| UNIT ONE |
CHAPTER 2
Some Tools of the Economist
A.
Opportunity Cost
1. Opportunity cost: The highest
valued activity sacrificed in making a choice.
a.
Opportunity costs are subjective and vary across individuals.
2.
The opportunity cost of college:
a.
Monetary cost: tuition, books.
b.
Nonmonetary cost: forgone earnings.
c. If opportunity cost of college
rises (e.g. tuition rises), then one will be less likely to attend college.
B. Trade
1.
Mutual gain is the foundation of trade.
a. Trading goods among people to get
them to higher valued uses and users can create value.
2. Transactions costs: the time,
effort, and other resources needed to search out, negotiate, and consummate an
exchange.
a. Transactions costs reduce our
ability to produce gains from potential trades.
3. Middleman: a person who buys and sells, or who arranges trades.
a.
A middleman reduces transactions costs.
II.
The Importance of Property Rights
A.
Private Property Rights
1.
Property rights: the right to use, control, and obtain benefits from a
good or service.
2.
Private property rights involve:
a.
the right to exclusive use
b.
legal protection against invaders.
c.
the right to transfer to another.
B.
Private Property Rights Incentives
1. Private owners can gain by
employing their resources in ways that are beneficial to others.
2. The private owner has a strong
incentive to care for and properly manage what he or she owns.
3. The private owner has an
incentive to conserve for the future if the property’s value is expected to
rise.
4. With private property rights, the
private owner is accountable for damage to others through misuse of the
property.
a. Private ownership links
responsibility with the right of control.
III. Production
Possibilities Curve
A.
Shifting the Production Possibilities Curve Outward
1. An increase in the economy’s
resource base would expand our ability to produce goods and services.
2. Advancements in technology can
expand the economy’s production possibilities.
3. An improvement in the rules under
which the economy functions can increase output.
4. By working harder and giving up
current leisure, we could increase our production of goods and services.
IV. Division of Labor,
Specialization, and Production Possibilities
A.
Division of Labor
1.
Division of labor: breaks down the production of a commodity into a
series of specific tasks, each performed by a different worker.
2.
Division of labor increases of labor increases output for three reasons:
a.
Specialization permits individuals to take advantage of their existing
skills.
b.
Specialized workers become more skilled with time.
c.
Permits adoption of mass-production technology.
B. Law of
Comparative Advantage
1.
Law of comparative advantage: total output is greatest when individuals
specialize in the production of goods they produce at a low opportunity cost and
trade those goods for goods they are a high-opportunity-cost producer.
a.
The principle of comparative advantage is universal as it applies across
individuals, firms, regions and countries.
C.
Voluntary Exchange
1.
Voluntary exchange channels goods toward those who value them most and
permits us to realize gains from specialization, division of labor, mass
production, and cooperative effort among individuals.
a.
These elements underlie our modern living standards.
V.
Economic Organization
A.
Methods of Economic Organization
1.
Market organization: A
method or organization that allows unregulated prices and the decentralized
decisions of private property owners to resolve the basic economic problems.
a.
Sometimes market organization is called capitalism.
2.
Collective decision making: The method of organization that relies on
public-sector decision making to resolve basic issues.
a.
An economic system in which the government owns the income-producing
assets and directly determines what goods they produce is called socialism.
B. Exit and Voice
1.
Individuals have two major methods for sending messages and influencing
decision makers.
a.
Voice:
communicating complaints, desires, and suggestions directly to decision makers.
b. Exit: the ability to withdraw
from an economic relationship with another person or organization.
(1)
Exit is easier to exercise in a market setting.
(2)A person’s voice will be more effective if exit is also available.
