econ midterm

How might specialization negatively affect people?

"Animal that Trades 3": Doing the same task is monotonous and doesn't create much motivation to pursue a more fulfilling life According to Adam Smith, it makes a man more "stupid" and less able to be rational

How can there be cooperation in competition? (Are cooperation and competition opposites?)

"Blurry Line": Cooperation is woven into competition in the market. Competition (people using their skills to work toward a goal and getting results according to performance) involves the cooperation (working together to achieve a mutually beneficial outcome) of the competitors in following the rules/norms that allow them to win if followed.

Considering the chicken sandwich that took 6 months and $1500 to make and the toaster made from scratch, explain why making these simple goods individually required so much effort.

"Blurry Line": These goods are usually easier to make because of cooperation in the market. Many people work together to achieve a mutually beneficial outcome: cheaper chicken sandwiches and toasters.

Sunk Costs vs Opportunity Costs: What is a sunk cost? How is this different from opportunity cost? (What is a sunk cost?)

"Concept of opportunity cost": a sunk cost involves a cost that already happened while an opportunity cost is a cost that MAY happen in the future if you make a certain decision "The concept of opportunity cost": a "historical" cost that was already paid but the value for which is lost, ie car breaking down a second time after getting it fixed

Opportunity Cost and Choice: How can every choice involve giving up something else? (Why is there an opportunity cost involved with every choice?)

"Costs, Cancer": we must choose which of our wants to satisfy since there's not enough resources to fulfill them all. Since we must make choices, we are always giving up something else in the form of the alternative choice

What makes specialization worthwhile?

"Division of Labor: Burgers and Ships" video: Specialization in the division of labor makes people more productive It becomes worthwhile by producing large quantities of goods

What is the sure sign that a resource is being used efficiently? (What is economic efficiency?)

"Efficiency": sure sign is that no one is willing to pay more to divert its use to another economic efficiency is an evaluation of the relationship between the value of the means and the value of the ends

Marginalism and Decision Making: When offered the choice between a diamond and a bucket of water, why would someone be more likely to choose the diamond? (What role does marginalism play in our decision making?)

"Marginalism": although water is more useful to us in total, marginally a diamond would be more appealing. Receiving one additional diamond exceeds the satisfaction that we would get from one additional bucket of water assuming that we have already received a lot of water. Because we already have a lot of water, it has diminished in value marginally than the diamond. We tend to make a choice by measuring the marginal, or additional, cost or benefit that would be involved with that decision.

Pencil and Family Tree: What point is the pencil trying to make in explaining the details of its family tree? What lesson does it seek to teach through its complex history? (How does the family tree of the pencil give an image of cooperation?)

"No single person on the face of this earth knows how to make me." Point: a lot of people contribute their skill to making a very simple thing - pencil. The complex network of people who contribute to the pencil's creation cooperate to contribute "his tiny know-how". They are acting in their own self-interest in order to get compensation that will allow them to get stuff (other than pencils) that they do want. Lesson: remove all possible obstacles to let creative "know-hows" freely flow and let the invisible hand do its work

What role does property rights play in the rule of law?

"Property rights and the rule of law" video: Property rights inform the rule of law. Rule of law maintains order when there are established property rights in which people are interested in protecting their property

Is selfless or self-interested service more efficient in creating value?

"Service in a free society": self-interested service is what incentivizes people to serve well. The incentive that high profits create motivate entrepreneurs to satisfy high demand Forcing "selfless" service is harmful to society by diminishing more productive contributions which are chosen voluntarily (ie diverting useful talent)

How does specialization play a role in gains from trade?

"Voluntary Exchange Promotes Econ. Progress": Specialization allows for a maximization of production with a minimization of cost. Producers can use the profit from selling what they produce to buy goods that they are less efficient making.

How does the division of labor contribute to gains from trade?

"Voluntary Exchange Promotes Econ. Progress": With specialization in the division of labor, people become more productive at producing a particular good. Specialization increases productivity which allows for large-scale production and lower costs.

How does a good become wealth? How does trade create wealth?

"Voluntary Exchange Promotes Econ. Progress": a good becomes wealth when it is in the hands of someone who values it "Trade channels goods and services to those who value them most"

Service in a Free Society by Chad Seagren:

Adam Smith taught, people serve us very well precisely because their service is not selfless. Their self-interest causes them to deliver what we want and to deliver it well. The only positive obligations free men and women have are the ones they voluntarily elect to undertake. These include responsibilities to their families, employer, church, community organizations, and those with whom they contract.

Why are restrictions on property rights, such as through price controls, harmful to the order in society?

Alchain's "Property Rights": Restricted property rights force people to resort to violent competition instead of the orderly efficiency of free market prices which assist in allocating resource to their most valuable uses Competition for resources will involve discrimination as a factor for allocating a resource.

