1. Thinking in the Language of Economics Please listen to the audio as you work through the slides.

2. A key to success: Focus on understanding, not memorizing! Please listen to the audio as you look through the slides. It will be like sitting in class, but without the commute.

3. Thinking in the Language of Economics One of the biggest challenges for new Economics students is getting a grip on the language of Economics. So lets start with that. I will help introduce you to some new words and help you understand what they mean Learning Objectives Students should be able to thoroughly and completely explain: 1. The 3 features of the economic way of thinking. 2. The pitfall to sound reasoning.

4. Economics Is: The social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants. Economics Defined

5. Economics is about Connecting the Dots Finding relationships between seemingly unrelated information

6. Sometimes everything comes up roses!

7. And sometimes the result is bad!

8. Either way, Your success of failure will depend on Your ability to connect the dots! Please keep that in mind throughout this course.

9. How to position Economics This is our only home, for now!

10. How to position Economics Economic Systems are part of Global Ecosystems

11. What is an Ecosystem? An ecosystem is a community of animals and plants interacting with one another and with their physical environment. Ecosystems include physical and chemical components, such as soils, water, and nutrients that support the organisms living within them. These organisms may range from large animals and plants to microscopic bacteria. Ecosystems include the interactions among all organisms in a given habitat. People are part of ecosystems. The health and wellbeing of human populations depends upon the services provided by ecosystems and their components - organisms, soil, water, and nutrients, etc.

12. What are Ecosystem Services? Ecosystem Services are the processes by which the environment produces resources that we often take for granted such as: clean water, timber, and habitat for fisheries, and pollination of native and agricultural plants. Whether we find ourselves in the city or a rural area, the ecosystems in which humans live provide goods and services that are very familiar to us. To what degree do we value those goods and services?

13. What “services” do Ecosystems produce? List of Ecosystem Services Moderate weather extremes and their impacts Disperse seeds Mitigate drought and floods Protect people from the sun’s harmful ultraviolet rays Cycle and move nutrients Protect stream and river channels and coastal shores from erosion Detoxify and decompose wastes Control agricultural pests Maintain biodiversity Generate and preserve soils and renew their fertility Contribute to climate stability Purify the air and water Regulate disease carrying organisms Pollinate crops and natural vegetation

14. Dots These ecosystem services represent only a few of the Dots that we need to connect

15. Global North – Global South Map

16. The Language of Economics 3 key Features of the economic way of thinking 1.Scarcity and Choice 2.Rational Behavior 3.Marginal Analysis

17. Scarce resources – 1950 to 2000 Let’s look at a few key resources and begin to connect the dots Water – Water use tripled between 1950 and 2000 What is the # 1 use of water? – The earth’s ability to produce water stayed the same – Globally, water levels dropping (aquifers) What’s an aquifer? – Fossil – Rechargeable

18. Canada and America, Saudi Arabia

19. Saudi Arabia has been self sufficient in grain thanks to use of their aquifer. Now ending their production of grain due to overuse of the aquifer.

20. Source: http://water.usgs.gov/ogw/rasa/html/introduction.html U.S. Aquifer Map Compare aquifer locations and prime food growing areas

21. Water Glaciers melting at a more rapid pace Himalayan glaciers connect to Asia's nine biggest rivers that pour into China, India, Pakistan, Bangladesh and Myanmar keeping rivers flowing during dry season. Connect the Dots! Scarce resources – 1950 to 2000

22. Demand for seafood increased fivefold (1950 to 2000) – The sustainable yield of ocean fisheries stayed the same Connect the dots between consumer demand, seafood suppliers, and sustainable yield thresholds and draw a conclusion. Burning fossil fuels raised Carbon Dioxide emissions fourfold – Earth’s natural capacity to absorb CO2 stayed the same How does the earth process CO2? Connect the dots and draw a conclusion.

23. Scarce resources – 1950 to 2000 Agricultural land diminishing – desertification, over farming – What do these terms mean and how do they impact Population growth rates Economic growth rates The health and wellbeing of people living in those areas People living on the other side of the world?

26. Scarce resources – 1950 to 2000 World grain production not increasing as in the past World population increasing Connect those two dots and draw a conclusion.

27. Global Population Density The number of people living per unit of an area (e.g. per square mile); The darker the color, the greater the population density. What conclusions do you draw from this information?

28. Scarce resources – 1950 to 2000 World demand for food tripled. A good source for more information is: www.pecad.fas.usda.gov

29. Did you know? China is the largest producer and consumer of cotton. India is the second largest producer of cotton. Pakistan, another major cotton producer. How does this relate to what you have just learned? What connections do you see?

30. Features of the economic way of thinking SCARCITY & CHOICE Resources are limited Our wants are unlimited Therefore our choices are limited No free lunch All production involves the use of scarce resources and thus the sacrifice of alternative goods. Opportunity cost! What you have to give up to get what you want What is the opportunity cost of taking a class? What is the opportunity cost of smoking?

31. RATIONAL BEHAVIOR Human behavior reflects rational self interest Assumption: We act in our own best interests. We really need to question this! Do we really act in our own best interests? How does that impact economic theory? We want to increase or maximize our UTILITY Utility = satisfaction or pleasure Given our unique set of preferences (ranking) Applies to individuals, firms, governments We weigh the costs and benefits of our decisions. We do our own cost – benefit analysis Features of the economic way of thinking

32. More about Utility Diminishing marginal utility – Utility – Marginal utility – the increment to total utility that results from the consumption of one more unit of a good or service – Diminishing marginal utility (what does it mean?) Satisfaction obtained from Consumption Three characteristics of utility – Utility differs from usefulness – Utility is subjective – Utility is difficult to quantify

33. The United States still maintains nearly 800 military bases in more than 70 countries and territories abroad. Graphic by 5W Infographics.

