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econ notes ch 1-6

econ notes ch 1-6 - Chapter 1 The Economic Approach Adam...

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Chapter 1: The Economic Approach Adam Smith – published foundation of economics in 1776 in “An inquiry into the Nature and Causes of the Wealth of Nations” Argued wealth of a nation lies in goods and services rather than gold and silver Economics is about the choices individuals make Scarcity- fundamental concept of econ, can’t have everything thus individuals must make a choice-selecting among alternatives includes trade-offs Resources- inputs- people use to produce goods and services therefore limited and includes land, labor, and skills. Capital – human made resources used to produce goods and services-enhances ability in the future Scarcity is an objective concept that describes a factual situation. Poverty is a subjective concept that refers to personal opinions on defined level of income. When a good or resource is scarce, individuals must ration or decide who will receive and who will go without Scarcity also leads to competition among individuals (good thing) Economic theory- definitions, postulates, and principles assembled in a manner that makes clear cause and effect relationships 8 Guideposts of Economic Theory 1. Use of scarce resources is costly, thus choices must be made and trade-offs will occur. Opportunity cost- the highest value alternative that must be sacrificed as a result of decision making. 2. Individuals choose purposefully-trying to get the most from limited resources. Economizing behavior- choosing the option that offers the greatest benefit at the least possible cost. Utility- subjective benefit or satisfaction a person expects from a choice or action 3. Incentives matter- choice is influenced in a predictable way by changes in incentives. (arguably the most important guidepost, sometimes called basic postulate of all economics) 4. Individuals make decisions at the margin (marginal- effects of a change in the current situation) 5. Although information can help us make better choices its acquisition is costly and time is scarce. 6. Beware of the secondary effects: economic actions often generate indirect as well as direct effects. (secondary effects-indirect impact of an event or policy that is not easily perceivable or often unintended or overlooked) 7. The value of a good or service is subjective and based on individual preferences 8. The test of a theory is its ability to predict, economics is scientific thinking based on theories and tests. Good theories are consistent and help explain real world events. Scientific Economics or Positive economics attempt to determine “what is”’ among economic relationships Normative economics is about “what out to be” given preferences and philosophical views of the advocate.
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