The Study of Economics Lesson 1.1

What is Economics? Economics can be looked at in a couple of essential ways. Study of Behavior: Individual Choice Economics can be used as a Social Science, to attempt to answer why people do what they do, and to predict behavior Finding answers to fundamental questions Any society needs to answer some fundamental questions in order to function, such as how do we distribute food to society?

The Economy The “Economy” is the system that coordinates choices about production and distribution Market Economy (Capitalism) Decisions are decentralized The economic system currently used in the U.S. and most countries around the world. Personal Incentives to motivate people (starvation) Property Rights Command Economy (Communism) Centralized decision making Used in few countries (North Korea, Cuba?, Old Soviet Union) Community Incentives (noble but largely unworkable) No (or few) personal property (everything belongs to the “State”)

Scarcity Defining axiom of economics There exists a limited quantity of resources to meet unlimited needs Example – everyone wants a house, but there is not enough land (it is also used for other essential things like farming, and not all land is readily usable for homes) These resources are factors of production What else would be a factor of production?

Factors of Production Entrepreneur-ship (On – tray – pren – ur) Land Agriculture, mining, logging, water (rivers), housing, parks, buildings, office space Labor Educated vs. non-educated, skilled vs. non-skilled, high-wage vs. low-wage, domestic vs. foreign Capital Money, equipment, assets, products, raw materials Entrepreneur-ship (On – tray – pren – ur) Risk taking, innovation, organization of resources

Goods and Services Goods and Services are the products that come from the factors of production that we buy from other people and companies. The good could be an ice cream cone, and a service could be mowing your lawn. By the book, capitalists supply goods and services to those who demand it.

Choices and Trade-Offs In any situation you will find that there is a choice to be made. Some decisions are easy, some are very difficult. Economics makes a study of these choices; what people get or do, versus what they do not get or do. These are Trade-Offs. Example – After school you could do your homework, or go out with your friends. What is the trade-off in each case? What other things could you do with this time?

Opportunity Cost Opportunity costs are trade offs that you accept. The opportunity cost is the best thing or activity you are willing to give up, to get something else you want. This opportunity cost can be expressed as a good, service, your time, expense, or even a relationship.

Margins Incremental Cost vs. Benefit – For most economists, thinking at the margin is essential to economic thinking. The idea of “thinking at the margin” is all about what it will cost to produce just one more item. If there is benefit, you do it, then consider the next item. Marginal Analysis Marginal Benefit Marginal Decision On The Margin

Macro and Micro Economics Macroeconomics The Big Picture Economic Aggregates National Income (GDP) Inflation Microeconomics Individual Decisions Households Businesses

Positive vs. Normative Economics, and why Economists Disagree Positive Economics Based on fact I.e. The economy added 240,000 jobs last month. Normative Economics Opinion (What should be done) I.e. We should spend more on education. Why Economists Disagree Most economists agree on most issues Disagreements come from interpretation of facts and what is and is not a causal factor. I.e. Economists disagree on the effects of taxation, and how taxation should be applied to get the best performance out of the economy.