Do property rights conflict with human rights?

Alchain's "Property Rights": strong property rights are helpful to human rights because they promote healthy competition based on the most efficient use of a resource. Weaker property rights are likely to harm human rights because they facilitate unfair allocation. Private property rights are the rights of humans to use specified goods and to exchange them. Any restraint on private property rights shifts the balance of power from impersonal attributes toward personal attributes and toward behavior that political authorities approve.

How can common ownership of resources be disadvantageous to efficiently using them?

Alchain's "Property Rights": the tragedy of commons - no one owns the resource so there is no incentive to take care of it. Preserving it only allows for other people to gain

Price mechanism:

And there's a fundamental insight: if you and I disagree about the value of something, we can probably agree on a price. So, all prices that are agreed on probably result from a disagreement about value: you must value it more than I if we can agree on that price. Once you have that insight--that prices reconcile disagreement--you now have a direction of adjustment. The prices use the information that people have about the alternatives that they might want to face or have to face in a world of a shortage of flour relative to the year before. So, some people are going to have to deal with less flour; some people are going to have to use substitutes. Some people are going to look for new ways to create the products they've already had that don't use flour. Thousands of things are going to be set into motion to make people's lives pretty good, even though there's not as much flour as there used to be. let's recognize that it's the prices that give signals about how we should not only organize, but change, update, the way that we've organized the structure of the city. And there's no--there's no 'we.' It's the individuals acting alone which improves the city. Not the planner. the market as a process. by and large we see an amazing, an amount of peaceful and productive cooperation among people. Globally. We have billions of people today peacefully cooperating with each other. They are not aware of it in any conscious sense.

What is "wealth"? What is economics?

BE ch 1 p. 15: Scarcity - "Economics is the study of the use of scarce resources which have alternative uses" BE p. 17: production - economics studies consequences of decisions made about how to use resources to produce output BE p. 20: "systematic study of cause and effect" and how decisions lead to certain incentives

Free Market Economy: Why was China able to sustain a 9% economic growth rate each year following the government's withdrawal of control in the market? (What are the advantages of having a price-coordinated free market economy to a centrally planned economy?)

BE ch. 2 p. 25: the realization of the Soviet economists - "there are too many economic relationships, and it is impossible to take them all into account and coordinate them sensibly" A price-coordinated economy incentivizes people to make the most of their knowledge when bidding for goods so as to avoid making costly mistakes. Allowing the prices to be determined by the free market makes prices act as signals which in turn ensures that resources will be used efficiently: ie greater amount of food available in Chinese cities with income of farmers raising by more than 50%

Scarce Resources: Some things such as time and national resources are scarce. What are some of the effects involved with scarcity? (Why are things such as clean air or gold considered scarce? What are the implications involved in scarcity?)

BE ch. 2 p. 30-31: the fluctuation of prices does not mean that they are moving away from the "real" value of the good because there is no "real" value. A good does not have objective worth because the value is determined subjectively by those involved in the economic transaction. No one buys or accepts payment for anything unless they subjectively determine that they are getting more value by buying or selling that thing (Buying a newspaper for a dollar example)

Why Institutions are necessary?

Because, in general, a country's political, legal, economic, and social institutions will affect economic growth.

Adam Smith and Self-Interest: According to Adam Smith, why can we expect dinner from the butcher, brewer, or the baker? (According to Adam Smith, how can man succeed in soliciting help from others?)

Butcher, baker, and brewer serve consumers out of their own "self-love" or in pursuing their own advantage P. 1, Last paragraph: man can receive the service of others if he can "show them that it is for their own advantage to do for him what he requires"owell on Economics: What does Sowell say is more important than having an opinion on an Economics topic? (According to Sowell, what should serve as the basis for making economic decisions?)

Capital Markets:

Capital markets are composed of the suppliers and users of funds. In general, suppliers include households (through the savings accounts they hold with financial institution of banks) as well as other financial institutions such as pension and retirement funds, life insurance companies, investment companies, credit unions, charitable foundations, and non-financial companies that generate excess cash. All economies need a well-functioning and efficient capital market to be able to grow. Capital market is where companies can raise huge sums of money to finance their capital investments. Funds could be raised by selling stocks of the company to the public or borrowing from financial institutions by issuing bonds.

Sowell on Economics: What does Sowell say is more important than having an opinion on an Economics topic? (According to Sowell, what should serve as the basis for making economic decisions?)

Changes in their economic policies led to many people rising above poverty BE p. 21: Large scale effects like the growth of national economies shows us that economics is an important study of causes and effects rather than a bunch of opinions

What is an example of gains from trade?

