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Principles of Microeconomics – Mr. Lilly Topic 2 Skills 1. Be able to tell whether a given economic question is a positive question or a normative question. (Goodwin p. 1-2 + slide 2-2.) (p.1-2)Positive questions are about how things are. Nomative questions are about how things should be. Positive Questions What is the extent of hunger and malnutrition in Africa? How would the African peoples’ health and behavior change if international food aid to African nations was doubled? How much would their GDP per capita change? Normative Questions How much effort should be given by the developed nations to hunger reduction in Africa? What kind of effort should be given? By whom? Λτ 2. Understand the meaning of the term “efficiency” in economics. Be able to recognize and explain two false conclusions often drawn from neoclassical economics due to its emphasis on efficiency as the only goal necessary to promote maximum human welfare. Know that these two false conclusions are examples of economistic thinking. (Goodwin pp. 1-19 to 1-20 + slide 2-4). (1-3) An efficient use of resources produces the maximum possible value of output, without unnecessary waste or expense. GDP per capita is the only measure needed, and efficiency is the only goal needed to ensure maximum happiness in society. You can be as selfish as you want in your economic interactions with others. The “invisible hand” will ensure that your selfishness is converted into maximum social good. (1-18) economistic thinking - The idea of “more is better” andefficiency as the main (or only) economic goal held sway. (1-20) economistic thinking = confuses the assumptions of the simple mechanical model with reality. (1-18) model = is an analytical tool that highlights soe aspects of reality while ignoring others.
3. Understand the difference between an intermediate goal and a final goal. Be able to explain why wealth maximization may be a good intermediate goal, but is not a good final goal. Be able to list at least 3 final goals that the intermediate goal of wealth maximization might serve. (Goodwin pp. 1-3 to 1-7 and/or slide 2-6.) A Sample List of Our Final Goals •Maximum human happiness. •A society that is just. •A society that is sustainable. What Makes People Happy? •Material needs: Getting a slice of the good life for yourself. •Social needs: To feel needed by others and appreciated by others for the help you give. To feel you fit in to your society and your world. To feel you belong, are loved, and are lovable. •Esteem needs: To be looked up to by others. To be able to boss others around. To have more than everybody else. •Justice needs: To feel that opportunities and outcomes are fair both for you and for others you care about.
4. Understand each of the sample final goals listed in table 1.1 of the Goodwin text. (Book only: pp. 1-6 to 1-7). a. Satisfactino of basic physical needs, such as for bodily survival, growth, health, procreation, security, rest, and comfort. b. Happiness, or the opportunity to experience feelings like contentment, pleasure, self respect, peace of mind, etc. c. Realization of one’s potential, including opportunities for physical, intellectual, moral, social, and spiritual development. d. Fairness in the distribution of life possibilities. Individuals and cultures differ in how they assesss the “fair share” of society’s resources and opportunities for each person, but the goal for fairness is universal. e. Freedom in economic and social relations. This means permitting individuals to make as many small and large life choices for themselves as are possible within the limits of responsible relations with others (and the limits of their decision-making capacitym, as in the case of children). f. Participation in social decision making. Individuals should have the opportunity to participate in the processes in which decisions are made that affect the members of society as a collectivity nd thereby define and regulate the society. g. Good social relations, including satisfying and trustful relations with intimates, friends, family, business associates, and fellow citizens, along with respectful and peaceful relations among nations. h. Ecological balance, meaning that natural resources and the natural environment are sustained over the long run, for the well-being of present and future generations.
