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.

Demonstration Scarcity Opportunity cost

For whom will it be produced WHFW Questions 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 WHFW 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. 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.

How the three basic questions work in your life Think of three things you want for your future…think big. New car, private college, trip outside the United States, children, a house, etc. How do you make the choice of what to have and what to give up? What do you really want, how are you going to get it, should you have it at all?

If a society is going to produce goods and services, it needs the four factors of production.

The Factors of Production Factors of production are resources necessary to produce what people want or need. Land is the society’s limited natural resources—landforms, minerals, vegetation, animal life, and climate. Capital is the means by which something is produced such as money, tools, equipment, machinery, and factories. Click the mouse button or press the Space Bar to display the information.

The Factors of Production (cont.) Labor is the workers who apply their efforts, abilities, and skills to production. Entrepreneurs are risk-takers who combine the land, labor, and capital into new products. Production is creating goods and services—the result of land, capital, labor, and entrepreneurs. Click the mouse button or press the Space Bar to display the information.

The Factors of Production (cont.) Click the mouse button or press the Space Bar to display the information.

Crash Course Econ

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)

Marginal benefit is the gain you receive for doing anything "one more time." If you owned, say, a cake shop, and you could sell an unlimited number of cakes for $15 apiece, then your marginal benefit for each additional cake you produced would be $15. In the real world, though, you'll always reach a limit on how much you can sell at a given price. If your market is saturated, you might have to drop your price to sell another cake. So your marginal benefit for the next cake might be $9. For a business, marginal benefit is typically measured in terms of revenue -- how much you can get for the next unit you produce. Marginal cost is the additional cost you incur to produce one more unit. In the example, it's what it costs to make one more cake. As long as your marginal benefit -- that is, your marginal revenue -- from producing one more item exceeds your marginal cost of producing that item, you'll continue to make a profit.

Consumers experience marginal benefits. If a customer thinks she can get $15 worth of use or satisfaction from buying one of your cakes, she'll buy one. But once she has one, the question is how much benefit she would get from buying a second one. If it's still $15 worth of benefit, she'll buy a second. If it's less, she won't, and the only way you can get her to buy is to drop your price or offer some other promotion. Consumers' marginal benefit is also referred to as "marginal utility.“ Under an economic precept known as the law of diminishing marginal utility/return, consumers' marginal benefit goes down as they consume more and more of something. As the marginal benefit for cakes declines among your customer base, so does the price they're willing to pay -- which in turn affects your marginal benefit as a cake maker. EX. Once you are full, you no longer want cake as much.

. 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 .

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

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 WHFW 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

technology and productivity the rule of 72 for growth the factors of production: land or natural resources, labor, capital, entrepreneurship technology and productivity the rule of 72 for growth the rule of 72, is the method for estimating an investment's doubling time. The rule number (e.g., 72) is divided by the interest percentage per period to obtain the approximate number of periods(usually years) required for doubling.

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