Chapter 1: The Economic Approach

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ECO 2013
Joseph Calhoun

Chapter 1: The Economic Approach  The Importance of Adam Smith, The Father of Economic Science o Foundation: originated in 1776 w/ Smith’s publication of An Inquiry Into the Nature and Causes of the Wealth of Nations o Revolutionary view: the wealth of a nation does not lie in gold and silver, but in goods and services o Order and efficiency could exist without central authority o He was a lecturer at the University of Glasgow in his native Scotland o Free exchange and competitive markets were good o People are directed by the “invisible hand” of market prices  What Is Economics About? o Choices of individuals  corporations o Scarcity means having to make choices  Scarcity- fundamental concept of economics that indicates that there is less of a good freely available from nature  Refrain from using scarcity to describe availability or abundance  Unlimited desires + limited goods = choices  Choice- the act of selecting among alternatives  Resources- ingredients, or inputs, people use to produce goods and services (e.g. technology or skill, talents of humans, knowledge)  Capital- human-made resources; physical resources (e.g. machines, tools)  Natural resources include: the ocean, land, mineral deposits  People will always face scarcity  choices  economics o Scarcity and poverty are not the same  Scarcity is an objective concept that describes a factual situation in which the nature of our resources keeps us from being able to completely fulfill our desire for goods and services  Poverty is subjective; means different things to different people  Needs vs. wants o Scarcity necessitates rationing  Rationing is necessary when there is scarcity  Deciding who gets the good and who doesn’t will have an influence on human behavior  For example, choosing a political party based on how many food stamps you will receive, or  Imagine if football tickets were given out to those with the highest GPA…  If you have to pay for something, it’s scarce o Scarcity leads to competitive behavior  When the rationing criterion is price, individuals will engage in income- generating activities that enhance their ability to pay the price needed to buy the goods/services they want  Competition generates innovation and encourages discovery (along with good prices!)  The Economic Way of Thinking o Many economists have different philosophies, but their approaches are very similar o That common ground is known as “economic theory” o Eight guideposts to economic theory  1. The use of scarce resources is costly, so trade-offs must be made  (“there is no such thing as a free lunch;” the use of resources to produce one good diverts those resources from the production of other goods). The highest valued alternative that is sacrificed is known as the opportunity cost.  2. Individuals choose purposefully – they try to get the most from their limited resources.  Economizing behavior- choosing the option that offers the greatest benefit at the least possible cost  Utility- the subjective benefit or satisfaction a person expects from a choice or course of action  The rational choice is not the same as the right choice  3. Incentives matter – choice is influenced in a predictable way by changes in incentives  “basic postulate of all economics”  Making an option more beneficial will predictably cause more people to choose it. Making an option more costly will cause fewer to choose it  4. Individuals make decisions at the margin  Marginal- term used to describe the effects of a change in the current situation. For example, a producer’s marginal cost is the cost of producing an additional unit of a product, given the producer’s current facility and production rate  Cheeseburger and drink vs. happy meal  Marg
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