Cowen's "Gains from Trade": buying a meteor shower, purchasing expensive dog clothing, hiring a travel attendant for preparing meat

Broken-Window and Fallacy of Destruction: According to the "backed-up" demand fallacy, the destruction of goods, such as houses in war, is beneficial because it generates economic demand and, thus, business for producers. Why is this view erroneous? (Are there really "blessings" involved with destruction?)

Creates need: All the destruction does is create a need rather than "effective economic demand". Economic demand must involve purchasing power. Destruction diminishes purchasing power because it diverts resources away from other uses that would have created more wealth. Merely diverted demand: The seemingly "backed-up" demand is, in reality, diverted demand, a need that must be addressed. The resources used to make up for this need is a loss of wealth as they could have been used to add to the sum total of wealth

Do different institutions affect a nation's economy? North Korea vs South Korea?

Different institutions make different incentives South Korea: incentive for commercial operation, producers were allowed to make profit or go bankrupt: economy involving cooperation, trust, and honest commercial dealing developed North Korea: totalitarian state centrally planned economy, no freedom to start businesses or make a profit - result: poverty, no incentive to make enough food

What does division of labor include?

Division of labor, the separation of a work process into a number of tasks, with each task performed by a separate person or group of persons. It is most often applied to systems of mass production and is one of the basic organizing principles of the assembly line.

Example of Social Coordination? (How does economics explain social coordination?)

EWOT Ch 1: Economics helps us to understand how countless personal choices, made according to self-interest, contribute to social coordination. Social coordination is the process in which people adjust their actions according to the advantages brought about from the interaction of people's choices. For example, drivers are paying attention to the advantages of driving in a particular lane in order to be able to drive the fastest. The choices made by many drivers to choose the faster lane changes the advantages of that lane: it slows down. Then drivers will begin to choose the initially slower lane. See how the choices of many drivers change the perceived benefits and costs of a choice.

Middlemen often get a bad rep because of the cost required to compensate for their services in addition to the cost of the good ultimately obtained. Are middlemen obstacles to trade?

EWOT ch 2 p. 29-32: Middlemen are not obstacles. They actually facilitate trading by lowering the transaction costs. They make trade easier by providing information that would have otherwise been more costly to obtain.

Why does voluntary exchange never involve goods of equal value? (Should trade involve goods of equal value?)

EWOT p. 21: trade only occurs when both parties are incentivized to do so by the opportunity to gain for themselves. Both traders find the other good more valuable than what they have.

Division of Labor "Burgers and Ships":

Each worker has a specific job in the chain of production that serves burgers and fries to its customers. Each worker is specialized. This specialization, what Adam Smith called the division of labor, makes individual workers more productive. No more lost time switching between tasks.

What is the emergent order in economics?

Economists call this emergent order, more commonly known as self-organization. Markets, law, and language are all examples of unplanned systems that evolve naturally through our interactions. Order that occurs without design or control These are things that are caused by humans and that appear to have an intention, but actually don't. No one person intended these things to happen. They just sort of happened through the concerted actions of all of us acting together. The variety and availability of bread at decent prices in cities around the world is an example of emergent order, order that emerges from the decisions and actions of individuals that no one of those individuals intends. It's not designed. It's not under anyone's control. It's not designed. It's not under anyone's control. Market is considered as an example of spontaneous or emergent order. Explain. We really don't understand--most of us don't understand very well--how it is that markets are able to coordinate all of the different activities at once and disagreements that people have, and reconcile those into some kind of order. But, that's the thing that that emergent property gives us.

Should economic efficiency serve as a universal standard or goal for all activity that occurs in an economy?

Efficiency": Dowager's diamonds vs poor baby example - economic efficiency not necessarily always the objective but... economic efficiency is still necessary to promote the cooperation needed for moral / charitable causes EWOT ch 2 p. 34: Even though Marx criticizes a capitalist society for the greed for profit, he recognizes that amassing the resources or the "productive forces" have led to a surge in production and wealth.

What is the view of Rerum Novarum on man?

For man, fathoming by his faculty of reason matters without number, linking the future with the present, and being master of his own acts, guides his ways under the eternal law and the power of God, whose providence governs all things.

Opportunity Cost: What is the opportunity cost in the Parable of the Broken window? (How does the broken window make James worse off?)

Had the window not been broken, James would have had both a functional window and a new pair of shoes. Wealth was destroyed in that James had to give up using a resource (money) for an alternative use - wealth is destroyed by value of opportunity that was lost

Using the concept of the tragedy of commons, explain why cattle "on the common" would be undersized compared to the cattle on privately owned property? (What is the problem in the tragedy of commons?)

