Ch 1. Limits, Alternatives, & Choices

1. Ch 1. Limits, Alternatives, & Choices

2. A. Economics – the social science concerned w/ the efficient use of scarce resources to achieve the maximum satisfaction of economic wants. -- The complete satisfaction of economic wants is impossible. -- Economics is a social science that deals with how society/people allocate scarce resources among unlimited wants and needs.

3. Basic economic problem B. Scarcity – People’s wants & needs are unlimited; resources needed to produce goods/services are limited. 1. Utility = Satisfaction. What Rolling Stones song reflects the idea of scarcity? -- Limited resources creates scarcity. -- Allocation is the choosing which needs to satisfy and how much of our resources we will use to satisfy them.

4. Scarcity

5. Is it worth spending more $ on a Porsche, or buy two (cheaper) Honda Accords? C. Marginal analysis – compare marginal benefits & marginal costs. -- Economic choices or decisions involve weighing the pros and cons. -- The marginal benefit is the greater lifetime pleasure (utility). -- Utility is the pleasure or satisfaction you get.

6. D. Scientific method: 1. Hypothesis – proposition tested to develop econ theories. 2. Economic Principle – reliable econ theory/law. 3. Model – several theories to explain reality. -- Economic methodology consists of a number of elements (above). -- A ‘principle’ would best explain economic behavior.

7. E. Other-things-Equal assumption = ceteris pairibus. Policy Economics  Theoretical Economics Theories   -- used to limit the influence of other factors in making a generalization. Facts

8. Panama City port operated by the Chinese, 2009. F. Macroeconomics – Examines the economy as a whole or its basic subdivisions (aggregates). Large scale -- Subdivisions: the gov’t, household, and business sectors. -- Aggregate: collection of specific economic units treated as one unit, such as millions of consumers in the U.S. -- Looks at the BIG picture; Seeks an overview or general outline of the structure of the economy and the relationships of its major aggregates.

9. G. Positive Economics – Focus on facts and cause & effect relationships. H. Normative Economics – Incorporates value judgments about what the economy should be like or what should be recommended. What is What ought to be -- Both macroeconomics and microeconomics involve facts, theories, & policies. -- Both contain elements of positive and normative economics.

10. Property resources I. Resource Categories: 1. Land – natural resources 2. Capital – manufacturing aids 3. Labor – workers 4. Entrepreneurial – risk bearer Human resources a.k.a. the Four Factors of Production -- Society’s economic wants are unlimited; Resources are limited. -- Economic Resources: all natural, human, and manufactured resources that go into the production of goods and services.

11. J. Opportunity Costs • Opportunity cost or economic opportunity loss is the value of the next best alternative forgone as the result of making a decision. • The next best thing that a person can engage in is referred to as the opportunity cost of doing the best thing and ignoring the next best thing to be done. • The Law of Increasing Opportunity Costs: The more a product is produced, the greater is its opportunity cost. -- Oppty Cost: What you give up. -- Oppty Benefit: What you gain.

12. Production Alternatives Types of Products A B C D E Pizzas 0 1 2 3 4 (in hundred thousands) Robots 10 9 7 4 0 (in thousands) K. Production Possibilities Table -- Assumptions for the Table: Full employment and production efficiency, fixed resources, fixed technology, only ‘two goods’ being produced (pizzas representing consumer goods, and robots representing capital goods. -- Consumer goods: products that satisfy our wants directly. -- Capital goods: products that satisfy our wants indirectly by making possible more efficient production of consumer goods.

13. Use the data from the table to determine where the points go on the curve/graph. L. Production Possibilities Curve This is a ‘concave’ curve -- Points on curve are max combo produced w/ resources fully/efficiently used. -- More Robots means fewer pizzas and vice versa. -- Assumes full production and productive efficiency.

14. M. Unemployment & Productive • Inefficiency With unemployment and inefficiency, the economy could operate on the curve. This means it could produce more of one or both products than it is at point U. -- “U” inside the curve represents what is attainable, but shows unemployment & failure to produce efficiency.

15. N. Economic Growth – ability to produce a larger total output. -- AB is the current curve, CD is the future curve. -- Shows the increase in production possibilities.

16. O. Why Economics? 1. Affects daily life 2. Informed decisions 3. More effective citizen 4. Who we elect 5. business -- Economic issues: unemployment, inflation, taxation, poverty, int’l trade, health care, pollution, regulation, education, etc. -- President gets economic advice from the Council of Economic Advisors. -- Academic subject to understand society’s best interest / run a business.

17. John Maynard Keynes(1883-1946) “The idea of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” -- Prominent economists: Adam Smith, David Ricardo, John Stuart Mill, Karl Marx, and John Maynard Keynes.

18. P. Economic Policy: 1. State the goal 2. Determine policy options 3. Implement and evaluate the policy that was selected Be specific  Alternatives?  Did it work?  Taxes? Beneficial or harmful results? Be altered? Free college education for everyone?

19. Q. Fallacy of Competition – the assumption is not correct. Pitfalls to Sound Reasoning include: Biases, Loaded Terminology, Fallacy of Composition, Causation Fallacies (Post Hoc Fallacy and Correlation vs. Causation) -- Fallacy of Composition – what is true for one is not necessarily true for a group of people or the whole.

20. R. Causation Fallacies. 1. Post Hoc Fallacy – “after this, therefore because of this” theory. 2. Correlation vs. Causation – Connection (association) of 2 events, or 1 caused a reaction. If A precedes B, then A is the cause of B If A increases, B also increases. Due to causation or a coincidence?