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...it-foregone of the next-best alternative. In economic reasoning, opportunity cost must be less than the benefit of the choice you have made. Opportunity cost are not limited to individuals but to government decisions as well The opportunity cost concept applies to all aspects of life and is fundamental to understanding how society reacts to scarcity. Economics & Market Forces When goods are scarce they must be rationed. Rationalizing – is a mechanism chosen to determine who gets what One of the most important choices that society must make is to what extent economic forces are allowed to function freely. A Market force – is an economic circumstance that is given relatively free rein by society to work through the market. -Market forces ration by changing prices. Economic reality is controlled by 3 forces: -Economic forces (the invisible hand) -Social & cultural forces -Political & legal forces Economic Forces The invisible hand is the price mechanism – the rise and fall of prices – that guides our actions in a market -When there is a shortage, the price goes up. -When there is a surplus, the price goes down Social & Cultural Forces, Political & Legal Forces: -Political & social forces often work together against the invisible hand -What happens in society can be seen as a reaction to, the invisible hand, political and legal forces and social and cultural forces. Economic Insights General insights into how economics work are often based on economic theory Economic theory – generalizations about the workings of an abstract economy Theories and the models and principals used to represent them are abstract but, efficient, means of conveying information In order to understand the theory you must understand the assumptions underlying the theory The Invisible Hand Theory: The invisible hand theory states that markets are efficient in coordinating individual’s decisions, allocating scarce recourses to their best possible use. This insight is called the invisible hand theory – a market economy through the price mechanism will allocate resources effectively Microeconomics and Macroeconomics Economic theory is divided into two parts; -Microeconomics & Macroeconomics Microeconomic –is the study of individual choice, and how that choice is influenced by economic forces. Microeconomics – Considers economic reasoning from the view point of individuals and forms and builds up from there to an analysis of the entire economy Microeconomics studies such things as: -Pricing, policy of firm, decisions on what to buy and how do markets allocate resources among alternative ends. Microeconomics - analysis from the parts to the whole Macroeconomic -Is the study of inflation, unemployment, business cycles and economic growth Macroeconomics - analysis from the whole to the parts. Economic Institutions Corporation’s, governments and cultural norms are all economic institutions They differ significantly among nations Economic institutions sometimes seem to operate in ways quite different than economic theory predicts In applying economic theory to reality, you must know about economic institutions Economic Policy Options Economic policies are actions taken by government to influence economic actions Those who wish to carry out economic policy effectively must understand how institutions might change as a result of the economic policy. Objective Policy Analysis Objective Policy Analysis is that which reflects the analysis’s view of how things should be Objective is very concrete. In order to make the distinctive between objective and subjective analysis clear economists have divided economics into 3 categories: -Positive economics -Normative economics -Art of economics Positive economics – is the study of what is and how the economy works. Example includes: How does the stock market work, what are the consequences of rent control on the market for housing, and are the costs of having children related to family income. Normative Economics – is the study of what the goals of the economy should be Examples – people on welfare should work in order to get benefits, inherited wealth should be taxed more heavily, and corporations should not be allowed to move their facilities overseas unless it is agreed to by labor unions. Art of economics – is the application of the knowledge learned in positive economics to the achievement of the go...