Principles of Economics Mr. Barnett University High School AP Economics

Back to the definition… Economics is the study of how society manages its scarce resources In most cases, it is a study of how people make decisions

Digging Deeper…Economic Assumptions Economics assumes people are rational Economics assumes people almost always act in their own self-interest Thus, economics is a social science…a study of how people act in their own self-interest

The Three Amigos Economic Questions What products do we produce? Trade-offs How do we produce the products? Alternative means of production Who consumes the products? How to distribute society’s products

Two Different Kinds of Products Goods Something tangible that satisfies people’s wants and desires Services Something intangible that satisfies people’s wants and desires

Two Different Kinds of Products

Two Different Kinds of Products Types of Goods Consumption goods – Provide immediate satisfaction of wants Food, Gasoline, Clothing Intermediate goods – Part of final product or used up in production process Wood used for desk, rubber for bottom of shoe Capital goods – Manufactured factor of production that is used to produce other things Physical - Tractors, factories, hammer, machinery, printing press Human – Result of training and/or education

Ten Principles of Economics Numero uno: People face trade-offs Usually have to sacrifice one thing for another Example: Money used for buying bubble gum could have been saved for a video game Example: Time spent working a summer job could have been used to study palm reading Important trade-off for society is between efficiency and equality Efficiency – maximizing utility from scarce resources Equality – distributing economic welfare amongst society

Ten Principles of Economics Numero dos: Cost of something is what you give up to get it Cost of attending Stanford? Tuition = $40,050 On Campus Room & Board = $12,291 Books = $1,500 Fees = $1,514 Misc costs (Plane tickets, etc) = ? Total = $55,355 Going to a school where your mascot is a color and your represented by a goofy tree = PRICELESS Sacrificed Job = $15,080 Opportunity Costs – Whatever must be sacrificed to obtain some item

Ten Principles of Economics Numero tres: Rational people think at the margin At the margin means at the ‘edge’ – Small, one unit change in value Marginal cost - cost of one additional unit of something Marginal benefit – benefit of one additional unit of something

Ten Principles of Economics Numero quatro: People respond to incentives An incentive is something that induces a person to act Can be positive (reward) or negative (punishment) Examples? Governments often use incentives to induce change…some might argue economic incentives are the only way to provoke change

Ten Principles of Economics Numero cinco: Trade makes everyone better off Trade allows people/countries to specialize in something they do best Trade allows people/countries to acquire a greater diversity of goods/services

Ten Principles of Economics Numero seis: Markets are usually a good way to organize economic activity Market Economy: An economy that allocates resources through markets via the decentralized decisions of firms and households Replaced centrally planned economies around the world Advantages of Market economy? Adam Smith (1776 Wealth of Nations)– Invisible Hand In centrally planned economies no self-regulation In market economies, the ‘invisible hand’ guides the market in deciding what to produce, how much and who gets goods & services

Pencil

Ten Principles of Economics Numero siete: Governments can sometimes improve market outcomes An economy needs a government to: Protect private property…ensure some semblance of stability To promote efficiency To promote equality

The Purge

Ten Principles of Economics Numero siete cont: Governments can sometimes improve market outcomes The free market sometimes fails to promote efficiency or equality Market Failure: When a market left on its own fails to allocate resources efficiently Sometimes due to externalities – impact of one person’s actions on the well-being of a bystander Prices in the market do not reflect the full costs or benefits of consuming a good or service Negative Positive

Ten Principles of Economics Numero ocho: A country’s standard of living depends on its ability to produce goods and services Numero nueve: Prices rise when the government prints too much money Numero diez: Society faces a short-run trade-off between inflation and unemployment

Thinking like an Economist Micro vs Macro Micro – small; what individuals/firms consider when making decisions Macro – study of aggregate decisions Policies Overall gov’t spending Conditions of economic growth

Thinking like an Economist Positive Economic Statement Descriptive Deals with cause and effect relationships Can be tested (not necessarily right) Normative Economic Statements Prescriptive Involve value judgments Cannot be empirically tested

Thinking like an Economist I’m positive, I’m positive.

Economics a science?

Adam Smith