Foundations Of Economics

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Economics

Back 1

a social science that concerns how people cooperate in the division of labor

Front 2

Social

Back 2

concerning interpersonal action

Front 3

Science

Back 3

a systematic arrangement of the laws which God has established, so far as they have been discovered, of any department of human knowledge

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Economics studies:

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how people seek to make their lives better through human action

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Axiom at the beginning of economics

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humans act

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Economic Law

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an inexorable regularity of phenomena present in the field of human action

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Goal of Economics

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social cooperation through the division of labor

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How to achieve goal of economics

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people must be able to exchange

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Complex Economy

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economy in which people are able to exchange

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For a complex economy:

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people must be able to calculate profit and loss

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Money

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medium of exchange

Front 12

Market Prices:

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enable calculation of profit and loss

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What is necessary in an exchange economy:

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private property

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Ludwig von Mises

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Austrian, 1881-1973, demonstrated how socialism couldn't work w/Hayeck 1920s-30s

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Frederick Hayek

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Austrian, 1899-1992, demonstrated how socialism couldn't work w/Mises 1920s-30s

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Nassau Senior, John Stuart Mill, John Baptiste Say, Francis Wayland

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characterized economics as science of nature/production/distribution of wealth

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Adam Smith

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Wealth of Nations, 1776

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A statement is True if:

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it is factually correct and agrees w/reality

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Epistemology

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concerns how we know the truth

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4 Epistemologies

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Skepticism, Relativism, Empiricism, Apriorism

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Skepticism

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epistemology that there are no absolute truths

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Relativism

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epistemology that different groups have different truths which are all true

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Empiricism

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epistemology that all knowledge is only based on experience (Locke/Hume: blank slate)

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Apriorism

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in order for us to gain knowledge there is something that is logically prior to the facts (mental categories)

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Where empiricism doesn't work:

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w/time, math, causality

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Important part of the Image of God

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reason

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Reason

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the ability to think rationally, in terms of cause and effect

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Human Action

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purposeful behavior; applying means according to ideas to achieve ends

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End

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a purpose for our action

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Means

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the things we use to achieve our ends, things we can appropriate for our purposes

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General Conditions

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The part of our environment we can't control

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Idea

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the thought about the way we can achieve our ends using our means

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3 necessities for action:

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End, Means, Idea

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Scarcity of time/means:

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we must rank our ends (decide which are more/less important)

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Economizing

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using our means to serve our most desired ends

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We rank our ends:

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by our Subjective Evaluation, by what gives the most Utility

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Utility

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satisfaction

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Opportunity Cost

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the highest valued alternative that must be forgone as a result of choosing a certain end (subjective)

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Do we rank our ends ordinally or cardinally?

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Ordinally, because utility is not quantifiable

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Hebrew and Greek words that imply subjectivity

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H: "arak", "mikaw"; G: "timao"

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Economic Goods

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means used in action

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Consumer Goods (2 other names)

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goods which are directly serviceable (also called Goods of the First, or Lowest, Order)

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Producer Goods (other name)

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indirectly serviceable (transformed into directly serviceable goods in the future; also called Goods of a Higher Order)

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Types of Producer Goods:

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Land, Labor, Capital Goods

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Land

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space/resources

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Labor

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human energy used in production (original factors of production)

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Capital Goods

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produced means of production

Front 48

Structure of Production resembles:

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a family tree

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Time it takes to produce a good

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Period of Production

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Duration of Serviceableness

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length of time a good provides satisfaction (more/less Durable)

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All action is _, and yields _ profit

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Speculative, Psychic (=mental)

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One thing we know for certain about the future:

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it's uncertain

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Why the future is uncertain:

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affected by: other people, natural phenomena, God's actions

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Law of Marginal Utility

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there is an inverse relationship btwn the quantity of a good and the marginal utility of the good

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Adam Smith thought that value was:

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objective and equal to the production cost

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Diamond-Water Paradox:

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troubled Adam Smith: water more useful than diamonds, but diamonds more valuable

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Paradox

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when two mutually exclusive statements seem true

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3 Principles of Human Action

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1) ranking ends: subjective
2) attempting to exchange a less satisfactory future state of affairs for a more satisfactory one
3) people value means according to their valuation of the ends

