Introduction to Economics D.W. Hedrick Fall 2003

Instructional Method Primarily Lecture format with discussion, simulations, and video presentations Constructive discussion is welcomed Grading is based on five of seven quizzes (25%), three midterms (25% each), and an optional comprehensive final (replaces lowest midterm) – NO MAKEUPS GIVEN

Instructional Method Suggestions for the study of economics

Definition of Economics Mankiw’s definition –How Society manages its scarce resources Hedrick’s definition –How society chooses to allocate its scarce resources among competing demands to best satisfy human wants Alternative definitions –Economics is the study of choice. –Economics is what economist do.

Scarcity and the Fundamental Questions of Economics Unlimited wants versus limited resources WHFM –What is to be produced? –How is to be produced? –For whom will it be produced?

Economics as a Science The scientific method Normative vs. positive approaches A brief history of economic thinking The language of economics

The Ten principles of Economic Thinking

Categories of Basic Principles of Economics How people make decisions? How people interact? How does the economy work overall?

How People Make Decisions Principle #1 - People face tradeoffs –Time allocation – an example of tradeoffs –Efficiency versus equity –Production Possibilities Frontier

How People Make Decisions 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

How People Make Decisions 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) *

How People Make Decisions 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 –Example of SUV (with child car seat) in Issaquah

How 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 –Example of why Ellensburg

How People Interact Principle #6 - Markets are usually a good way of organizing economic activity –Feudal times and haciendas in the new world –The power of trade: cooperation versus conflict –Markets: prices and quantities traded, typical and abstract

How People Interact Principle #6 - Markets are usually a good way of organizing economic activity creativity and productivity and resource allocation –“Failure” of centrally planned economies –“set it and forget it” becomes “compete or be obsolete”

How People Interact Principle #7 Governments can sometimes improve market outcomes –Market signals can fail to allocate resources efficiently or equitably –Public goods, the exclusion principle, the free- rider problem and non-rival consumption –External costs and benefits –Examples: vaccines, education, pollution

How People Interact Principle #7 Governments can sometimes improve market outcomes –Equitable or fair distribution of resources –Efficiency and equity: the pie analogy –Government Failure: is government intervention always the proper solution?

How the Economy works 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)

How the Economy works as a Whole Principle # 8 – A country’s standard of living depends upon its ability to produce goods and services –leisure time and productivity –the factors of production: land or natural resources, labor, capital, entrepreneurship –technology and productivity –the rule of 72 for growth rates

How the Economy works as a Whole Principle #9 – The general level of prices rises when the government prints and distributes too much money –Definition of money, and economic language

How the Economy works as a Whole Principle #9 – The general level of prices rises when the government prints and distributes too much money –Examples: “Not worth a continental” and Argentina –Establish of the Federal Reserve and the introduction of sustained inflation in the US

How the Economy works as a Whole 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

How the Economy works as a Whole Principle #10 – Society faces a short-run tradeoff between inflation and unemployment –Counter-cyclical stabilization versus pro- cyclical destabilization –Political business cycles