Economics Today

Chapter 1 The Nature of Economics

The Power of Economics Analysis

Defining Economics Economics is the study of how people make choices to satisfy their wants The purpose of economics is to understand choices Consumer Producer Employee Employer Economics is the study of how people make choices to satisfy their want. The purpose of Economics is to understand choices. Consumer Producer Employee Employer

Microeconomics versus Macroeconomics Microeconomics is the part of economic analysis that studies decision making undertaken by individuals (or households) and by firms. Examples Macroeconomics is the part of economic analysis that studies the behavior of the economy taken as a whole. Examples

The Economic Person: Rational Self Interest Economists assume that individuals act as if motivated by self interest and respond predictably to opportunities to gain.

The Rationality Assumption Economist assume that individuals do not intentionally make decisions that would leave them worse off. Realistic? No Useful? Yes

Self interest Self interest involves monetary gains but also: Prestige Friendship Love Power Compassion Others

Economics As A Science Economics is a social science. Models Theories

Models And Realism No model in any science are complete in the sense it captures every detail and interrelationship that exist. Model: Is an abstraction from reality. Maps serves as a Model

Assumptions Assumptions define the set circumstances. World is flat World is round Ceteris Paribus is an assumption that nothing changes except the factors being studied. “Other things equal”

Models of Behaviors Economic Models Do: Study the way people act Do not: Study the way people think Empirical Evidence

Substitution Substitution exits in virtually every decision you make. Consumption Production Substitution is not variety Same level of utility or satisfaction for each sustitution

Positive And Normative Economics Positive analysis, a scientific term that relates to the value-free nature of the inquiry. Positive Economics is concern with “what is” or facts. Normative analysis relates to values. Values are beliefs, things that are important to us as individuals.

Chapter 2 Scarcity and the World of Trade-Offs

Scarcity Scarcity is the most basic concept in all of economics. Scarcity exits because human wants always exceed what can be produced with limited resources and time that nature makes available. Scarcity is not a shortage or poverty.

Scarcity And Resources Resources are scarce! Resources can be defined as inputs used in the production of things that we want. Resources produce goods and services Factors of Production Land Labor Capital Entrepreneurship

Wants And Needs Needs are not objectively definable. Individuals have competing wants but cannot satisfy all of them, given limited resources. In a world of scarcity, every want that ends up being satisfied causes one or more other wants to remain unsatisfied or to be forfeited.

Scarcity, Choice, And Opportunity Cost Scarcity leads to the necessity of making choices. Every choice made means that some other choice (opportunity) had to be sacrificed You have one hour. What choices can you make to use that one hour? You must choice the highest-valued activity.

Scarcity, Choice, And Opportunity Cost The value of the next-best alternative is called its opportunity cost. The opportunity cost of any action is the value of what is given up. When you choose do something, you choose not to do something, which is the opportunity cost. What is the opportunity cost to go to College?

The World of Trade-Offs Time is a very important limited resource. How do we use it? Graphic Anaylsis Study time: Accounting versus Economics

Production Possibilities Curve A curve representing all possible combinations of total output that could be produced assuming: 1. A fixed amount of productive resources of a given quality, and 2. The efficient use of those resources. PPC is a graphic representation of, among other things, opportunity cost.

Technology Technology is defined as society’s pool of applied knowledge concerning how goods and services can be produced Technology is the formula used to combine the factors of production.

Off The PPC The PPC indicates the maximum quantity of one good available given the quantity of the other. Points outward Points inward

Efficiency An economy is efficient whenever it is producing the maximum output with given technology and resources. A situation in which a given output is produced at minimum cost.

Law of Increasing Costs The observation that the opportunity cost of additional units of a good generally increases as society attempts to produce more of that good. This causes the bowed out shape of the PPC, Why?

Economic Growth and The PPC What happens to the PPC when economic growth occurs?

Trade-Off Between the Present and the Future Whenever we use productive resources to make capital goods, we are implicitly forgoing current consumption. Trade-off between consumption goods and capital goods

Specialization and Greater Productivity Specialization is the division of productive activities among persons and regions so that no one individual or one area is totally self-sufficient. Absolute Advantage is the ability to produce a good or service at an absolutely lower cost, usually measured in units of labor or resource input required to produce one unit of the good.

Comparative Advantage The ability to produce a good or service at a lower opportunity cost. Comparative advantage is relative. Example: Babe Ruth

The Division of Labor The segregation of a resource into different specific task. Example: automobile workers