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Marginal Utility

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the satisfaction one recieves from the marginal unit of a good

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Marginal Unit

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unit relevant for action (in a sense, on the edge)

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Income affects _ in what way

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affects demand directly

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What relationship does price have w/the quantity of a good demanded

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inverse

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Tastes and Preferences affect _ in what way

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affects demand directly

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Expected Future Prices affect _ in what way

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affects demand directly

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Population affects _ in what way

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affects demand directly

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Social Action

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interpersonal action

Front 67

2 types of Social Action:

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Violence, Voluntary Exchange (concern of economics)

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Double Coincidence of Wants

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two people value goods in reverse order (each values the good the other person has more than his own)

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Ownership

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ultimate control (includes the ability to transfer ownership)

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Ex Ante

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judgments regarding benefits of trade are made before the trade is made

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Search Costs

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cost of finding a person willing to trade

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Middlemen

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reduce search costs

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Market

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the vast network of interpersonal exchanges

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Consumption

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the actual or direct act of satisfying a want by means of a good or service

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Division of Labor

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different people spending all their time producing different goods

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Reasons for the Division of Labor

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□ Natural inequality of God's creation (diversity)
□ People have differences in their stock of capital goods
□ God created each of us with different skills

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Benefits of the Division of Labor

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□ Raises standard of living
□ Allows us to fulfill cultural mandate wt/starving/killing each other

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Absolute Advantage

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each person is better at producing a good than the other

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Comparative Advantage

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if one person has an absolute advantage in everything, or another person has in nothing, can still benefit: produce what the person w/absolute advantage would get less gain from using his time producing

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Free Society

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one in which people are able to use their property as they see fit, so long as they do not infringe on the rights of other people

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Positive Economics

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statement of what is, with no moral value attached

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Barter

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trading consumer and producer goods directly with each other

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Poblems w/Barter:

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1) the indivisibility problem
2) lack of the double coincidence of wants problem
3) no prices = no comparison of exchange ratios, efficient use of goods

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Indivisibility Problem

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for some goods, if they are divided into smaller parts, the value of the sum of the parts is not nearly as valuable as the undivided whole

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Indirect Exchange

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goods are not traded directly for other goods desired, but are traded indirectly through some medium of exchange

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Money

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general medium of exchange in all markets
□ Economic good/commodity
□ Product of the free market (not the state)

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Price

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a rate of exchange (expression of one good in terms of another)

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Demand

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relates the different quantities of a particular good a person is willing and able to purchase at every given price

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Law of Demand

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there is an inverse relationship btwn price and quantity demanded

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Market Demand Schedule shows:

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total quantity of units of a good that will be demanded at each hypothetical price, maximum price price people are willing to pay for any given quantity

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Demand Curve shows:

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illustrates the maximum price a buyer is willing to pay for any given quantity, and the maximum quantity a buyer is willing to buy at any hypothetical price

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Supply

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relates the different quantities of a particular good a person is willing to sell at every given price

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Law of Supply

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at the point of sale, there is a positive relationship btwn the price of a good and the quantity of that good supplied

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Supply Curve shows:

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maximum quantity suppliers are willing to sell at each hypothetical price, and the minimum price necessary to induce sellers to sell any given quantity

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In order for a sale to take place:

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minimum selling price of the seller must be lower than or equal to the maximum buying price of the buyer

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The actual price agreed upon will be:

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btwn mimimum selling price of seller and maximum buying price of buyer

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Most Eager Buyer

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person willing to pay the highest price for the good in question

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Most Eager Seller

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person willing to sell the good in question at the lowest price

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Well-Developed Economy

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a complex market economy based on an intricate network of exchanges btwn many buyers and sellers using money

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Equilibrium Price/Market Price

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price at which quantity demanded equals quantity supplied (most buyer/seller preferences satisfied): demand curve and supply curve intersect

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Excess Demand

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quantity of goods demanded at a particular price is greater than quantity of goods supplied at that price

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Law of One Price

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for any good, there will be one and only one market price which is paid and recieved

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Complementary Goods

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used together to achieve a particular end

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Substitute

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a good that can be used in place of another to achieve one's end

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Technology

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techinical know-how; knowledge bound up in physical capital goods

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Complement in Production

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a production process yields two goods

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Substitute in Production

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goods whose production uses the same factors