Ch. 1 Economics and Economic Reasoning PDF

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Ch. 1: Economics and Economic Reasoning Sunday, November 22, 2020

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Economics: study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of society Three Central Problems: a. What, and how much, to produce it? b. How to produce it? c. For whom to produce it? Scarcity: goods available are too few to satisfy wants a. Degree is constantly changing b. Quantity of goods depend on technology and human action Economic Theory: a. Microeconomics: study of individual choice, and how its influenced by economic forces i. Pricing of firms, household decisions on what to buy, allocation of resourc b. Macroeconomics: study of the economy as a whole i. Inflation, unemployment Decisions are made by comparing marginal costs and marginal benefits a. Marginal Cost: additional cost over and above costs already incurred b. Marginal Benefit: additional benefit above what is already derived c. Economic reasoning: based on premise that everything has a cost Economic Decision Rule a. If MB > MC -- do it // If MC > MB -- don't do it Opportunity Cost: benefit that you might have gained from choosing the next-best alternative a. Opportunity cost should always be less than benefit of what you have chosen b. Basis of cost/benefit economic reasoning Two aspects of opportunity cost a. Implicit costs: costs associated with a decision that often are not included in nor accounting costs i. Implicit costs should be included in opportunity costs b. Illusionary sunk costs: costs that show up in financial accounts that are ALREADY spent

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in normal accounting costs i. Implicit costs should be included in opportunity costs b. Illusionary sunk costs: costs that show up in financial accounts that are ALREADY spent i. Sunk costs should not be included in opportunity costs Economic and Market Forces a. Economic forces: the necessary reaction to scarcity i. Market force: economic force that is given relatively free rein by society to work through the market ii. Invisible hand: market force that is a price mechanism that guides our actions in a market 1) Shortage: price rises 2) Surplus: price falls Social and Political Forces: what happens in society is a reaction to, and interaction of: a. Economic, social, and political forces b. Social and political forces influence market forces i. Often work together against the invisible hand Economic Model: framework that places the generalized insights of the theory in a more specific contextual setting Economic principle: commonly held insight stated as a law or general assumption Theories, models, and principles are tested to see predictions of the model match the data a. Models lead to: i. Theorems: propositions that are logically true based on the assumptions of the model ii. Arrive at policy precepts: policy rules that conclude that a particular course of action is preferable Invisible Hand Theorem: market economy, through the price mechanism, will allocate resources efficiently a. Price falls when quantity supplied > quantity demanded b. Price rises when quantity demanded > quantity supplied c. Efficiency: achieving a goal as cheaply as possible Economic Institutions: laws, common practices, and organizations in society that impact the economy Economic Policies: actions taken by government to influence economic actions a. Two Types of policy analysis i. Object policy analysis: keeps value judgments separate from

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analysis ii. Subjective policy analysis: reflects the analyst's views of how things should be Economic Policy Options: to distinguish between objective and subjective, we divide them into three categories a. Positive economics: study of what is and how the economy works b. Normative economics: study of what the goals of economy should be c. The art of economics: using knowledge of positive economics to achieve the goals determined in normative economics...