Students Again

Scarcity – Everything with a positive price must be scarce – i.e. people want more than is available if it were free. Even if something seems free, the time it takes to use or enjoy it is scarce. If I go to a movie, I don’t have time to go shopping or for a walk. I have paid the price by not getting to enjoy these other things. So even if a movie is free, it still has economic costs.

Rational Self-Interest – We use thins term to describe the motivation people have for the economic choices they make. They buy a Whopper because it makes them happier. They work to get money to buy the things that make them happiest. They go to school – to get the good paying job – to buy the things that make them happiest. The reason we do not use greed to describe the motivating behavior is because greed does not explain so many other economic decisions – like sleeping in late instead of getting to school, so you can get the good grades to get the good job, to get….well you know. Greed also doesn’t explain charitable giving. But Rational Self-Interest does. If a person feels better by giving and therefore can better enjoy the things they do have – that’s rational self-interest…. but it isn’t greed.

Marginal Analysis – Choices we make are made on the margin – meaning we choose whether to buy the next beer – not whether to buy 4 at the moment we walk into the bar. Without knowing it, we compare the cost of the next beer with the additional happiness (or utility) that it will bring us. By making marginal choices, we automatically pick the unique mix of goods and services that maximize our happiness. In MicroEconomics, we will call these pieces of marginal analysis – Marginal Cost and Marginal Benefit. In  MacroEconomics, we use it mostly to describe the choice of point of the Production Possibilities Frontier (Production Possibilities Curve) in the next chapter.

Ceteris Peribus - This is our first Latin term – and it means “all other things equal”. This describes the way we can attach cause and effect relationships in economic models. To find the effect of rainfall on crop yields – we have to compare a field that got one amount of rain, with another field that got more. If the rest of the factors that effect crop yields is held constant (i.e. the same for both plots) then the difference can be attributed to the difference in rainfall. The things held constant might be herbicides, pesticides, soil conditions, the number of sunny days, etc. Then we could give the result of: “each additional inch of rain resulted in an increase in corn output of 2 bushels – ceteris peribus”.

MacroEconomics – The study of the larger economy – dealing with sectors of the economy like the industrial sector, the household sector, the government sector etc. WE study how and why the government gets involved in the economy and what it can and cannot do. Other quasi-government agencies – like the FED (Federal Reserve System) are also explored.

MicroEconomics – The study of individuals, single firms, and individual industries try to maximize profits, minimize costs or choose what to produce and how to produce it.

Aggregate – This simply means the total or sum of something. Aggregate output would be total output of the economy. Aggregate Demand would be the demand by all households, firms, government and the international sector.

Positive and Normative Economics – Any study can be either a positive study or a normative one. The basic difference is that Positive studies describe “what is” – or how things are related and that’s all. Normative Economics studies take what is (a positive study’s result) and prescribe a course of action. For example, if I said, “since unemployment falls .3% each time GDP rises by 1%, government ought to raise GDP by 5%” While the relationship might be true between GDP and unemployment – prescribing a course of action (government ought to) makes it a normative study. The term normative means “values” – kind of like we say that each society has it’s social “norms” – which would be their customs, religion and societal values.

Fallacy of Composition – This is the first of two major pitfalls one can fall into with social science studies. This says that if I find something to be true for me – I can not simply apply it to the rest of society and expect it to always be true for everyone. The best example is the person who stands up at a ballgame to see a play better and incorrectly decides that everyone would be able to see better if they all stood up.

Post Hoc fallacy – Post Hoc is another Latin phrase (and you thought it was a dead language!) and is short for “Post Hoc Ergo Propter Hoc” which means “After this, therefore caused by this”. This is the story of the guy that thinks it rains because he washed his car. While it might appear to work most of the time, we are all pretty aware that Mother Nature does not cause it to rain just to ruin Mr. Smith’s new wax job.

Correlation – When two things move together (change at the same time) but neither is caused by the other. They might just be caused to change by the same thing – so they are both dependent on some third variable but otherwise have nothing to do with each other.

Causation – This is the case where something happening triggers another thing to happen. This is “Cause and Effect”. I study  therefore I do better on my test. Studying causes the level of the grade to be effected.