* Economic Growth & Scarcity

Economics for Leaders Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade.

Economics for Leaders #1: People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives. #2: Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up. #3: People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways. #4: Institutions are the “rules of the game” that influence choices. Laws, customs, moral principles, superstitions, and cultural values influence people’s choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system. #5: Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it

Economics for Leaders * The Science of Choice! * A social science that focuses on the choices people make. * The choice people and countries make about how to use their resources in the efficient way.

Economics for Leaders * The choices people make have both present and future consequences * People make choices based on their perceptions of what is best for them * Choices made by individuals, firms, or gov. officials often have long-run unintended consequences.

Economics for Leaders * This is not the question! * Scarcity exists everywhere * Scarcity forces us to choose! * “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it.” – Thomas Sowell

Economics for Leaders

* Needs: * Necessary to remain alive * You work for these Wants: Not needed to survive Makes our lives better Comes from extra

Economics for Leaders * Time is scarce to you! * You have to choose whether you will sleep away the morning or go to school You must choose whether to spend your allowance or save your allowance Scarcity prohibits you from saving and spending the same dollar: YOU MUST CHOOSE If you spend: You must choose what to buy… If you save it: Will you save it for a college or car?

Economics for Leaders * Society must choose! * Will a piece of land be used as a park? * Or, a housing development? * Will tax revenue be used for healthcare * Or, education?

Economics for Leaders * Opportunity Cost: the most highly valued opportunity given up when you make a choice * I buy the shoes! * My opportunity cost of buying the shoes… * ….. I cannot buy the ipad. * The opportunity cost is the opportunity lost

Economics for Leaders * The opportunity cost of spending money is * The lost opportunity to save the money!

Economics for Leaders * The opportunity cost of using land for parks is * Land not available for building houses

Economics for Leaders * The opportunity cost of tax revenues spent on healthcare is * the lost opportunity to spend the money on education opportunity cost is the most highly valued opportunity given up! Keep in mind that the opportunity cost is the most highly valued opportunity given up!

Economics for Leaders * Your alarm clock goes off! * You have a # of options: * Go To school * Play Modern Warfare all day * Go to the beach

Economics for Leaders * Is it playing Modern Warfare and going to the beach? * NO! * Because of the scarcity problem, you would have only been able to do one of those options if you weren’t at school. * You are only giving up the opportunity to do one of them, more specifically the one you were most likely to do! on which you placed the next highest value * Your opportunity cost for choosing school would be the one on which you placed the next highest value, playing Modern Warfare!

Economics for Leaders Every choice requires giving up something (costs)

Economics for Leaders * Pizza Factory put up a sign for all FBHS students: * Why wouldn’t that be a free lunch? * It didn’t cost you anything right? * Explicit cost=money costs Pizza and soda: $0.00

Economics for Leaders * Any situation which forces you to make a choice results in an opportunity cost=implicit cost

Economics for Leaders * You may spend several hours this evening tweeting, facebooking, and texting friends at no additional monetary cost to your phone plan. * You may think of this as free, but there is a cost * What opportunity did you give up? * Because of scarcity we must choose and choice means that here is an opportunity cost.

Economics for Leaders * Your choice to eat pizza * Means that you are giving up the opportunity to dine elsewhere! * Like:

Economics for Leaders * Perhaps, your evening spent tweeteing and texting at home was an evening not spent with other friends at a football game or * God forbid, not playing Modern Warfare! * The cost of what you give up=implicit costs

Economics for Leaders * The most important and irretrievable of these costs is time.

Economics for Leaders * Scarcity * Choice * Opportunity Cost

Economics for Leaders they * People make the choice that they perceive will offer the most benefit over cost * People’s choices among considered alternative choices reflect their perceptions of the costs and benefits – to them- of the alternatives they face * The key to understanding human behavior lies in: identifying incentives. * Incentives are rewards or punishments that influence people’s actions * When incentives change, people’s behavior changes in predictable ways.

Economics for Leaders

Economics for Leaders * Why Should We Care?

Economics for Leaders

SCARCITY: the FACT that resources are limited and human wants and needs are unlimited Not enough to go around!

Economics for Leaders * Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.

Economics for Leaders Fact: Resources ARE limited Land (natural resources) Labor (human effort) Capital (buildings, machines, & technology) Entrepreneurship (willingness to risk) Time Fact: Human desires are boundless

Economics for Leaders * Available resources are limited  Land (57,506,000 sq mi. & not even all habitable!)  Labor (6,7 bil. souls x 24 hrs a day)  Capital (less than ∞, trust me)  Entrepreneurship (not everybody is Bill Gates) * Human desires are boundless

Economics for Leaders * It’s not just you out there

Economics for Leaders Scarcity Forces You to CHOOSE Something Is Scarce? SCARCITY CHOICE

Economics for Leaders *A*A lthough we cannot have it all… …we still can have SOME of it. WW hat shall we have? HH ow much of it? HH ow shall we produce it? WW ho will get it? Scarcity implies the need to make CHOICES!

* Some choices are wiser than others * Some deal better with that problem of scarcity.

Economics for Leaders

* Why are some countries rich and others poor? * Why have some countries experienced economic growth and others have not? (What factors lead to economic growth? * What can be done to promote economic growth and reduce poverty?

Economics for Leaders

* Economic growth raises standards of living, even in the continuing face of scarcity

Economics for Leaders ~1750 Population Growth and Important World Events

Economics for Leaders Notice the same hockey stick in per capita GDP as we saw in world population: this graph really shows that things have changed quite a bit even for the average Joe Schmoe on the street: you cannot get a 37-fold increase without the poor sharing in it in some way or other. Clearly, you can only extract wealth that has already been created and if the average world citizen in 1600 had 150 dollars and there were not even a billion of them, then surely there is no way to get to $6500 per person with 6+ billion just by looting. The numbers would not add up.

Economics for Leaders improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living

Economics for Leaders * Increasing productivity means that greater output is produced from a given set of resources in a given period of time.

Economics for Leaders * The formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Institutions in your life: Institutions

Economics for Leaders Dating ?

Economics for Leaders 1.) Open markets 2.) Property rights 3.) The rule of law 4.) Entrepreneurship and innovation

Economics for Leaders

* The reward or penalties that influence people’s choices and behavior. * People respond predictably to positive and negative incentives * Rewards are positive incentives that make people better off * Penalties are negative incentives that make people worse off.

Economics for Leaders * The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

Economics for Leaders * The value of the next best or forgone alternative.

Economics for Leaders Our only choice is the next choice Marginal = additional, next, a little more or a little less

Economics for Leaders Marginal Benefit = benefit of the next Action, Choice, Unit of production

Economics for Leaders Rational choice = choosing the alternative that has the greatest excess of benefits over costs. If ALL choices are rational, then the challenge is to understand the decision-maker’s perception of costs and benefits. Another way of putting it…

Economics for Leaders 1.) Scarcity forces us to choose among alternatives 2.) Economic growth gives us more to choose from and raises standards of living by: * reducing infant mortality, * Increasing life expectancy, * reducing hunger, * improving environmental quality, and * reducing the incidence of debilitating diseases.

Economics for Leaders 3.) Some institutions and institutional arrangements encourage economic growth and some do not. What are the institutions that foster growth and economic development? 4.) The institutions that foster growth and economic development include: Open markets Property rights the rule of law Entrepreneurship and innovation