quiz 1 - scarcity, opportunity costs, incentives Flashcards
what do consumers and producers (firms) tend to maximize?
consumers - utility
producers - profit
normative economics vs. positive economics
normative deals with ethics, values, judgments and opinions
positive only discusses facts
regarding production possibility frontiers, what yields a shift out of the PPF curve?
generalized increases in technology (more of both goods can be produced)
specific increases in technology (more of only one good can be produced)
examples of generalized increases in technology include the internet, discovery of electricity
increases in labor or capital could also cause generalized increase in PPF
opportunity cost
the highest-valued alternative that you must give up in pursuing any action
it is the slope of the PPF
it is not constant
costs in economics means opportunity costs; these are different from accounting costs
the opportunity cost is the one used in making decisions and is considered the true cost according to economists
value vs. cost
value is hard-wired; it is the net gain of something (its benefits minus its drawbacks); the good and bad of any item or action cannot be separated from one another; they determine that thing’s net value
opportunity cost always relates to choice; it’s what you give up when making a choice
example of value - pool is fun to swim in but can kill you; its value is the net of these two things
example of opportunity cost - you want a pool but have to give up a car in order to get it
what is the opportunity cost of a sunk cost
0
broken window fallacy
The broken window fallacy was first discussed by a French economist named Frederic Bastiat in 1850 in an essay called (translated) “That which we see and that which we do not see.”
The fallacy in the parable is that the broken window doesn’t create wealth.
We must add up all the costs and benefits of every action, including the hidden costs
In this case, the opportunity cost is the next best alternative: instead of repairing the broken glass, the shopkeeper could have kept his old glass and used the money to buy a new pair of shoes rather than a window. Now he only has a window without shoes.
The fallacy is applied to any destructive act that causes people to work to replace the damage, such as a hurricane or a war.
Instead of fixing damage, we could have been creating new goods and services
Sometimes it is hard to identify the opportunity cost because it is what didn’t happen (“that which we do not see.”)
point = spending money on items that have been destroyed does not lead to economic gain because that money could have been used directly for things we actually want/need
three types of incentives people have
material (money)
physical (their well-being or that of their families)
moral (religious beliefs, ethics, etc.)
people make choices to satisfy any or all of the above
people make choices that satisfy their self interest, and all three of these incentive types contribute to their self interest (utility)
point = utility comes from material, moral or physical incentives
when is the optimal time to discontinue an activity
when its marginal benefit = marginal cost
you’ll keep buying something if MB > MC but you’ll stop when MB = MC
what is the source of all economics problems?
scarcity
