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Econ key points ch 1-6

Econ key points ch 1-6 - Economics Key Points Chapters 1-6...

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Economics: Key Points Chapters 1-6 Chapter 1 Scarcity and choice are the two essential ingredients of economic analysis. A good is scarce when the human desire for it exceeds the amount freely available from nature. Scarcity requires us to choose among available alternatives. Every choice therefore entails a trade-off. Every society will have to devise some method of rationing scarce resources among competing uses. Markets generally use price as the rationing device. Competition is a natural outgrowth of the need to ration scarce goods. Scarcity (objective) and poverty (subjective) are not the same thing. Absence of poverty implies that some basic level of need has been met. An absence of scarcity implies that our desires for goods are fully satisfied. We may someday eliminate poverty, but scarcity will always be present. 8 Economic Guideposts: 1) the use of scarce resources to produce a good always has an opportunity cost. 2) Individuals make decisions purposefully, always seeking to choose the option they expect to be most consistent with their personal goals. 3) Incentives matter. The likelihood of people choosing an option increases as personal benefits rise and personal costs decline. 4) Economic reasoning focuses on the impact of marginal changes because it is the marginal benefits and marginal costs that influence choices. 5) Because information is scarce, uncertainty is a fact of life. 6) In addition to their direct impact, economic changes often generate secondary effects. 7) The value of a good or service is subjective and varies with individual preferences and circumstances. 8) The test of an economic theory is its ability to predict and explain events in the real world. Economic science is positive; it attempts to explain the actual consequences of economic actions or “what is”. Normative economics goes further, applying value judgments to make suggestions about what “ought to be.” Microeconomics focuses on narrowly defined units, while macroeconomics is concerned with highly aggregated units. When shifting focus from micro to macro, one must beware of the fallacy of composition: the idea that what’s good for the individual may not be good for the group as a whole. The origin of modern economics as a science dates to the publication of “An Inquiry into the Nature and Causes of the Wealth of Nations” by Adam Smith in 1776. Smith believed a market economy would generally bring individual self-interest and the public interest into harmony. Chapter 2 The highest valued activity sacrificed when a choice is made is the opportunity cost of the choice; differences or changes in opportunity costs help explain human behavior. Mutual gain is the foundation of trade. When two parties engage in voluntary exchange they are both made better off. Trade creates value because it channels goods and resources to those who value them the most.
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