Quizlet: https://quizlet.com/127610162/gmu-econ-103-exam-1-boudreaux-flash-cards/ The OGS Important people we need to know - Julian Simon, was born in Newark, NJ, in 1932 and died in Maryland wrote an important book in 1996 called The Ultimate Resource. Simon argued that there are no inherent natural resources; something becomes a resource once a creative human makes it one. - EX: petroleum oozing out of the ground is useless to the natives until it is transformed into a valuable resource by someone who invents the internal combustion engine. - The more people we have, the more creative minds there are, which leads to more resources and new innovations. This is why many economists believe that an increasing human population is beneficial. - Adam smith - Born in 1732 and died in 1790 - Moral philosophers - The most famous book published in 1776 is The Wealth of Nations (The Inquiry into Nature and the Cause of the Wealth of Nations). - He was living in the best time to see the standard of living increasing. - He asked the important question what caused the increase of the standard of living? - The Wealth of Nations marks the beginning of modern economics - 8/29 - Everything we consume we do not know how to make (Made by strangers). - Ex: Pencil Person= Someone who knows how to make everything in a pencil (Does not exist) - The knowledge to make a pencil is spread out to multiple people. - Each person in the modern world specializes in how to make a tiny fraction of the pencil (specialization allows us to create bigger and cooler things.) - When all those minds combined allow us to create new things. - This makes things cheaper - The production of the pencil can not be random - - To produce things of value we can not just throw things together randomly they have to come together in order. The arrangement of resources is crucial to living in a productive society. - Ex: you do not want to grow wheat in the middle of new york, you would not an econ professor do brain surgery. The Foundation of Economics which is what Economic Theory is Built Upon. - 12 Foundation Stones of Economics a. 1) Our world is one of inescapable scarcity. (Something is scarce when not enough is available to go around to satisfy every conceivable human desire for it). b. 2) Scarcity implies choice and implies cost. ( when you choose to use the scarce thing for ABC (choice) you can no longer use it for XYZ (cost).) - Ex: You have $20 and you are in a supermarket and there are things filled with things you want to buy. (The $20 is your scarcity constraint) You want to eat tonight so you buy a burger for $10 you buy dog food for $5 and you want clean products you get soap for $5 but you also want to get root beer for $5 but you do not have enough money. You have all these wants and your limited need of getting them you have to choose what need. So instead of the soap, you get the root beer by making this choice you incurred a cost (opportunity cost) You gave up the satisfaction of buying the paper towels.) c. 3) Human wants are unlimited. - 4) We assume that every adult is rational and self-interested. (That is normal) - Rational (We do not mean that humans are machines what we do mean is that every human is rational and has three characteristics act with a purpose ( since we know that people have a purpose we can morally judge them if we see someone pull out a gun and shoot a person and kills a lot of people he would be a be mass murder since we know that acted purpose we know that he meant to hurt someone if we see a boulder kill person we do not say that boulder is a bad person because we know that boulder has no purpose.), learns from his or her mistakes, has transitive preferences (We choose the best option or else we would stuck in loop) - Self-Interest and Rationality: Individuals often act in self-interest, which does not solely equate to a focus on wealth but includes caring for loved ones more than strangers. This highlights a fundamental aspect of human behavior that economists consider when analyzing choices. - Concentric Circles of Care: The idea that people care more about those closer to them illustrates the limitations of altruism in economic theory. This model helps explain why charitable acts may not be as prevalent as expected. 5) Do not confuse cost with money - The Role of Money: Money serves as a tool for measuring costs and benefits but is not the essence of economic value. This distinction is important for understanding true economic welfare. 6) People respond predictably to incentives - The example of changing payment structures for ship captains demonstrates that altering incentives can lead to vastly different outcomes. This principle is crucial for policymakers to understand when designing interventions. 7) We assume that more is preferred to less 8) Methodological Individualism(Assumption that all social phenomenon are ultimate results of individuals not groups) 9) All taste and preferences are subjective - The acknowledgment that tastes and preferences are subjective reinforces the idea that individual choices are personal and not universally applicable. This understanding is key in a diverse society. 10) Actions speak louder than words - Actions Over Words: The adage that “actions speak louder than words” in economics underscores the importance of empirical behavior over mere statements. This principle can guide more accurate predictions of individual behavior. 