Hardin, "Tragedy of Commons": In the common, the herders have no incentive to care for the land. They are incentivized to grow their herd because the personal benefits are greater than the commonized loss of over-grazing the land. The over-used pasture had unhealthy soil. The resulting bad plants led to cattle malnourishment. Video: the problem - when many people share the same resource, they are incentivized to pursue short term self-interest. This harms the common good which ends up causing long-term negative effects for everyone.

What Hayek says about Spontaneous order?

Hayek himself taught, law is another example of spontaneous order. The rules that we follow in our intercourse with each other are very seldom the result of conscious human design or position. These rules emerge spontaneously in the course of our interactions. And, what governments do is sometimes they enforce these laws. Sometimes they try to override these laws with legislation. We may agree that that attempt to override is beneficial. But, laws themselves emerge, unintended, from--they are the result of human action but not of human design. Government is very useful in creating the rules of the game, in creating courts, in creating police. And possibly some forms of regulation,

Choices and Opportunity costs: On Friday evening you have the choice between going out to ice cream with your friends or studying for your economics exam. What is the opportunity cost of going for ice cream? Of studying for the exam? (What is an opportunity cost?)

Henderson "Opportunity Cost": the value lost of the next alternative use of a resource OR "the Concept of opportunity cost": "what you have to give up to get something" OR "Costs, Caner": "the foregone expected subjective utility of our next best option" OR "comparative advantage": The value of what is given up

Why can gift giving be a negative trade? (How can gift giving lead to a loss in wealth?)

If the recipient of the gift values it less than what it cost the giver People who give gifts have less incentive and knowledge to give a good / valuable gift

Smith Wealth of Nation: Book 1 Chapter 2: Truck, Barter, Exchange:

In this short chapter, Smith identifies the human "propensity to truck, barter, and exchange one thing for another" as the source of the division of labor. This tendency, he says, runs deep in human nature and is one of the things separating humans from other animals. Moreover, the inclination to barter is "common to all men"—even a beggar will trade the old clothes he receives for food, lodging, or other necessities. In chapter 2, Adam Smith first showed that human nature is all self-interested by the sentence "It is in vain for him to expect it from their benevolence only" written. Indeed, people will help or fulfil others' tendencies only when they can see the return from others. Adam Smith argued that the "propensity to truck, barter, and exchange" was inherent in human nature and gave rise to things such as the division of labour (1776). Basically, it refers to the fact that humans, by nature, trade goods and services among one another. From this tendency or propensity, Smith argues, the division of labor occurs naturally. As people trade with one another to meet their needs, some of them gradually specialize in taking care of specific needs, such as food, shelter, and clothing. With this in mind, he says, it is a mistake to attribute the division of labor to "the difference of natural talents." People acquire different skills in adulthood because they are brought up differently, not because they are innately different from one another. Even two very seemingly different characters, such as a philosopher and a porter (think "baggage clerk"), owe their differences to "habit, custom, and education," rather than to any innate disparity in intelligence. Thus, Smith concludes, differences in talent are usually an effect—not a cause—of the division of labor. As a note: It is helpful to keep in mind that Smith's economic ideas are grounded in a specific, 18th-century view of human motivation. This is one point on which later economists, recognizing the irrationality of human behavior, have often parted ways with Smith.

Prices and Incentives: How does an increase in the price of a good affect the buyer side of the market? Producer side? (What incentives do higher prices bring about?)

Incentives matter: higher price discourages buyers from buying and encourages producers to produce which in turn lowers the price. Incentives matter. The most famous example in economics is the idea of the demand curve—when something gets more expensive, people buy less of it. When it gets less expensive, people buy more of it... Example of people's response to incentives? When the price of an apple rises, people decide to eat more pears and fewer apples because the cost of buying an apple is higher. At the same time, apple orchards decide to hire more workers and harvest more apples because the benefit of selling an apple is also higher. Good grades are an incentive that can motivate students to study hard and do well in school. Money is also an excellent example of an external reward that motivates behavior. Note: Rewards must be obtainable in order to be motivating. US government fees, charges, and taxes are widely used incentives which generally place a per unit monetary charge (or fee or tax) on pollution emissions or waste to reduce the overall quantity. Incentive matters: "Where the Busses Run on Time: Incentive matters."

Basic Sources of Economic Growth:

Increases in labor Increases in capital increases in the efficiency

What does Rerum Novarum say about socialism?

It supports the rights of labor to form unions, rejects both socialism and unrestricted capitalism, while affirming the right to private property. Rerum Novarum is considered a foundational text of modern Catholic social teaching.

Jeff can bake 8 chocolate cakes or 4 yellow cakes in one day. Zack can bake 4 chocolate cakes or 3 yellow cakes in one day. Who is more efficient at making chocolate cakes? Yellow cakes? (In the economic way of thinking, how is efficiency measured?)

