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Chapter One: What is Economics?

Idea 1: How much does it really cost? Opportunity Costs: The true costs of decisions are not the number of dollars spent, but the value of what must be given up in order to acquire the item. These decisions represent the opportunities the individual, firm, or government must forgo to make the desired expenditure. Rational decision making is based on this. Ex. Going to college vs. skipping college and begin working. Idea 2: Attempts to Repeal the Laws of Supply and DemandThe Market Strikes Back When something is in short supply, the price usually goes up. When something has an abundant supply, prices usually reduce. Falling prices make producers unhappy and often pursue legislation to impose price floors. However, price floors on certain objects, such as agriculture, are not helpful because it usually causes a surplus in a particular item. Idea 3: The Surprise Principle of Comparative Advantage Law of Comparative Advantage: States that even in extreme cases in international trade, two nations can still benefit by trading and each can still gain as a result. Ex. If one country is more efficient in everything, both countries can gain by producing the things they do best comparatively. Idea 4: Trade is a Win-Win Situation Both parties must expect to gain something in a voluntary exchange. - Ticket Scalping - Minimum wages Idea 5: The Importance of Thinking at the Margin Idea 6: Externalities: A Shortcoming of the Market Cured by Market Methods Externalities: Social costs that affect parties external to the economic transactions that cause them. Markets are adept to producing goods that consumers want in the correct quantities they desire by rewarding those who respond to what consumers want and who produce these products economically. The market flushes out waste and inefficiency by seeing to it that inefficient producers lose money. This only works as long as each exchange only involves the buyer and the seller and no one else. Idea 7: Why the Costs of Education and Medical Care Keep Growing The growth in technology causes workers to be more productive at their jobs. Therefore, wages for employees also rise to avoid the risk of employees leaving their jobs for higher paying ones. When wages rise, the cost of these services goes up. This phenomenon is called cost disease. Idea 8: The Trade-Off Between Efficiency and Equality The American solution to deal with unemployment and low wages is to let markets work to promoted efficiency with minimal government interferences to reduce economic inequalities. In Europe, the promote high minimum wages and substantial benefits to their employees. However, their taxes are higher than the U.S. and they have a higher unemployment rate than the U.S. Idea 9: Productivity Growth is (Almost) Everything in the Long Run Productivity is referred to as the outputs per hour of work of a certain material/thing Productivity has increased by about seven times in the past 100 years What is an Economic Model? Economic Model: Representation of a theory or a part of a theory, often used to gain insight into cause and effect.