Chapter One “The Economic Way of Thinking”

  1. Why Economics is important?
  2. Affects daily livesprovides with logical, effective decision-making process; helps maximize our resources
  3. Helps us make more informed decisionsneed to think about setting priorities, weighing options, we do this subconsciously to a certain extent
  4. More effective citizensby voting we decide to certain extent the future/type of economic policieshow we want the government to allocate its resources
  5. A Science of Choices
  6. economics as a science helps us analyze , explain and predict behavior
  7. Basic Economic ProblemScarcitythe condition that occurs because people’s wants and needs are unlimited, and the resources needed to produce goods and services to meet these wants and needs are limited
  8. unlimited wants and needs
  9. limited resources
  10. allocationprocess of choosing which needs will be satisfied and how much of our resources we will use to satisfy them
  1. DEFINITIONTHE SOCIAL SCIENCE THAT DEALS WITH OF HOW SOCIETY ALLOCATES SCARCE RESOURCES AMONG ITS ULIMITED WANTS AND NEEDS BY EXAMINING THE ALTERNATIVES AND CONSIDERING THE OPPORTUNITY COSTS FOR EACH ALTERNATIVE
  2. Costs and Benefitseconomists consider the opportunity costs and benefits of making each decision
  3. Opportunity Costthe value of any alternative that you must give up when you make a choice (what are the opportunity costs of coming to school today?) Do T-Shirt vs. Movie thing; budget constraint involved here which is the mix of goods that can be purchased given a limited amount of income
  4. Opportunity Benefitwhat is gained by making a particular choice; (example of decision to move)
  1. Individual and Social Choicesindividual choices refer to decisions made to fulfill one’s own needs versus social choices which are made to satisfy needs of society as a whole; corresponds with micro and macroeconomics respectively
  2. Microeconomicsbranch of economics that examines the choices and interaction of individuals concerning one product, firm, or one industry (how individual producers and consumers respond to changes in market)
  3. Macroeconomicsthe branch of economics that examines the behavior of the whole economy at onceunit of analysis not individual but economy as a whole (Bush talking mostly about macroeconomic decisions last night)
  4. THREE BASIC ECONOMIC CHOICESsome societies/governments make more social versus individual economic decisions (which kinds of governments/societies do what?)
  5. What will be produced with limited resourceshard decisions to make after and when you provide the basics; once you have food, shelter, clothing, what is next? Education? National Defense? Etc.
  6. How will the goods and services be producedneed to account for the resources that are most readily available then go for either labor or capital (machines; equipment) intensive resources
  7. For whom will the goods and services be producedwho gets what is decided by consumers and the price system in the market; how individuals choose to spend their income varies according to their personal preferences as well as their income levels; in market economy this is mostly an individual level decision? Or is it?
  8. The Importance of Economic Theory
  9. Theorysimplified description of reality; why is theory important even if it is sometimes incorrect? Or can’t predict outcomes 100% of the time? (modelsimplified form of reality which shows the relationship between different factors)
  10. Economic Theory Simplifies Realityroadmap analogy, gives you general features with which to navigate, not super detailed; have to carefully select theory and apply it to the problem (if problem doesn’t fit the theory then, the results are not going to be productive) so you have to carefully define the problem
  11. Economic theory is relevant b/c can help you make better informed choices; take 5 minutes and write down what you did yesterday; what were the opportunity costs of those choices you made? How did those choices affect what was produced? How it was produced? And for whom?
  1. Insurance how it works, cost of insurance distributes cost of replacing item that is damaged/stolen among many people; those who are not risk averse, might not want insurance or opt for lower levels of coverage?
  2. Carliability (losses to others); collision (losses to owners car); medical pays bills for policy holder and family
  3. Lifeterm versus whole
  4. Housebuyers/renters; personal liability coverage
  5. Healthgroup and individual
  6. Incomedisability; income

Chapter 2 Making Personal Decisions

  1. Individual Decisions and Social Choicesecon as science of choices made by either individuals or society; need to make informed decisions
  2. Economic Questions and the Market Economy
  3. economic questionsdecisions a society must make on what, how and for whom to produce goods and services
  4. market/capitalistic economyeconomic questions answered primarily by individuals
  5. make economic decisions based on economic incentives-the increase in our personal satisfaction that may result from some economic activity
  6. psychic incomethe nonmenetary reward we get from taking some action (Name some examples?)
  7. we make decisions based on economic and psychic incentives
  8. What to produce decided by consumers “voting” with dollars; if there is an increased demand for something, it will get produced, if there is little or no demand for a good then it will become less profitable to produce and therefore production declines or is eliminated altogether
  9. How to produce decided by individual choice; your incentive in the marketplace is personal gain; you want to maximize your income (or utility)
  10. For whom to produce-individual choice; anyone who has enough money can buy any product
  1. Individual Choice, Self-Interest, and the Invisible Hand
  2. in market economy individuals directly benefit from their decisions; the more info you have the better decisions you can make and the more likely that your utility can be maximized
  3. Economic Profit-the difference between the money you obtain from selling a product and the cost of producing that product
  4. Adam Smith1723; 1776 Wealth of Nations; argued that market operates by an invisible hand; idea that self interested based choices produces the greatest good for society; consumers wants to minimize costs; producer wants to maximize profits when someone decides to buy something the transaction (if in free market) benefits both;
  5. Invisible handthe incentive that guides individuals to choose in the best interest of society by pursuing their own self interest
  6. Costs and Benefits of social choicemost believe that individual choice is better to social choice in economic matters because the product of a social choice benefits some members of society at the expense of ALL (example would be parks; public schools; Camp David etc)
  7. Individual Incentives and Social Choicesocial choice can reduce incentive of direct self interest and can lead to inefficient behavior on the part of individuals
  8. Focus on Individual DecisionsProblem solving steps
  9. Define the problem
  10. Problems usually arise because of scarcity or the need to allocate
  11. Be objective (ruling out aspects of a problem that seem important only b/c of strong emotions or feelings about them)
  12. Focus on the issue
  13. List the Alternatives
  14. limit your alternatives
  15. be realistic
  16. List the criteria used to evaluate your alternatives (decide and then rank order them)
  17. Evaluate the alternatives
  18. decision matrixa table showing comparisons of alternative decisions
  19. strength of preferencesUtilitythe satisfaction one receives from the consumption, use, or ownership of a good or service
  20. utilthe unit of measurement for utility
  21. Choose the best alternative
  22. Individual Choice and Opportunity Costevery time you make a decisions you must pay an opportunity cost
  23. Applying to realitystudents have 5,000 at their disposal; use 5 steps of decision making process to decide how to use it; students need to prepare a decision matrix