MICRO CH1 Flashcards
Scarcity
The inability to satisfy all of our wants is the problems of scarcity.
Scarcity arises from limited time, money, and energy.
희소성(scarcity)이란 어떤 것을 원하는 사람들의 욕구를 모두 만족시킬 만큼 자원이 충분히 있지 않다는 것을 뜻한다.
Economics
How individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets.
Opportunity cost
The cost of the next best alternative given up.
It can be money, time, or resources given up when one choice is made rather than another
To make a smart choice
Because of scarcity, every choice involves a trade off. To get something, you must give up something else.
To make a smart choice, the value of what you get must be greater than the value of what you give up.
Incentives
Rewards and penalties for choices.
Anything that motivates a person to do something
Common types of incentives
Tax Incentives
Financial Incentives
Subsidies
Voluntary trade
Simple economic answer: instead of self-sufficiency, specialization and trading makes us better off.
Any time two people make a voluntary trade, each person feels that what they get is of greater value than what they give up.
If there weren’t mutual benefits, the trades won’t happen.
Why? differing opportunity costs of producing.
NOT absolute advantage, but COMPARATIVE advantage groups have over one another makes the trade beneficiary for both parties.
Production Possibilities Frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Simply put, maximum combinations of products or services that can be produced with existing inputs.
Absolute advantage
The ability to produce a product or service at a lower absolute cost than another producer.
Comparative advantage
The ability to produce a product or service at a lower opportunity cost than another producer.
Calculating Opportunity cost
Give up / Get.
Opportunity cost of producing wood and bread
“Give up x amount of wood to get y amount of bread.”
Take the maximum amount of production capability for each variable in this example wood and bread, and use the formula.
Economic models
The map that economists use. A simplified representation of the real world, focusing attention on what’s important for understanding a specific idea or concept.
Economic models which assume all other things not in the model as constant, are the mental equivalent of controlled experiments in a laboratory.
A good economic model helps you make smart choices, or helps you better understand the observed facts of the economic world around you. If the model helps you understand and predict, it’s a good model.
Positive statements
About “what is”, about things that can be checked.
Can be evaluated as true or false by checking the facts.
ex) “Toronto is closer to Vancouver than to St. John’s, Newfoundland”
“Government-provided healthcare increases public expenditures.”
This statement is fact-based and has no value judgment attached to it. Its validity can be proven (or disproven) by studying healthcare spending where governments provide healthcare.
Normative Statements
Involves Judgements or opinions, things that cannot be factually checked.
About what you believe “should be”.
“Women should be provided higher school loans than men,” “Laborers should receive greater parts of capitalist profits,” and “Working citizens should not pay for hospital care.” Normative economic statements typically contain keywords such as “should” and “ought.”
Distinction between positive statements and normative statements will help you make smart choices. How?
To make smart choices in life, you first have to decide your goals. What do you value? Should you spend your life getting rich or help others?” These are normative questions.
Once you choose your goals, thinking like an economist and using economic models and positive statements will help you effectively achieve them, and get you to where you want to go.
Micro economics
“Mikros: small in Greek”.
Analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets.
Individual choices, the “TREES in a Forest”
Macro economics
“Makros: large in Greek”
Analyzes performance of the whole nation’s economy and the global economy. It’s the combined outcomes of all individual microeconomic choices.
Three keys to smart choices
- Choose only when ADDITIONAL benefits are greater than ADDITIONAL OPPORTUNITY COSTS.
- Count only ADDITIONAL benefits and ADDITIONAL OPPORTUNITY COSTS.
- Be sure to count ALL ADDITIONAL benefits and costs, including IMPLICIT COSTS and EXTERNALITIES.
Opportunity cost rule
- Choose only when ADDITIONAL/Marginal benefits are greater than ADDITIONAL/Marginal OPPORTUNITY COSTS.
ex) Decision to go to college
additional benefits: higher lifetime income, more reputation, better education etc.
additional costs: the money you will spend on tuition and books, your time and income you give up by not working that time etc.
MARGINAL AND ADDITIONAL means the SAME THING.
Look forward only to additional (marginal) benefits and additional (marginal) opportunity costs
If you decide to study for the next hour, the tuition you already paid is irrelevant.
You cannot get back the tuition you ALREADY paid whether you choose to study or not.
When deciding, DO NOT LOOK BACK, ONLY LOOK FORWARD. Your previous decisions or the money you’ve already spent are history and cannot be undone.
Implicit Costs
The opportunity costs of investing your own money or time.
Examples of implicit costs include the loss of interest income on funds and the depreciation of machinery for a capital project. They may also be intangible costs that are not easily accounted for, including when an owner allocates time toward the maintenance of a company, rather than using those hours elsewhere.
Negative Externalities
The costs that affects others who are external to the choice or trade in a negative way.
i.e) Driving. you drive a car, you pay for car payments, insurance, repairs, licence fees, tolls and parking. BUT you don’t necessarily pay for the pollution you are emitting.
negative externality exists when the production or consumption of a product results in a cost to a third party. Air and noise pollution are commonly cited examples of negative externalities.
Positive Externalities
Benefits that affect others who are external to a choice or a trade.
For example, education directly benefits the individual and also provides benefits to society as a whole through the provision of more informed and productive citizens.
Private markets will underproduce in the presence of such positive externalities because the costs of production for the firm are overstated and the profits are understated.