Jeff gives up 2 chocolate cakes for each yellow cake that he bakes. Zack gives up 1.3 chocolate cakes for each yellow cake. Jeff has a higher opportunity cost for making yellow cakes so Zack is more efficient at making yellow cake. Jeff gives up 0.5 yellow cakes for each chocolate cake. Zack gives up 0.75 yellow cakes for each chocolate cake. Zack has a higher opportunity cost by making chocolate cake so Jack is more efficient at making chocolate cake. EWOT p. 26: Efficiency is not necessarily being able to make more of something. According to the economic way of thinking, efficiency consists in comparative advantage, having less of an opportunity cost in producing something.

What does Rerum Novarum say about capitalism?

Leo XIII criticizes both capitalism for its tendency toward greed, concentration of wealth, and mistreatment of workers, as well as socialism, for what he understood as a rejection of private property and an under-emphasis on the dignity of each individual person.

Mercentalism: How did rulers engaged in mercantilism manage their country's economy? (What is mercantilism? What are some of its effects?)

Minimizing imports by implementing tariffs so as to maximize exports and get the most gold (the measure of wealth for most countries) Mercantilism encouraged belligerence, colonialism, slavery to maximize hoarding of resources as if there was only a finite amount of wealth

Besides differences in comparative advantage, how do market institutions develop and create prosperity?

Munger's "Division of Labor": Prosperity extends beyond comparative advantage and varying skills and preferences. People are incentivized to learn and specialize in order to pursue prosperity. For this reason, the division of labor is sufficient to create prosperity.

Does invisible hand or markets solve everything?

No, it doesn't solve everything. It doesn't solve lots of things. And there's a case to be made for regulation in lots of areas, pollution being one of them that I would mention, although there may be other ways of solving it other than certain kinds of regulation that we have. But certainly the invisible hand isn't going to solve pollution magically the way it solves, effectively, the way it solves the problem of how we are going to get enough bread in the city tomorrow. So, that's not--it's not perfect. 'We understand emergent order. We understand the invisible hand. We understand markets. They just don't work so well. And we have to fix them. We have to do things. We have to add regulations. We can't rely on markets to produce, say, high-enough quality bread. So we need safety regulations; we need government inspectors. We can't just rely on this invisible hand, uncoordinated, unconscious cooperation, because for a lot of folks, it leads to misery and despair.

Bastiat and Government: Why does Bastiat say that the real effort of the government is to NOT interfere with the natural laws of society? (Should the government check or regulate the natural social order?)

P. 4: according to Bastiat, the government need not put effort into interfering with the social order because "under liberty, each man's self interest is in accord with that of every other, and those of all are mutually favorable." Under the natural laws of society, the interest of the individual coincides with the interest of the whole common good. For this reason, government shouldn't try to manipulate the natural order because it would be interfering with the common good.

Role of Government: According to Skarbek, what does the government do? How does the role of government explain the seemingly irrational and barbaric actions among inmates in the prison system? (What are the three main roles of the government? How might this help explain the prisoners' behavior?)

P. 5-6: The role of the government is to protect property rights, facilitate trade, and lead people to act collectively with the goal of establishing an orderly society. P. 4: Due to the lawlessness of criminals, they can't rely on the law like ordinary citizens who do obey the law. For this reason, they must create their own governance institutions

olitical Economy: Simple definitions:

Political economy is an interdisciplinary branch of the social sciences. Its main focus is on the interrelationships of individuals, governments, and public policy. It is also used to describe the policies set by governments that affect their nations' economies. It examines how the realm of politics impacts the economy and society and how the economy impacts politics. These are determined through the study of sociology, politics, and economics. Political economy is a social science that studies production, trade, and their relationship with the law and the government. It is the study of how economic theories affect different socio-economic systems, such as socialism and communism, along with the creation and implementation of public policy. An international example of political economy is the impact of political economy in the real world is best exemplified by a US company considering whether to trade with China and the effect that it will have on its operations.

What does Rerum Novarum say about the right to possess property?

Pope Leo XIII examined the role of private property extensively: He identified that ownership of property is beneficial to the common good: "For, every man has by nature the right to possess property as his own" (Rerum Novarum, 6) and that this "is in accordance with the law of nature." (Rerum Novarum, 9), ie, it is a matter of justice that one who labors should be able to 'possess' that which he has invested himself in.

What is the main message of the Rerum Novarum?

Pope Leo XIII's encyclical Rerum Novarum (the economic and social doctrine of the Catholic Church written inn 1891) is considered one of the first major works to introduce Catholic social thought on a global level. A key message undergirding Rerum is the concept of supporting the needs of others, leading to empowerment and self-sufficiency.

