Economics Concepts

Language of Economics

• Economics studies the choices individuals make in the face of scarcity
• Scarcity arises from limited resources and unlimited wants
• Scarcity influences choices

Scarcity and Resources

• Scarcity involves limited resources and unlimited wants
• Resources are used to create economic goods
• Types of resources include:
• Land: air, land in general, oil
• Nonhuman animal resources: chickens, wildlife
• Labor: human resources
• Capital: man-made resources like computers and physical monitors
• Technology: software, data, AI, and math skills

Scarcity vs. Poverty

• Everyone experiences scarcity because resources are finite
• Scarcity is objective vs subjective
• Scarcity, not poverty, drives choices
• Even without poverty, scarcity necessitates choices

Positive vs. Normative Statements

• Positive statements can be tested and proven or disproven
• They involve quantifiable data
• Normative statements are opinions that cannot be proven or disproven
• Keywords include "ought," "should," "good," and "bad"
• Positive economics studies how the economy works
• It informs normative economics

Normative Economics and Economics Thinking

• Normative economics identifies problems and suggests solutions
• It combines opinions with factual support
• Adding "very" to a positive statement transforms it into a normative one
• There are nine guideposts to economics thinking:
• Rationality, subjectivity, incentives, marginal analysis, tradeoffs, information costs, secondary effects, theory, and market forces

Rationality

• Decision-makers choose purposefully and weigh costs and benefits
• People aim to maximize benefits at minimum cost
• Rationality: the benefits outweigh the financial costs
• Irrationality: the financial costs outweigh the benefits

Costs and Benefits

• Costs and benefits are subjective
• Costs: price, comfort, practicality, judgment, risk
• Benefits: style, social status, joy, attention
• Rational decisions exclude sunk costs which are costs that cannot be recovered Every cost-benefit analysis avoids sunk costs

Incentives and Marginal Decisions

• People react predictably to incentives
• Economic thinking involves considering one extra unit at a time which means extra to extra, not additional

Economic Decision Rule

• When the marginal benefit of an action exceeds the marginal cost, pursue it
• Cease action when marginal cost equals the marginal benefit

Scarcity and Tradeoffs

• Scarcity implies tradeoffs and opportunity costs
• Opportunity cost is the highest-valued benefit forgone due to a choice
• It is not the sum of all forgone activities
• Opportunity cost is subjective, and can vary per person

Information and Secondary Effects

• Acquiring information is costly
• Choices are made with imperfect information and impacted by the internet
• Anticipate secondary, unintended consequences
• Seat belt laws led to more reckless driving and pedestrian deaths

Economic Theory and Market Forces

• Economic theory's test is its ability to predict
• Simplify the details to model the concept
• Avoid adding too many variables to retain predictive power
• Economic models are abstract tools for studying complex concepts
• Three market forces influence economic outcomes
• The invisible hand (price/opportunity cost): individuals unintentionally benefit society by acting in their own self-interest
• The invisible handshake (social and historical forces/culture): social norms and traditions that shape decisions
• The invisible foot (political and legal forces): political and legal interventions

Pitfalls in Economic Thinking

• Avoid these 5 pitfalls to avoid economic thinking:
• Violation of ceteris paribus
• Good intentions do not guarantee certain outcomes
• Association is not causation
• Avoid fallacy in composition
• There is never a free lunch and no such thing is free

Math and Graph Review

• Economic variables and their relationships
• Y = f(x)
• Y: is the dependent variable
• X: is the independent variables
• Y=GPA, X=# of hours students study per week, is a positive mathematical relationship
• If they go in opposite directions we call it a negative or inverse mathematical relationship

Web-Site Revenue Graph

• Y=Web Revenue
• Let X = # of website hits
• Investment of $100
• 10 cents a "hit"
• Y=f(x)= 100+1.x
• Downward Slope = Inverse Relationship. Y=a+bx (linear equation, b is the slope. A is the y axis integer)

Key Terms

• Market: where trading occurs
• Ticket Trading: market setting facilitates specialization

Trade

• Trade creates wealth, is voluntary and is not a zero sum game
• It creates a value and allows efficient wealth creation

Transaction Costs

• Costs that can inhibit trade
• Include time, effort, and other resources
• Middlemen cut the cost

Production Possibility Frontiers(PPF)

• Trade restrictions reduces the value and create the opportunity cost
• PPF is a boundary or PPF curve
• That is shown with the possible goods and outcomes with combinations of fixed technology and resources

Concepts to Know with PPF

• Unemployment of resources
• Infinite number of outcomes
• PPF measures opportunity cost
• Opportunity Cost changes at every point

PPFs Linear and Curved Graphs

• Linear slope graphs: there is a constant slope
• A curved PPF: changing slopes

PPFS and Opportunity Costs

• The slope of a PPF shifts to diminishing marginal returns
• Do you feel as good after the tenth hour of studying as you do on the first, in any given day?

Guns vs. Butter

• Represents the graph describing the trade-off governments face with spending, specifically national defense or domestic programs
• The law of increasing marginal opportunity cost the increasing amount that the economy is able to produce means the more opportunity cost will grow

Comparative Advantage

• An advantage of a resource with the lower opportunity cost of producing something and should be used in economics is the law of comparative advantage

Types of Production

• Specialize in a product vs. trade, specialize in the product and exchange as trade opens up and have people use what production is cheap

Absolute Advantage

• You can produce more of a goof with the same amount of resources as someone else

Shifts in the PPF

• What restricts the economy from producing more of everything?
• Lack of resources, causing us to make those trade offs, over time it is possible for a country to shift is PPF. This is called economic growth Factors to shift the PPF outwards:
• Advancements in technology can expand the economy's production possibilities

3 Aspects Expanding Possibilities

• Invention: creating new products
• Innovation: effective adoption of new techniques
• Entrepreneurs: introduce new products to satisfy consumers at a low cost
• Positive Shocks- Positive Shocks shifting outwards

Shift Considerations

• Technological breakthrough
• Discovery of Natural Resources
• Rules under which the economy functions can also increase output
• An important innovation has been patents. shifts the PPF outwards shift the PPF outwards

Rules to Production

• What about rules that add more tape shift inward on graph.
• The graph shifts are
• Negative shocks (shifts inwards- called economic contraction)

Types of Economic Contraction

• Unenven Shocks
• Labor Leisure Tradeoff- ppf outward shift -Work= increase payment
• Leisure means anything not for wage earning
• US workers work more hours compared to EU workers

Economy resources to produce

Ex. Investment- give more good skills

• Fertility explained- invest in child growth equals more labor in the future
• Budget constraint graph
• It's mathematical and budget maximizing
• This means that it is downward sloping so it's a inverse relationship so we're the ones who can benefit from it
• Property rights, control and service for what you own
• Can't control the other's property without permission meaning you cant' invade another mans space

Review fundamental economic relationships and concepts. Questions cover topics like inverse relationships, linear equations, descriptive statistics, market mechanics, the Production Possibilities Frontier, and comparative advantage.