11) Intentions are not results(beware of unintended consequences) - Intention vs. Outcome: The discussion on the flight attendants’ campaign emphasizes that well-meaning policies can produce harmful results. Understanding the broader implications is vital for effective governance. “Good intentions can have bad results” 12) All decisions are made at the margin. - We are not confronted with all-or-nothing choices. In life, we are faced with choices that are a little bit more or a little bit less. - Ex: She is asked if she wants a diamond or if she wants water. She is making what we call a marginal decision. - This is how a marginal decision is made - The cost and benefit associated with one additional unit at a time, then ultimately decides to consume/produce the highest possible quantity at which additional benefit outweighs the additional cost. Positive statement- An objective statement that we can prove to be right or wrong. (Not an OPINION) Normative statement- Opinions - Positive statements affect our normative opinions Logical Fallacies - Ad hominem (By the demand fallacy)- When someone judges the merit of the argument by the identity of the person making the argument. (judging a book by its cover) - Ex: A college professor says we should increase salaries for college professors but you are only saying that because he is a college professor you are committing the ad hominem fallacy. You have to judge the argument, not the person. - Post hoc- Just because event A happened before B that doesn’t mean A caused B. - Ex: The roster crows and the sun comes up and you say that the roster crow caused the sun to rise. - You vote for a candidate and the get elected and unemployment rates drop and you assume that your candidate is the one who causes this. - (causation does not mean correlation). - Composition- That which is true for part of the group is necessarily true for the whole group. - Ex: They will look at one part of society and they will say that has to be true for the rest of the society. (This happens a lot in economics) - Naturalistic fallacy- David Hun identified the naturalistic fallacy. Some conclude that just because something exists that something is ethically justified. - Slavery has existed forever therefore it means it must be ethically correct - Ceteris Paribus- All things are equal. - If we look at the price of apples we hold everything else consistent. Adam Smith (Specialization) - He saw the people getting out mucks of poverty and their wealth or standard of living was increasing. - So he wrote a book called (the inquiries in the Nature and the Causes of the Wealth of Nations) - He says that what causes the increase of wealth of a nation is the division of labor or what we call today specialization. - This means every worker needs to increase their output. - Adam Smith identifies this increase in output per worker as be specialization - Famous example: 10-20 ordinary workers on average produced 10-20 pins per week but now it is a lot different the same ordinary workers are able to produce on avg 4,000 pins every day. He asks what causes the increase in production. (Specialization) - If we can identify this we might be able to understand the increase in the wealth of nations. The difference is the workers were not specialized they did all the things needed to make pins. - Specialization causes output per work to increase because - 1)When workers specialize they don’t spend time moving from task to task - 2)When we concentrate our efforts on doing something we improve at it - 3)Specialization encourages labor by nonhuman means of production - Machines work faster than humans the output increase - It might seem like Machines replacing humans is a bad thing but the human that was required to do that task of making pins can do something else instead of something else that would not be produced otherwise. - When you specialize that task becomes narrow and narrower. - What he described in his book was capitalism. The Wealth of Nations created a lot of talks and discussions. —----------------------------------------------------------------------------------------------------------------------------------------The next great book about economics was written by a guy named David Rocordio. - David Rocordio in his book introduced the term comparative advantage. Comparative Advantage - - - - - Comparative Advantage is the benefits of trade even when one party is more efficient in producing all goods, and Individuals consume more than they produce - Through specialization and trade, both individuals/parties consume more than they could independently - Leads to overall economic gain - Economic advantages transcend productivity levels alone - Comparative advantage in one area always mean there is a comparative disadvantage in another area - Its logically impossible for one party to have the comparative advantage in everything International Trade - Specialization based on comparative advantage is fundamental to international trade - Common misconceptions about countries having an absolute advantage in everything Capital Goods vs. Consumption Goods - Consumption goods are used to satisfy direct wants - Capital goods are tools used to produce other goods, leading to increased efficiency Investment and Tools - Investment in tools, such as fishing net, can enhance production capabilities - Savings are necessary to invest in tools and improve future productivity Table set with products and specialist - To find who has the comparative advantage (In class version) - Fractions and ratios between the two on production and how to get both profit - Cost/Gain – Cost divided by Gain - To find who has the comparative advantage (Simplified version) - Cross multiply and the two numbers that have the bigger outcome are the two areas of specialization for the groups A world without money would be a world without specialization The function of money. - - A medium of exchange (Unique to money) A unit of account (Unique to money) - Market value, compare products. EX: If you wake up one day and everyone switches to zumpez currency you would not be able to tell how much something is worth or how expensive it is. Store of value - Basically a check.
