The World of Economics The study of how societies allocate scarce resources to meet unlimited wants and needs The study of how societies allocate scarce resources to meet unlimited wants and needshow societies allocate how societies allocate

THREE QUESTIONS WHAT TO PRODUCE? HOW TO PRODUCE? FOR WHOM?

ECONOMIC SYSTEMS TRADITIONAL MARKET COMMAND

Traditional Economic Systems Economic decisions repeat those made in earlier times

Traditional Economic Systems Strengths: – Sets forth certain economic roles for all members of the community – Stable, predictable and continuous life Weaknesses: – Discourages new ideas and new ways of doing things – Stagnation and lack of progress

ECONOMIC SYSTEMS COMMAND – SOCIALISM OR COMMUNISM – GOVERNMENT OWNERSHIP OF RESOURCES – CENTRAL PLANNING – NORTH KOREA AND CUBA

Command Systems Strengths: – Capable of dramatic change in a short time Weaknesses: – Does not meet wants and needs of consumers – Lacks effective incentives to get people to work – Requires large bureaucracy which consumes resources – Has little flexibility to deal with small day-to-day changes – New and different ideas discouraged, no room for individuality

Economic Systems MARKET – PRIVATE OWNERSHIP OF RESOURCES – USE OF MARKETS AND PRICES TO DIRECT ECONOMIC ACTIVITY

ECONOMIC SYSTEMS MARKET – COMPETITION Producers: how to produce Consumers: what to produce – SELF INTEREST, MAXIMIZING PROFIT OR SATISFACTION – LAISSEZ-FAIRE

Market Systems Strengths –A–Able to adjust to change gradually –I–Individual freedom for everyone –N–Notable lack of government interference –I–Incredible variety of goods and services –H–High degree of consumer satisfaction Weaknesses: –R–Rewards only productive resources. Many people are too old, or too sick to work. –M–Must guard against market failures

The World of Economics The study of how societies allocate scarce resources to meet unlimited wants and needs The study of how societies allocate scarce resources to meet unlimited wants and needsscarce resources scarce resources

SCARCE RESOURES LAND LABOR CAPITAL ENTREPRNEUR

SCARCE RESOURCES LAND – Gifts of nature (natural resources) – Oil, iron ore, cotton, water LABOR – Human efforts in production – Doctor, machine operator, computer technician

SCARCE RESOURCES CAPITAL – Human made resources – Physical Capital: Tools to produce – Human Capital: Skills and knowledge gained through education and training ENTREPRENEUR – Risk taker – Brings it all together

TWO FIELDS OF ECON MICROECONOMICS – INDIVIDUALS, HOUSEHOLDS AND FIRMS MACROECONOMICS – ECONOMY WIDE PHENOMENA – UNEMPLOYMENT, INFLATION, INTEREST RATES

SCIENTIST OR POLICY ADVISOR? POSITIVE – VERIFIABLE – FACTS – NO VALUE JUDGEMENTS – ECONOMIST AS SCIENTIST DESCRIPTIVE NORMATIVE – NON-VERIFIABLE – VALUE BASED – HOW THINGS SHOULD BE – ECONOMIST AS POLICY ADVISOR PRESCRIPTIVE

USE OF MODELS DELIBERATE SIMPLIFICATION STRIPS AWAY UN- NECESSARY DETAILS TO MORE EASILY UNDERSTAND CETERIS PARIBUS – ALL ELSE EQUAL

CAUTIONS WHEN USING MODELS CAUSALITY VS. CORRELATION – CAUSE: EVENT A CAUSES EVENT B TO OCCUR PRESSING THE ACCELORATOR ON YOUR CAR INCREASES SPEED – CORRELATION: TWO VARIABLES TEND TO CASUALLY COEXIST SUNNY WEATHER AND AUTO ACCIDENTS

Correlation vs. Causation Parent’s income vs. SAT scores – Causation or Correlation? Causation or Correlation? – The real story?real story

CAUTIONS WHEN USING MODELS REVERSE CAUSALTIY – NUMBER OF OFFICERS VS. AMOUNT OF CRIME IN CITIES