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Introductory ConceptsScarcityThe most important word in economicsScarcity means that we live in a world of UNLIMITED wants but resources are LIMITED. Therefore, because we live in a world of scarcity, we have to make choices. Every time we make a choice, we face a trade-off. For example, if you sleep in an extra two hours that is two hours you cannot study. More time doing X means less time to do Y. You can’t do it all!This is why there is always a cost when you do something. So, why is scarcity the most important word in economics? Because economics is the study of individuals making choices. Economics is NOT the study of money or the stock market. It’s the study of individuals making choices. Why do we have to make choices? Because we live in a world of scarcity!Price v. Cost When you are referring to the amount of money that you spent to buy a product, use the term “price”The word “cost” means what you give up or sacrificeFor example, the typical person says, “The Starbucks latte cost me $5” or “The movie ticket cost me $15.” What you should say is, “The price of the movie ticket is $15.”The cost of the movie ticket was, of course, the two hours of your time that you gave up (instead of studying or doing something else) but also what you would have done with that same $15 insteadThe main point is that NOTHING IS FREE!! Please do not say “free healthcare” or “free education.” When people use the word “free” what they mean is that they did not have to pay with MONEY. And, of course, when people refer to the healthcare system in other countries or the higher education system in other countries as “free” that is incorrect since citizens have to pay more in taxes for those services. If that is the case, please say “zero price” instead. Nevertheless, there is NEVER a zero cost. This is why economists say “There Ain’t No Such Thing as a Free Lunch.” You might not have to spend money to get something but you will have to pay with your time or pay by giving up something else. Either way, you pay even if you don’t spend money! In other words, do not ever use the “F word!”—FREE! NOTHING IS FREERevealed PreferenceThis term means that actions speak louder than words If you ever hear someone say, “Starbucks is a rip off!” and then they go to Starbucks and order a Frappuccino, then their action of buying the drink proves they really do not think it’s a “rip off.” Why would someone purposely allow himself or herself to get ripped off? It would not make sense. If I were to tell you that I am being “taken advantage of” or “exploited” by my employer because of the “low” salary they are paying me, the fact that I have not quit proves that I do not really believe this!Of course, I would love to get paid more and my employer I am sure would love to pay me less, but the fact that I am still making a VOLUNTARY CHOICE to work proves I think it’s worth it. In other words, the benefit is greater than the cost (what I am giving up)Am I claiming that there is never a rip off? No! Theft, fraud, and misrepresentation are all examples of rip offs. My point is that IF the trade/exchange is voluntary and there is NO fraud or deception, then obviously one thinks it’s worth it to buy that product or to work for that particular wage (hourly payment) or salary (fixed amount). InstitutionsThe rules of the gameIn usual conversation, “institution” might refer to a company or a university. For example, “Bank of America is a financial institution” or “San Jose State University is an educational institution.” However, in my class “institution” will refer to the rules of the game—the legal and political system.The institutions—rules of the game—in South Korea are very different from the rules in North Korea. The institutions in communist countries were (are) very different from institutions in more market-oriented countries. Moreover, with different institutions come different results. North Korea is desperately poor while South Korea is wealthy. The average South Korean lives much better than the average North Korean does. The usual (and wrong!) answer as to why a country is rich is because of its natural resources. However, the answer is its good institutions.What do I mean by “good institutions”? That will be presented later ................
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