at...

the percentages of total income earned by different groups of people

economic choices are made by...

people who are pursuing their self interest.

Social Interest

Choices that are the best ones for society as a whole.

Self Interest Choices

The choices that you think are the best ones available for you.

it is how you feel that influences your choice.

Efficient

resource use is efficient if it is not possible to make someone better off without making someone else worse off.

The situation is not efficient if...

it is possible to make someone better off without making someone anyone worse off.

Four issues about social interest:

globalization

information age monopolies

climate change

financial instability

Globalization

the expansion of international trade, borrowing, lending, and investment.

brings expanded production and job opportunities but destroys American jobs.

globalization is in the self interest of...

Those consumers who buy low cost goods and services produced in other countries.

The multinational firms that produce in low cost regions and sell in high price regions.

Information Age Monopolies

the technological change of the past 40 years (information revolution)

Absence of competition allowed products to be sold at high prices far above the cost of production

the information age is in the self interest of...

the consumers

the owners of the businesses

Climate change

Carbon emissions bring global warming and climate change.

self interested choices like using electricity leave a carbon footprint.

Do govt have to change incentives so our self interested choices are also in the social interest?

The Economic Way of Thinking

1. A choice is a tradeoff

2. People make rational choices by comparing benefits and costs

3. Benefit is what you gain from something

4. Cost is what you must give up to get something

5. most choices are how much choices made at the made at the margin

6. Choices respond to incentives.

A choice is a tradeoff

When we make choices we select from the available alternatives, you must chose how to devote your time

Tradeoff

A constraint that involves giving up one thing to get something else.

Making a Rational Choice

A choice that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.

Only the wants of the person making the decision are relevant to determine its rationality.

What goods and services will be produced and in what quantities?

Those those that people rationally choose to buy

Benefit

The gain or pleasure that it brings and is determined by preferences.

Measured as the most that a person is willing to give up to get something.

Opportunity cost

the highest valued alternative that must be given up to get something else.

most are not all or nothing but involve choosing hoe much of an activity to do.

Margin

When a choice is made by comparing a little more of something with its cost the choice is made at margin.

Marginal Benefit

The benefit that a person receives from consuming one more unit of a good or service, measured as the max amount that a person is willing to pay for one more unit of the good or service.

Marginal Cost

The opportunity cost of producing one more unit of a good or service. It is the best alternative forgone. It is calculated as the increase in total cost divided by the increase in output.

Choices respond to incentives

people undertake activities for which the marginal benefits exceed the marginal cost and reject activities for which the marginal cost exceeds marginal benefit.

The key to reconciling self-interest and the social interest

incentives

Positive Statements

about "what is"; says what is currently believes about the way the world operates.

We can test it by checking it against the facts.

ex: " our planet is warming because of the amount of coal we are burning"

Normative Statements

About "what ought to be"; depends on values and cannot be tested

ex;" we ought to cut our use of coal by 50%"

To answer cause and effect questions economists create...

an economic model

economic model

A description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand.

An economic model is tested by...

comparing its predications with the facts, but it is difficult because we observe the outcomes of simultaneous change of many factors so economists look for natural experiments, conduct statistical investigations to find correlations, and perform economic experiments by putting people in decision making situations and varying the influence of one factor at a time.