Economics 10 1 2017 September Lecture 2 Chapter 1 2017 Economics 101 CCC

Step 1 - Thinking like an economist

content Define economics and distinguish between microeconomics and macroeconomics Explain the market systems Explain key elements of how a market works Explain the two big questions of economics Examples of social versus self interest Economic way of thinking

Definition of economics

Definition of Economics All economic questions arise because we want more than we can get. Our inability to satisfy all our wants is called scarcity. Because we face scarcity, we must make choices. The choices we make depend on the incentives we face. An incentive is a reward that encourages an action or a penalty that discourages an action.

Definition of Economics Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Economics divides in to main parts: Microeconomics Macroeconomics

Definition of Economics Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments. An example of a microeconomic question is: Why are people buying more e-books and fewer hard copy books? Macroeconomics is the study of the performance of the national and global economies. An example of a macroeconomic question is: Why does the unemployment rate in Canada fluctuate?

economic market systems

What do we mean by the term economic market systems? Factors of production (term for resources) Ownership is important - needed to produce the goods or services Land and natural resources (natural resources) Labor (including all human resources) Capital (including all man-made resources) Entrepreneurship (this brings all the resources together for production) Knowledge is often seen as a distinct from human resources

What do we mean by the term economic market systems? Goods and services Exchange: Capital and Labor Price: Gov’t role?

What types of economic market systems exist? Market-based economy (capitalist system) Factors of production ownership: Private Goods and services: Freely produced and exchanged according to demand and supply between consumers and producers Exchange: Medium of exchange Capital and labor: Moves freely across places, industries and firms in search of higher profit. Price: Allocates resources among competing users. Gov’t role? defense & assist, laws , taxes, regulations, enforcing contracts, correcting market failures, ensuring strong economy, provision for poor, children, vulnerable & elderly, pursue national goals established by society, & protection environment and natural resources.

Capitalism

What types of economic market systems exist? Command-based economy (Socialism) Factors of production? State owned, controlled & allocated Goods and services? Government central planning markets and how/where exchange of goods and services - manufacturing, production, trade and distribution Exchange: Allocated basic needs Capital and Labour Private ownership banned and only consumption based goods are allowed to be privately owned.. food/clothing. Price of goods set by government not production cost Profits do not exist and labour compensation and benefits and investment expenditures are defined by central planners. Capital, labor, and land are assigned by the state and free movement of labor is severely restricted. Gov’t role?

Centrally Planned Market

What types of economic market systems exist? Mixed economy (combo of capitalism and socialism ) Factors of production Goods and services? Exchange: Capital and Labour Price Gov’t role

How does a market work?

How does a market work? Market Network of buyers and sellers that come together to trade in a given product or service. Consists of amount of something that is available – the supply – and the amount of something that people want – the demand Economic activity between buyers and sellers Free exchange

How does a market work? Market Buyers (Consumers) Goal Max utility Demand for a particular product varies with price Suppliers (Firms) Goal: Max Profit Supply of a particular product varies with price. Both are self-interested. Exchange of goods or services is a transaction

How does a market work? Interaction of buyers and sellers in the market determines the market price Role of Price creates signals Allocating scarce goods and services efficiently. Think about this ..lots of demand lots of supply what happens? Determines how much of something to consume, and also how much to produce.

How does a market work? Function of the market Facilitate exchange of goods between buyers and sellers Define equilibrium price when supply and demand are in balance. Goods supplied are equal to what is being demanded – no excess or shortage

How does a market work? At equilibrium there is efficient allocation of the goods good thing for a society because people are encouraged to specialize and exchange specialization and exchange achieves a higher standard of living and better for all society

How does a market work? How does it all happen? Invisible Hand Metaphor for a marketplace Term used by Adam Smith to describe his belief that individuals seeking their economic self-interest actually benefit society more than they would if they tried to benefit society directly. Does this apply to both free market system versus centrally planner market system? https://www.youtube.com/watch?v=ulyVXa- u4wE

How does a market work? Invisible hand Consumers and Producers focusing on their own gain (self interest) and led by these price signals get a result in the market that was no part of their intention pursuing own interests, equilibrium P & Q occurs, efficient allocation of the goods and promotes better overall for society

Two big economic questions

Two Big Economic Questions Two big questions summarize the scope of economics: How do choices end up determining what, how, and for whom goods and services get produced? When do choices made in the pursuit of self-interest also promote the social interest?