Absolute and Comparative Advantage: It costs McDonald's $1 to produce a cheeseburger and $2 to make its own lemonade. Burger King must spend $3 to make a cheeseburger and $2.50 to make lemonade. Rather than making its own lemonade, McDonalds decides to order lemonade from Burger King. Is this decision advantageous to McDonalds? Why or why not? (Why is Portugal better off by importing cloth from England even though Portugal requires less labor to make cloth?)

Portugal (McDonalds) is better off by importing cloth (lemonade) because even though they have an absolute advantage in producing it (costs them less than England / Burger King), they gain more by specializing in wine (burgers). England (Burger King) has a comparative advantage producing cloth (lemonade) because Portugal (McDonalds) has a greater opportunity cost by producing it themselve

Capitalism: Characteristics of pure capitalism include:

Private ownership of means of production and freedom of contracts. Goods and services are produced to be sold to make profit. Free mobility of resources. Labors are mobile and like any other goods are hired and fired. Freedom of enterprise and choice under pure capitalism Sel- interest motivates the economic behavior. Minimal government interference except to protect property rights and so on. Prices are determined in the marketplace through the invisible hand of supply and demand with the voluntary and free interaction of buyers and sellers. Competition: producers compete with each other to sell their products to consumers. Other characteristics of capitalism. However, they are not the sole characteristics of capitalism. Non capitalist countries may exhibit these characteristics too. Extensive use of capital Specialization Use of money

Examples of Institutions:

Private property rights: The owner of private property has the right to determine how that private property is used. And this right is protected by the state. They ensure that resources are allocated efficiently in the economy. In the US, The Fifth Amendment protects the right to private property (How?). Rule of Law. The rule of law is defined in the Encyclopedia Britannica as "the mechanism, process, institution, practice, or norm that supports the equality of all citizens before the law, secures a nonarbitrary form of government, and more generally prevents the arbitrary use of power." Regulatory institutions: FDA; US Consumer Protection Agency; Equal Employment Opportunity; US Securities Exchange Commission; FDIC; FTC; Federal Reserve System; Etc. Institutions for macroeconomic stabilization: Monetary and fiscal institutions and policies are established to reduce volatility and encourage welfare-enhancing growth. Institutions for social insurance: Such as Social Security, Medicare, Unemployment Insurance, Workers' Compensation, and Disability Insurance. Institutions for conflict management Free markets Competition

Is there any relationship between life expectancy and average income?

Rosling's "200 Countries": Higher income / being richer usually involves better health and life expectancy

What are the four economic principles in economic decision making:

Scarcity and Choice: Resources are limited. People face tradeoffs Opportunity Costs: The cost of something is what you give up to get it; Marginal Thinking: Rational people think at the margin; Incentive Matters: People respond to incentives

Smith Wealth of Nation: Book 1 Chapter 1:

Smith posits that this division of labor—and the corresponding increase in productivity—to a large degree creates wealthy nations. Smith illustrates this concept by relating it to pin-making. The concept of division of labor, which means that the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person. The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.

Institutions

Societies develop social structures, or institutions, that persist because they play a part in helping society survive. These institutions include the family, education, government, religion, and the economy.

Social cooperation

Society cannot exist without co-operation. Human survival can only be accomplished if human beings act collectively.

Scarcity: Most goods are scarce and not "free goods". How is this related to the study of economics? (What role does scarcity play in opportunity cost?)

TANSTAAFL: The scarcity of goods means that there are tradeoffs. To get most goods, we have to give up another good to get it. BE ch. 1 (what is economics): The idea that scarce goods leads to tradeoffs is the foundation for the study of economics since economics is concerned with observing the decisions made according to the tradeoffs. "The Concept of Opportunity Cost": economics is studying decision making in light of finite resources and infinite wants. The goal of economics, Understanding opportunity cost, comes from the fact that most goods are scarce

Ten Pillars of Economic Thinking (By David Henderson):According to the Ten pillars of Economic wisdom, what is economic thinking? (What is economic thinking?)

