Froeb Ch 2 Flashcards
goal
exploit inefficiency as an opportunity to make money
how is wealth created
when assets move from lower to higher valued uses
value
measured as the amount of money someone is willing to pay for a service or good
buyer’s value
how much they are willing to pay for it, their top dollar
seller’s value
cost or bottom line. how much they are willing to sell it for
advantage of capitalism
creates wealth by letting people follow their self-interest
for ex: a buyer willingly buys if the price is below their top dollar and seller for the same selfish reason
both buyers and sellers gain otherwise….
they cannot transact
voluntary transactions create
WEALTH by moving assets from lower to higher valued uses
seller surplus
difference between agreed price and seller’s value
buyers surplus
difference between agreed price and buyer’s top dollar
total surplus
sum of buyer’s and seller’s surplus
zero sum fallacy
thinking because one person earns money another one loses. A fallacy because the voluntary nature of a trade requires both parties gains, otherwise a transaction wouldn’t occur
does government create wealth?
the government plays a critical role in the wealth creating process by enforcing property rights and contracts to facilitate voluntary transactions
poverty
absence of property rights
wealth creating transactions are less likely to occur without
private property and contract enforcement
underground
how poor countries survive
give people ownership to their property and create…
an incentive for them to take care of it, invest in it, and keep it clean.
economics is used for
spot money making opportunities
efficiency
an economy is efficient if all assets are employed in their highest valued uses.
good policy facilitates
the movement of assets to higher-valued uses
bad policy prevents
assets from moving or, worse, moves assets to lower-valued uses.
to determine good or bad policy you must analyze
all effects - intended and unintended
Henry Hazlitt - the one lesson in economics (art of economics)
consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists of tracing the consequences of that policy not merely for one group but for all groups.
-look at incentives
the one lesson of business (art of business)
consists of identifying assets in low-valued uses and devising ways to provably move them to higher valued ones
anything that impedes assets movement destroys potential wealth
taxes, subsidies, and price controls. these create inefficiency which also means opportunity
taxes
government collects taxes out of the total surplus created by a transaction. IF TAX IS LARGER THAN THE SURPLUS, THE TRANSACTION WILL NOT TAKE PLACE
issues with taxes
The one lesson of economics tells us that the intended effect of a tax is to raise revenue for the government, but the unintended consequence of a tax is that it deters some wealth-creating transactions.
issues with taxes
The one lesson of business tells us that these unconsummated transactions represent money-making opportunities.
subsidies
the opposite of a tax. By encouraging low-value consumers to buy or high-value sellers to sell, subsidies destroy wealth by moving assets from higher- to lower-valued uses—in exactly the wrong direction.
price control
a regulation that allows trade only at certain prices
two types of price control
price ceilings and price floorsq
price ceilings
outlaw trade at prices above the ceiling
price floors
outlaw trade prices below the floor
how to deter wealth-creating transactions
Price floors above the buyer’s top dollar or price ceilings below a seller’s bottom line
inefficiency implies
a money making opportunity
a company is
a series of transactions
a well designed organization rewards…
employees who identify and consummate profitable transactions or who stop unprofitable ones
