#8 The test of a theory is its ability to predict
If real world events are consistent with a theory, then that theory is valid.
Pitfalls to avoid in economic thinking:
o Violation of ceteris paribus principle
Ceteris paribus: Other thin
#3 Beware of Secondary Effects
Secondary effect: the indirect impact an event or policy that may not be easily and
o Example: Killer seatbelts
o Example: Yacht tax
o Example: Trade restrictions
o Example: 1st graders
Be careful goo
#6 Transaction Costs and Middlemen
Why do people hate Wal-Mart?
o Wal-Mart employs sweatshop labor from other countries.
o Wal-Mart does not provide adequate compensation to their domestic
o Wal-Mart destroys the local small business community.
The Nirvana Fallacy
Nirvana Fallacy: the logical error of comparing the actual situation with its
idealized counterpart rather than the actual alternative.
o Example: Child labor and sweatshops
Marginal: Describes the effect of a change in a current situa
The invisible hand directs people toward activities that promote the general
The Invisible Hand Principle:
o The tendency for people, while pursuing their own interests, to promote
the economic well being of society.
Example: Lines at
Step 2: Choose your business structure
Sole Proprietorship: One person (you) own the company and are responsible for
its assets and liabilities.
o You alone get the rewards (profits) from your business
o You alone have complete control of how yo
Section 3 Step 1: Business Plan
Start with an Executive Summary:
o The mission statement
o Basic company information
o The products being offered
o Describe the nature of your business and the market you plan to serve.
o Explain how y
#4 Decisions Are Made at the Margin
Law of Diminishing Marginal Returns:
o As more and more units of a variable resource are applied to a fixed
amount of other resources, output will eventually increase by smaller and
Total Product (TP):
Calculating Economic Costs and Profits
o The payments a firm makes to purchase the goods and services of
o The opportunity costs associated with the firms use of resources that it
Key Elements of Economic Thinking
o How economics approaches questions scientifically
o Definition of economics and scarcity
Is life getting better or worse?
o What objective measures should we analyze?
o A strategy that is best for a player in a game regardless of the strategies
chosen by other players.
o The analysis of strategic choices made by competitors in a conflict
Real life applications:
Categories of Costs
Total Fixed Costs (TFC): The sum of the costs that do not vary with output.
Fixed costs will remain unchanged as output rises or falls in the short run.
o Example: Insurance premiums, property taxes, etc.
Average Fixed Costs (AFC): Tot
Production, Not just jobs, provides the source of high living standards
Agricultural Adjustment Act (1933)
o Discover what you can produce at a lower opportunity cost than other
o Dont just think about money, your opportunity cost
#1 There is No Such Thing as a Free Lunch
Opportunity Cost: The highest valued alternative that must be sacrificed when
choosing an option.
o Example: An hour of your time
o Example: How you spend your next $15
What is usually the biggest cost of getting
#5 Voluntary Trade Promotes Economic Process
Voluntary vs. Coerced
o Someone will devote resources to make you worse off if you dont
Voluntary = positive. Having the ability to choose to buy it or not.
Coerced = someone wins, someone los