Introduction to Economics 1

What is Economics? Economics is the study of how to allocate (spread/distribute) scarce resources among competing wants and needs. OR: the study of scarcity. What does that mean? 5

Less Formally... There is not enough of everything that people want (and need) to go around. Some people will get things and others will not. Certain products will be produced and others will not. That is a fact. The question is then, how do we determine who gets what? 6

How Do Economists Think - Scarcity and Goods Scarcity is at the heart of economics. If there were no scarcity, there would be no need for economics. Scarcity : limited amount of something desirable arises because society does not have enough resources to produce all the things people would like to have. These things are called goods. Goods are any items that are desired by people. 7

The Economic Questions What to Produce? How to Produce? For Whom to Produce?

How Economists Think - Utility and Rationality Economists assume that people act to maximize their own happiness Utility- The satisfaction or happiness gained from something. In Economics, it is not just the usefulness of something We also assume all people act rationally: make good decisions based on self-interest. 8

How Economists Think - Resources Resources- the elements that go into the production of a good or service. AKA: factors of production or productive resources. YOU CAN NOT CREATE A GOOD WITHOUT RESOURCES!!! 9

Four Resources or Factors of Production Land - Natural Resources (raw materials) Labor - Skills of People Capital - Goods Used To Make Other Goods (not money) Entrepreneurs – Risk takers who start new businesses or bring in new products in search for profits. 10

How Economists Think - Rationing Device How do we decide who gets what? A rationing device -a process by which we determine who gets what. It could be coupons, a line, height, or alphabetical order, lottery. What is the rationing device for most goods in the U.S. economy? -Price 11

There is no such thing as a free lunch! TINSTAAFL There is no such thing as a free lunch! What does this mean?

Trade Offs Making choices of how to spend money or time. You cannot have everything, so you have to choose. Trade-offs are multiple options; this, or that. Implies a give and a take.

Opportunity Cost Opportunity Cost – The value of the action not taken. The next best alternative; what’s NOT chosen. Examples? 12

Decisions Made at “The Margin” An economist is always thinking dynamically. Asking themselves “what next?” You have to think this way in this class. Marginal analysis refers to weighing the costs and the benefits of an incremental change. Small steps, one more unit, one more item, etc. 13

Incentives Economists always think about incentives. They believe that people respond to incentives. Incentives- something that encourages a certain type of behavior. 14

Incentives - Example For instance if I offered you an A in this class for $5, many of you would pay me. NOT GOING TO HAPPEN. What is the incentive for you in this class? Grades? Knowledge? 15

Types of Economics Microeconomics - Studies the behavior of individual people and firms. Macroeconomics - Studies the behavior of entire economies as a whole. 23

Types of Economic studies Positive: it is what it is; facts, data. Normative: value judgment; how it SHOULD /OUGHT to be. Give an example of each in your notes. Make a positive economic statement. Make a normative economic statement

Sample Resource Allocation Strategies Strategy Description Advantage Disadvantage price resource goes to those who use market mechanisms such as trade, barter, or price great for those who have money or a job with income not good for those who have little or no income majority rule resource goes to those who win an election; voting; consensus; largest number of people are satisfied great for those who are popular and those who have many members not good for the unpopular; those who don’t have the skills to form alliances contests resource goes to the most competitive – winner of a race or arm wrestle; survival of the fittest great for those who are talented and skillful not good for those who aren’t competitive; unskilled Force resource goes to the one who is strongest (physical, mental, political); most forceful great for those who are strong, powerful, bullish not good for those who are weak, small, easily intimidated sharing resource goes to multiple parties by dividing the resource great in that everyone gets an equal part; no one is left out not good in that some resources can’t be divided; no party may get enough; not everyone wants some of every resource Lottery resource goes to the luckiest; random; fair great for those who are lucky and win things; everyone has an equal chance; random winners not good for those who are unlucky or who “never win anything” command resource goes where directed, ordered, told by another person great for those who are liked by the commander or if the planner is always fair not good if the planner isn’t fair first-come, first-served resource goes to the early bird; first in line great for those who are quick, willing to get ahead of the crowd not good for the procrastinator; those who are late in planning/ preparing personal characteristics resource goes to the one with the greatest tenure, the longest hair, the oldest, the youngest, the bluest eyes, etc. great for those who are able to set the personal characteristic to be awarded the resource not good for those unable to influence the selection of the characteristic category