5. Understand the sample list of final goals presented by the instructor in slide 2-5. Understand that the instructor’s goal 2 is essentially the same as the textbook’s goal d and the instructor’s goal 3 is essentially the same as the textbook’s goal h. Understand why there is often tension or conflict within the individual arising from inherent conflict between satisfaction of their material needs and satisfaction of their social and justice needs. (Lecture only: slides 2-5 to 2-8.) Maximum human happiness. A society that is just. = Fairness A society that is sustainable. = Ecological balance Yin and Yang Material Needs <>Social and Justice Needs I, Me, Mine<>Helping, Belonging and Cooperation
6. Understand the model of human motivation presented only in lecture and summarized on slide 2-6. (Lecture only.) (No found)
7. Understand what positive and negative externalities are. Be able to recognize the three examples of negative externalities given on page 1-8 of the Goodwin text. Understand that the main problem with negative externalities is that economic actors, given freedom to choose, will tend to choose too much of activities that have negative externalities. Understand also that when individuals include the goals “good social relations” and/or “fairness” in their final goals set, positive externalities are generated in the form of reduced transaction costs. (Goodwin pp. 1-8 to 1-9 and slides 2-10 to 2-12.) Negative externalities: Harmful side-effects of an economic transaction that affect persons or entities that are not parties to the economic portion of the transaction. Examples: 1. A manufacturing firm dumping pollutants in a river. 2. Your upstairs neighbor listening to his music so loud you can’t study. 3. An employer setting up work schedules that have a negative effect on the families of the employees. Positive externalities: Beneficial side-effects of economic activity that accrue largely to persons or entities that are not among the economic actors directly involved in the activity. Examples: 1. A beekeeper’s activity produces benefits to nearby farmers. 2. A person keeping a flower garden in their front yard that pleases passers-by. (1-8) economic actor = is an individual, group, or organization that is engaged in resource maintenance or the production, distribution, or consumption of goods and services (1-8) Negative externalities are harmful side effects, or unintended consequences, of economic activity that affect persons, or entities such as the environment, that are not among the economic actors directly responsible for the activity. (1-9) Positive externalities are beneficial side effects, or unintended consequences, of economic activity that accrue largely to persons or entities that are not among the economic actors directly involved in the activity. (1-9) Transaction costs are the costs of arraging economic activities (1-9) good social relatioins and common standards of fairness
8. Understand why key element of economics #4 is generally true. Be able to identify exceptions to this rule and explain at least two situations in which it is not true. Understand the definition of transaction costs and why they reduce the number of beneficial exchanges that take place in a society per time period. Understand why transaction costs and economic progress are inversely related. (Gwartney and Stroup, pp. 11-12 + slides 2-13 to 2-15.) (11-12) Key element of economics #4 = Transaction costs are an obstacle to exchange; reducing this obstacle will help promote economic progress. “Transaction costs are an obstacle to exchange; reducing this obstacle will help promote economic progress.” • Most voluntary exchanges increase the well-being of both parties. • Therefore the more exchanges, the better! • With rare exceptions, anything that reduces the number of exchanges per period will retard wealth creation. Gwartney and Stroup mention only two kinds of transaction cost barriers: • Lack of adequate infrastructure • Taxes, price controls, and government regulations But these things also raise transaction costs: • The percentage of cheaters in society • The difficulty of catching cheaters • The difficulty of identifying cheaters Open your reader to page 1-6, Table 1.1 1. Which of the reasons listed help explain why you are taking this class? 2. Which explains the story in the “Commentary: Goals Beyond Survival” box on page 1-6? • When a heroin user buys a fix from his dealer, is this a voluntary transaction? • Does heroin add to society’s well-being? Why or why not?
9. Know and understand the four essential economic activities. (Goodwin pp. 1-10 to 1-11 and slide 2-17.) The Four Essential Economic Activities •Resource maintenance (1-10) means means managing natural, produced, human, and social resources so that their productivity is sustained. •Production (1-10) activities result in goods and services •Distribution (1-11) is the sharing of products and resources among people •Consumption (1-11) is the final use of a good or service. of goods and services
10. Know and understand the three basic economic questions. (Goodwin p. 1-12 and slide 2-18.) 1. What should be produced and what should be maintained? • There is a tension between production and resource maintenance. 2. How should production and maintenance be accomplished? 3. For whom should economic activity be undertaken? • How should the wealth created by economic activity be distributed among the members of society?
11. Know and understand the four modes of economic organization. (Goodwin pp. 1-13 to 1-16 and slide 2-19.) 1. Customary • Example: economic interactions within the family. 2. Consensual • Example: Kibbutzim, Amish communities. 3. Administrative 4. Through Exchange (Markets) (1-13) Custom consists of traditions, habits, and expectations about what it is proper and necessary for people to do in given circumstances. (1-14) Consensual – Organized by consent means agreement among a group of people reached through discussion or negotiation. Examples of a face-to-face, fully consensus-based economic system are few. They are included- at least for a time-some of the collective kibbutzim in Israel and some religious communities in the United States. (1-14) Aministrative organization gives decision-making authority to some person or agency. (1-15) Exchange transactions involve trading one thing for another.
12. Understand what a model is. Be able to list the two types of economic actors in the simple mechanical model of neoclassical microeconomics. Know which of the four modes of economic organization the simple mechanical model tended to emphasize. Know which of the four needs from the model of human motivation presented only in lecture on slide 2-6 are included in the simple mechanical model. (1-18) model = is an analytical tool that highlights soe aspects of reality while ignoring others. (Lecture) Assumptions 1. No externalities 2. No transactioncost 3. Rationality and perfect information 4. Only consumption of goods or services by that individual affects utility. What Makes People Happy? Material needs: Getting a slice of the good life for yourself. Social needs: To feel needed by others and appreciated by others for the help you give. To feel you fit in to your society and your world. To feel you belong, are loved, and are lovable. Esteem needs: To be looked up to by others. To be able to boss others around. To have more than everybody else. Justice needs: To feel that opportunities and outcomes are fair both for you and for others you care about.
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