TANSTAAFL: There ain't no such thing as a free lunch. Incentives matter; incentives affect behavior. Economic thinking is thinking on the margin. The only way to create wealth is to move resources from a lower-valued to a higher-valued use. Corollary: Both sides gain from exchange. Information is valuable and costly, and most information that's valuable is inherently decentralized. Every action has unintended consequences; you can never do only one thing. The value of a good or a service is subjective. Creating jobs is not the same as creating wealth. The only way to increase a nation's real income is to increase its real output. Competition is a hardy weed, not a delicate flower. When foreigners invest capital in the United States, they are, all else equal, likelier to invest it where prospective profits are high. So, for example, if a company already in the United States is making high profits on its brand name, foreign investors, wanting to "get some of that," will sometimes offer competing brands. If a company already in the United States is making high profits on a monopoly position, those monopoly profits will attract foreign investors the way honey attracts ants.

critial ideas

Technological efficiency can squeeze some waste out of processes; technological improvements can make it even better; but tremendous growth and well-being can't come from technological efficiency alone; Economic efficiency ensures that among the various technologically efficient processes for using a good or resource, the most-valuable one is chosen, increasing wealth and well-being Example: tech efficiency==having the best possible line up with the football players assigned to play the next baseball game; economic efficiency==having the best possible line up of the baseball players assigned to play the next baseball game; even if you do the best you can with the football players, you're not going to win a lot of baseball games with resources assigned to lower-valued uses Market price information DRIVES economic efficiency better than any other mechanism (such as planning, or random assignment) Economic efficiency DRIVES process efficiency because market competition (which ensures resources go to highest valued use) tends to drive process inefficient firms out of the market

Hayek, "Liberal Planning" in The Road to Serfdom:

The Road to Serfdom was about the dangers of centralized planning and nationalization of industry, including the media. Hayek rejects "central and also all kinds of "planning for specific aims. But Hayek defends the "planning for competition" as the main condition of a free society. This includes the provision of a pertinent institutional framework and state in to create markets in spheres of society previously ruled by nonmarket principles. Western democracies, including the United Kingdom and the United States, have "progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past". Society has mistakenly tried to ensure continuing prosperity by centralized planning, which inevitably leads to totalitarianism. "We have in effect undertaken to dispense with the forces which produced unforeseen results and to replace the impersonal and anonymous mechanism of the market by collective and 'conscious' direction of all social forces to deliberately chosen goals." Socialism, while presented as a means of assuring equality, does so through "restraint and servitude", while "democracy seeks equality in liberty". Planning, because it is coercive, is an inferior method of regulation, while the competition of a free market is superior "because it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority."

What are the three basic elements or attributes of private property right:

The exclusivity of rights to choose the use of a resource. The exclusive right to the services of the resource. For example, the owner of an apartment with complete property rights to the apartment has the right to determine whether to rent it out and, if so, which tenant to rent to; to live in it himself; or to use it in any other peaceful way. That is the right to determine the use. If the owner rents out the apartment, he also has the right to all the rental income from the property. That is the right to the services of the resources (the rent). The right to exchange the resource at mutually agreeable terms. That is the right to delegate, rent, or sell any portion of the rights by exchange or gift at whatever price the owner determines (provided someone is willing to pay that price). If I am not allowed to buy some rights from you and you therefore are not allowed to sell rights to me, private property rights are reduced.

Why is "eliminating the middleman" actually a disadvantage? (Does the middleman make trading more or less efficient?)

The idea that eliminating middlemen saves money is wrong because the services that they render and the costs involved are not eliminated. Those services and costs of the middleman are merely transferred to someone else. The middlemen in fact make the resale of goods cheaper by providing their valuable services. If the resaler became responsible for providing the middleman's services in addition to what they already provide, the total cost would go up.

Invisible Hand and Market: How does the invisible hand play a role in the exchange of goods in the economy? (What is the invisible hand?)

The invisible hand leads people to provide goods for personal gain / benefit Invisible hand is not a "guide" but an amoral spontaneous pattern of human behavior. Outcomes don't usually result from individual intention - SPONTANEOUS. As a note on SPONTANOUS: It is the pleasant thoughts that arise without the subjective experience of intent. In more concrete terms, experiencing pleasant affect during some activity or behavior (i.e., "liking" the activity) may imbue that concept and closely associated concepts (e.g., physical objects, people) with incentive salience, enhancing the ability of these cues to capture attention in subsequent encounters. That heightened salience in turn generates wanting and motivates approach behavior, increasing the likelihood that the individual will repeat the behavior in question.

Is trading a phone for a pencil a fair trade? (How does trade create wealth?)

The parties in a trade exchange create more wealth because they get something that they value more than the good with which they traded A phone and pencil do not seem to have equal value but if the people trading them consider the other good more valuable, then the trade creates wealth and is "fair". Goods have subjective worth. They are worth what people are willing to pay for them

Why is nothing overpriced? (Can a good be overpriced?)

The values of a good are subjective / people value things differently. Depends on what the buyer and the seller agree on.

Does a Worker Help the Rest of Society? By Robert P. Murphy:

The virtues of laissez-faire capitalism: Regarding worker pay, it is literally textbook economics to show that so long as there is competition among firms, workers will tend to be paid the "value of their marginal product," meaning that there is a definite sense in which workers are paid the "full value" of their labor. More generally, the productivity of labor increases with specialization. As the population grows, people can focus on more narrowly defined tasks: some produce only dental services; others grow food; others build houses; and so on. Economists generally agree that so long as the labor market is competitive, the owner of the factory will end up paying the last worker the value of his marginal product.