Two Big Economic Questions How do choices end up determining what, how, and for whom goods and services get produced? What ? What determines these patterns of production? How do choices end up determining the quantity of each item produced in Canada and around the world?

Two Big Economic Questions How? Goods and services are produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: Land Labour Capital Entrepreneurship

Two Big Economic Questions For Whom? Who gets the goods and services depends on the incomes that people earn. Land earns rent. Labour earns wages. Capital earns interest. Entrepreneurship earns profit.

Two Big Economic Questions When do choices made in the pursuit of self-interest also promote the social interest? Self-Interest You make choices that are in your self-interest—choices that you think are best for you. Social Interest Choices that are best for society as a whole are said to be in the social interest. Social interest has two dimensions: Efficiency Equity

Two Big Economic Questions Efficiency and Social Interest Resource use is efficient if it is not possible to make someone better off without making someone else worse off. Equity is fairness, but economists have a variety of views about what is fair.

Examples of between self-interest and social interest

example Globalization expansion of international trade, borrowing and lending, and investment. self-interest of consumers who buy low-cost imported goods and services and … self-interest of the multinational firms that produce in low-cost regions and sell in high-price regions. But is globalization in the self-interest of low-wage workers in other countries and Canadian firms that can’t compete with low-cost imports? Is globalization in the social interest?

example Climate Change political issue today. Every serious political leader is acutely aware of the problem and of the popularity of having proposals that might lower carbon emissions. Burning fossil fuels pours a staggering 28 billion tonnes—4 tonnes per person—of carbon dioxide into the atmosphere each year.

example Activists around the globe celebrated after the Army Corps of Engineers announced it will suspend work on the controversial Dakota Access Pipeline and consider rerouting the project. Members of the Standing Rock Sioux Tribe and their supporters have protested against the pipeline at a North Dakota site for months, arguing the multi-billion dollar project would contaminate drinking water and damage sacred burial sites. Though the decision marked a major victory for Native Americans and protesters, the fight may not be over just yet. BBC News Dec 2016

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The economic way of thinking

The Economic Way of Thinking Six key ideas define the economic way of thinking: A choice is a tradeoff. Benefit is what you gain from something. Cost is what you must give up to get something. People make rational choices by comparing benefits and costs. Most choices are “how-much” choices made at the margin. Choices respond to incentives.

The Economic Way of Thinking A Choice Is a Tradeoff The economic way of thinking places scarcity and its implication, choice, at center stage.

The Economic Way of Thinking Making a Rational Choice A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice. How do people choose rationally? Consider. Benefit: What person gains based upon preferences Cost: What you Must Give Up

The Economic Way of Thinking Cost: What you Must Give Up opportunity cost – cost of what you give up - the next best alternative you give up. Example What is your opportunity cost of going to an AC/DC concert? Opportunity cost has two components: 1. The things you can’t afford to buy if you purchase the AC/DC ticket. 2. The things you can’t do with your time if you go to the concert.

The Economic Way of Thinking How Much? Choosing at the Margin Choice is usually not all or nothing, but you must decide how many minutes to allocate to each activity. Ex: You can allocate the next hour between studying and instant messaging your friends. To make this decision, you compare the benefit of a little bit more study time with its cost—you make your choice at the margin.

The Economic Way of Thinking How Much? Choosing at the Margin What do we mean by margin? incremental changes in the use of your time. benefit from pursuing an incremental increase in an activity is its marginal benefit. opportunity cost of pursuing an incremental increase in an activity is its marginal cost. If marginal benefit > marginal cost for an activity the rational choice is to do more of that activity.

The Economic Way of Thinking Choices Respond to Incentives Incentives can change marginal cost or marginal benefit and leads us to change our choice. The central idea of economics is that we can predict how choices will change by looking at changes in incentives

questions What is a market? Players? Invisible hand? Role of price? Contrast the two main market systems What are the main elements of thinking the economic way? Explain. Examples. “Why are economists so concerned about the material aspects of life? What are the big questions in economics? Contrast self ad social interest Consumption and savings – this is an example of ??

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