Introduction to Economics

Introduction to Economics What is the economic problem? Scarcity : resources on earth are finite but human wants are unlimited Definitions of economics Webster: a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services Tucker: the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants Roberson: studies what rational people do when faced with choice

Introduction to Economics Capitalism Markets determine what is produced, how it’s produced and who consumes the output using the market price Business owners may succeed or fail Limited role for government to protect private ownership, to protect citizens, and to build common infrastructure Socialism Planning role for government Society ownership (no private property) Why is most of the world capitalist today? Socialism failed to provide entrepreneur and worker incentives

Introduction to Economics Resources used in production Land is the resource provided by nature. Labor is the mental and physical ability of workers to produce goods and services. Capital is the physical plants, machinery, and other equipment used to produce goods and services. Entrepreneurship The creative ability of individuals to seek profits by taking risks and combining resources to produce goods and services.

Introduction to Economics Microeconomics the study of how households and firms make decisions and how they interact in markets (Mankiw) microeconomics studies topics a business owner can change Macroeconomics the study of economy wide phenomena, including inflation, unemployment, and economic growth (Mankiw) macroeconomics studies topics a business owner can’t change but must understand for planning What is? A householder buying food at the market: microeconomics A business planning to purchase a truck: microeconomics Ford planning to purchase a factory: microeconomics Ford planning to exit the auto industry : microeconomics The auto industry going away microeconomics

Introduction to Economics Scientific Method Problem Identification applying an scientific method to define the issue Model Development hypothesize an explanation using economics models Economic models are mathematical equations derived by assumptions models are a simplification of the real world assumptions create the simplified world. Good assumptions will not impact the experiment outcome. Testing a Theory In the physical sciences “physics” researchers test the hypothesis under controlled lab experiments. In the social sciences “economics” researchers don’t have the option to control the subject environment; uses history and other observed relationships Ceteris Paribus Assumption – while certain variables change, “all other things remain unchanged”

Introduction to Economics Positive Statement Claims that attempt to describe the world as it is (objective view) Normative Statement Claims that attempt to prescribe how the world should be (subjective view) What is? Donald should be fired: normative Donald was fired: positive Unemployment is 9.5%: positive Unemployment of 9.5% is too high: normative Positive Analysis attempts to be objective, the scientific method, by removing bias from the research and conclusions

Introduction to Economics Sometimes decision makers don’t listen to economists Dr. Romer, Univ. of California at Berkeley Examined if NFL teams punt too often The conclusion was a resounding “Yes” In fact NFL teams should “Never” punt (win more without punting) Results were received and accepted by most all NFL coaches Yet on Sunday, fourth and two, coaches continue to punt Why? Could there be another rational incentive to punt beyond trying to win the game? Yes, at times a punt will not be successful, yielding better field position for an opponent. This creates job risk for the coach often inconsistent with attempting to win the game.