Three principles

The way we know if we have economic efficiency "highest valued uses of scarce goods" if if there is no tendency for ex-post trades to happen; If this is true, why not just use trade in the first place, since no trades will happen if trade is the process by which goods are distributed; Cannot separate the production of goods from the distribution; since the efficiency of the distribution mechanism is what drives the efficiency of the production mechanism; Besides efficiency and wealth creation, market processes contribute to peace and stability when there are strong property rights, rule of law, and a perception of fairness and due process (e.g. everyone has a chance to participate in the market).

What is the primary motivation for exchange according to Adam Smith?

To recap, self-interest and competition are very important economic forces. Self-interest is the motivator of economic activity. Competition is the regulator of economic activity. Together they form what Adam Smith called the invisible hand, which guides resources to their most valued use.

Name three reasons why trade "is made of win".

Trade is made of win 1: Trade creates wealth by making goods cheaper to obtain Trade is made of win 2: Specialization and trade is efficient because more goods can be produced Trade is made of win 3: Trading saves resources

How does sharing lead to the tragedy of commons?

Tragedy of Commons Video: When you own something you take care of it When everyone owns a resource no one takes care of it "Communal vs Private Property rights" article: cattle grazing example - shared land gave no incentive for an individual to take care of the land because the benefits of grazing another animal only fell on the individual villager

What does Hernando de Soto say is the key to prosperity?

Tragedy of Commons video: "Rules of the game must recognize who owns what" The power to prosper lies in legal recognition of property Evidence: Indians that have privately owned land are more well off than those living on land owned by federal government

Adam Smith vs Mercentalism: How was Smith's view of wealth different from that of mercantilism? (How did Smith view wealth?)

Wealth is not the amount of gold that a country has but is the labor and capital that a country produces Importing doesn't diminish a country's wealth (as holds mercantilism). Wealth comes from the nation's people committing their labor to industries in which they have an advantage

According to Adam Smith, what is the advantage to dividing the production of a pin into 18 different tasks performed by different workers?

Wealth of Nations Bk 1 ch 1: instead of one individual making not even one pin a day, a group of workers can produce 4,800 pins in one day The countries that "enjoy the highest degree of industry and improvement" are those that use "many hands" to produce one good Specialization increases the "dexterity" of the workman: more productive

What is the importance of institutions for a well-functioning economy?

Well-designed or established institutions create order from chaos. Order provides certainty, rules, regulations, and standard operating procedures.

Comparative Advantage and Opportunity Costs Takeaways:

When opportunity costs differ, potential from trade exists. In the above example, opportunity cost of producing textiles for B was lower than A. While, opportunity cost of food was less for A than B. Economizing behavior requires that output be produced by the one who has the lowest opportunity cost. The endowment of land, labor, and capital differ among regions and nations, so does the opportunity cost of producing different products. Residence of each region tend to specialize in those things that they do best. Examples: Florida: Oranges Kansas: Wheat Wisconsin: dairy products

How does specialization increase?

When the markets expand

Division of labor by Munger:

ts importance in economics lies in the fact that a given number of workers can produce far more output using division of labor compared to the same number of workers each working alone. The production increase has several causes. According to Adam Smith, these include increased dexterity from learning, innovations in tool design and use as the steps are defined more clearly, and savings in wasted motion changing from one task to another. The reason is that division of labor produces a cost advantage where none existed before—an advantage based simply on specialization. Consequently, even in a world without comparative advantage, division of labor would create incentives for specialization and exchange. "cooperation" as a means of achieving the benefits of specialization. Adam Smith did not invent division of labor. Smith described how decentralized market exchange fosters division of labor among cities or across political units, rather than just within them as previous thinkers had done. The division of labor gives rise to market institutions and expands the extent of the market. Constant pressure on the factory to (a) expand the number of operations even more, and to automate them through the use of tools and other capital; and to (b) expand the size of the market served with consequently lower-cost pins so that the expanded output could be sold. The Smithian conception of the basis for trade and the rewards from developing market institutions is more general and more fundamental than the simple version implied by deterministic comparative advantage. Any nation, regardless of its endowment of natural resources, can prosper simply by developing a specialization. That specialization might be determined by comparative advantage, lying in climate or other factors, of course. But division of labor alone is sufficient to create trading opportunities and the beginnings of prosperity. By contrast, nations that refuse the opportunity to specialize, clinging to mercantilist notions of independence and economic self-sufficiency, doom themselves and their populations to needless poverty.