34. More about Utility Total utility – Total satisfaction derived from a specific quantity of a good or service Marginal utility – Extra satisfaction derived from an additional unit of a good or service Law of diminishing marginal utility – Explains downward sloping demand curve – more on this later.

35. Utility Graphically 0 10 20 30 10 8 6 4 2 0 -2 1234567 1234567 Total Utility (Utile) Marginal Utility (Utils) (1) Tacos Consumed Per Meal (2) Total Utility, Utils (3) Marginal Utility, Utils 0123456701234567 0 10 18 24 28 30 28 ] ] ] ] ] ] ] 10 8 6 4 2 0 -2 TU MU Total Utility Marginal Utility Units Consumed Per Meal

36. Theory of Consumer Behavior Key dimensions of the consumer problem 1.Rational behavior 2.Preferences 3.Budget constraint 4.Prices (do prices reflect the true costs of production?) If not, what are the impacts? 5.What happens when income changes? It depends! Make sure you understand the two cases. 7-36

37. Pipelines across America Map of major natural gas and oil pipelines in the United States. Hazardous liquid lines in red, gas transmission lines in blue. Source: Pipeline and Hazardous Materials Safety Administration.

38. Theory of Consumer Behavior Consumer’s goal: – Find the utility maximizing combination of goods Utility maximizing rule – Allocate all income, so that – Last dollar spent on each good yields the same marginal utility – Make decisions based on Marginal utility per dollar 7-38

39. Features of the economic way of thinking Marginal analysis – marginal meaning “extra” Marginal Benefits & Marginal Costs Most decisions involve changes from the present situation. Marginal costs exist because the decision to produce more of some product means the sacrifice of other products. Marginal Benefit – the benefit derived from consumption of one more unit. Marginal Cost – the cost associated with the production of one more unit.

40. 3 features of the economic way of thinking 1.Scarcity and choice 2.Rational behavior 3.Marginal analysis

41. Why Study Economics? Economics for Citizenship / voting Political / social problems have economics aspects. How much war on terror is enough? The war on drugs, poverty, etc. when will they be over? Professional & Personal Applications Help students improve their analytical skills which are in great demand in the workplace. Improve Economic decisions of business people. Use of new technology, Recessions, Inflation, Unemployment, personal employment decisions, etc.

42. Economic Methodology Scientific Method - used by economists and other social scientists, physical and life scientists 1.Observe the facts, 2.Formulate hypothesis - an explanation of cause & effect 3.Test the hypothesis, 4.Accept, reject, or modify the hypothesis 5.Continue to test leading to Theory, Law or Principle: well tested and accepted theory. Models – simplified representation of how things work.

43. Economic Methodology Theoretical economics involves establishing economic theories by gathering, systematically arranging, and generalizing from facts. Good economic theories are tested for validity against facts. Economists use these theories – the most reliable of which are called laws or principles to explain and analyze the economy. Policy economics entails using the economic laws and principles to formulate economic policies.

44. Theories Facts Policy Economics Theoretical Economics Relationship between facts, theories, and policies

45. Analytical Economics – the ascertaining of cause and effect, within the economic system. Other Issues: Terminology – considerable overlap reflecting a gradation in the generalizations. Investment Generalizations – to simplify the complex Theories, Principles, Laws are generalizations Other-Things-Equal – ceteris paribus (other things constant) Abstractions - simplifications from reality Graphical Expression – graph intensive Economic Methodology

46. Economic Policy Approach STATE THE GOAL Achieve 4% unemployment rate in 2 yrs. POLICY OPTIONS Fiscal policy or Monetary policy IMPLEMENT & EVALUATE Measurable And Observable Evaluate Alternatives And select Best one

47. What are our National goals and objectives? Economic Goals

48. TRADEOFFS?TRADEOFFS? Economic Growth – obtain a higher standard of living Full Employment – provide suitable jobs for those willing and able to work Economic Efficiency – achieving maximum fulfillment of wants while using available productive resources. Price-Level Stability – avoid inflation and deflation Economic Freedom – freedom in economic activities. Economic Goals

49. TRADEOFFS?TRADEOFFS? Equitable Distribution of Income – No group of citizens face poverty while most others enjoy abundance Economic Security – provide for those less able, the chronically ill, disabled, laid off, aged, or otherwise unable to earn minimal levels of income Balance of Trade – seek an overall balance with the rest of the world Economic Goals

50. Macroeconomics examines the Economy as a whole

51. Microeconomics looks at specific economic units

52. Positive Economics Absolute Facts Normative Economics What Ought to be

53. 1.Bringing your own Biases to the analysis – government less efficient than business 2. Loaded (emotionally biased) Terminology – obscene profits, mindless bureaucrats 3. Definitions – Investment (stocks and bonds vs. purchase of newly created real capital assets) Pitfalls to sound reasoning

54. 4. Fallacy of Composition – true for one = true for all 5. Causation Fallacies Post Hoc Fallacy – B follows A, therefore A causes B 6. Correlation or connection vs. Causation – education and income Pitfalls to sound reasoning

55. economics economic perspective utility marginal analysis scientific method theoretical economics principles generalizations other-things-equal assumption policy economics tradeoffs macroeconomics aggregate microeconomics positive economics normative economics fallacy of composition “after this, therefore because of this” fallacy