Introduction to Economics

What is Economics? Scarcity – a basic human dilemma Limited resources vs. unlimited wants The human condition requires making choices Definitions of Economics Mankiw’s definition …is the study of how society manages its scarce resources Hedrick’s definition …is how society chooses to allocate its scarce resources among competing demands to improve human welfare Alternative definitions … what economists do. … is the study of choice.

Fundamental Questions of Economics - Scarcity requires all societies to answer the following questions: What is to be produced? How is to be produced? For whom will it be produced WHFM Questions

The Fundamental Economic Problem Scarcity is the condition where unlimited human wants face limited resources.  Economics is the study of how people satisfy wants with scarce resources.  Needs are required for survival; wants are desired for satisfaction.  Someone has to pay for production costs, so There Is No Such Thing As A Free Lunch (TINSTAAFL). Click the mouse button or press the Space Bar to display the information.

Discussion Question Why do you think scarcity is an issue with the rich as well as the poor? It is a human trait that few people, regardless of their economic status, are satisfied with what they have. Click the mouse button or press the Space Bar to display the answer.

Three Basic Questions What must we produce? Society must choose based on its need.  How should we produce it? Society must choose based on its resources.  Figure 1.1 For whom should we produce? Society must choose based on its population and other available markets. Click the mouse button or press the Space Bar to display the information.

Discussion Question How might the economic decisions of a mountainous island society differ from those of a mountainous landlocked society? An island society has water resources to consider and likely a more limited population. Click the mouse button or press the Space Bar to display the answer.

Categories of Basic Principles of Economics How do people make decisions? How do people interact? How does the economy work overall? 10 basic principles

How Do People Make Decisions? Principle #1 - People face tradeoffs Time allocation – an example of tradeoffs Efficiency versus equity Production Possibilities Frontier

Principle #2 - The cost of something is what you have to give up to get it Opportunity costs come from Von Weiser, a German economist late 1800s Opportunity costs are independent of monetary units TINSTAAFL The real costs of going to college

Principle #3 - Rational people think at the margin Rational or irrational decision-making Marginal benefits and costs versus total benefits and costs Weighing marginal costs and benefits leads to maximizing net benefits (total welfare) The boxes example

. Principle #4 –People respond to incentives Reactions to changes in marginal benefits and costs Increases (decreases) in marginal benefits mean more (less) of an activity Increases (decreases) in marginal costs mean less (more) of an activity Example of seat belts leading to increased speeds Example of SUV (with child car seat) in Issaquah

How Do People Interact? Principle #5 - Trade can make everybody better off Adam Smith author of the “An Inquiry into the Causes and Consequences of the Wealth of Nations” 1776 Gains from the division of labor and specialization Mercantilists perspectives Example of why Ellensburg

Principle #6 - Markets are usually a good way of organizing economic activity feudal times where feudal states were self- supporting, also haciendas in the new world the benefits of trade are so powerful that people began to trade markets for economists are more abstract than the notion of a middle eastern bazaar or a flea market and simply determine the prices and quantities traded of different goods and services the “failure” of centrally planned economies and the movement towards markets for the WHFM questions

Markets Principles 1-5 combine with markets to turn the pursuit of self-interest into promoting the interests of society Adam Smith and the “invisible hand” creativity and productivity are stimulated by the pursuit of self-interest into improving resource allocations “set it and forget it” becomes “compete or be obsolete” in some cases markets fail to allocate resources effectively so,

Principle #7 Governments can sometimes improve interaction that occurs in markets there are circumstances when market signals fail to allocate resources efficiently or equitably Public Goods, Externalities and Income Distribution Some goods or services that people desire will not be produced by markets (e.g. lighthouses). Some goods or services will either be underproduced (vaccines) or overproduced (pollution) because markets fails to register certain benefits or costs.

markets may also fail to provide an equitable or fair distribution of resources government intervention with its ability to coerce (the opposite of voluntary) can regulate, tax and subsidize to change market outcomes efficiency and equity: the pie analogy if government intervention always the proper solution?

How Does the Economy Work as a Whole? Principle # 8 – A country’s standard of living depends upon its ability to produce goods and services Adam Smith’s “An Inquiry into the Nature and the Consequences of the Wealth of Nations” Materialism – more toys mean more welfare wealth: a necessary or sufficient condition for happiness (are rich people happier, children with lots of toys) leisure time and productivity

the factors of production: land or natural resources, labor, capital, entrepreneurship technology and productivity the rule of 72 for growth rates

Principle #9 – The general level of prices rises when the government prints and distributes too much money definition of money, the concept of snow to Inuits, and economic language inflation is an increase in the general or average level of prices in an economy “not worth a continental” and recent example in Argentina the establish of the Federal Reserve and the introduction of sustained inflation in the US

Principle #10 – Society faces a short- run tradeoff between inflation and unemployment Short-run and the long-run demand and supply shocks short-run increases (decreases) in output above (below) long-run potential output lead to adjustments countercyclical stabilization versus pro- cyclical destabilization political business cycles