1. What is Economics About?

2. Economics: The Social Science which studies social and individual choices in a condition of scarcity with the objective of maximizing the satisfaction of human wants.

3. Resources and Wants We have limited resources.
We have wants which exceed those resources.
This leads to scarcity
Scarcity exists when there are insufficient resources to satisfy people’s wants.

4. Economic Resources Land - Natural Resources Labor - Skills of People
Capital - Man made inputs to production. (not money)
Entrepreneurship - The organizing resource of production; combines the other resources and accepts risk.

5. Payment to the Resources
Rent (for land)
Wages (for labor)
Interest (for capital)
Profit (for entrepreneurial ability)

6. Circular Flow of Economic Activity
Resource Prices
& Income
Resource
Market
Wages, Interest,
Rent, & Profit
Income $
Factors of Production
Households Firms
Goods and Services
Product
Market
Revenue $
Consumption $
Product Prices

7. The Questions of Economics
Scarcity requires us to make choices involving:
What to produce?
How to produce it?
For Whom? (how Income is distributed?)

8. Methods of Social Choice
Society makes choices through:
Market Forces
Governmental Forces
Social Forces (custom and tradition)

9. Economic Choice
In Capitalist economies the Market is the major rationing device:
Markets ration through the forces of
Supply and Demand.
If Demand > Supply the Price
and rations the shortage.

10. Economic Choice
In Command Economies (centrally planned), the Government make choices which allocate resources and decide:
What?
How?
For Whom?

11. Economic Choice In Mixed Economies (both market and
government combined), the society makes
choices which allocate resources through
a combination of government intervention
and market forces.
Government Forces:
Government Spending
Regulation
Taxes
Subsidies

12. Opportunity Costs
Opportunity Cost - is the highest valued alternative foregone when choosing between alternatives.
When an activity is chosen, the opportunity cost is the benefit expected from the next best alternative given up.

13. Economic Choice
To choose, evaluate tradeoffs--the opportunity cost of a choice is the value of the best alternative you gave up
“Wow, I could have had a V8!”
BEER!

14. Rational Self-Interest
Individuals rationally select alternatives they perceive to be in their best interests

15. Rational Choice I will choose to make a choice if MB > MC
Incentives change Benefit or Cost!
Incentives will cause:

16. Rational Choice I will choose not to make a choice if MB < MC
Incentives change Benefit or Cost!
Disincentives will cause:

17. Incentives Economists believe that incentives work.
They believe that people respond to incentives (that they weigh the costs and benefits rationally).
If the cost of choices increase, less of that
choice will be made.
If the benefit of a choice is increased, people will make that choice more.

18. How Do Economists Think: Utility and Rationality
Economists assume that people act rationally Economists assume that people act to maximize their own happiness and minimize their costs.
This happiness that economists assume people maximize is called utility.
This does not mean people are always greedy - some people get happiness from others happiness.

19. Types of Economics
Microeconomics - Studies the behavior of individual decision units (people and firms).
Macroeconomics - Studies the behavior of entire economies as a whole.

20. Types of Economics
Positive Economics - The economics of what is. This is descriptive of fact and theory without opinion.
A positive economic statement can be proved or disproved by reference to facts.
Normative Economics - The economics of what should be. This is economics where policy issues involve evaluation and the opinion of the economist.
A normative economic statement represents an opinion, which cannot be proved or disproved.

21. ECONOMIC GOALS
What are our
goals and
objectives?

22. ECONOMIC GOALS ECONOMIC GROWTH FULL EMPLOYMENT ECONOMIC EFFICIENCY
PRICE LEVEL STABILITY
ECONOMIC FREEDOM
EQUITABLE DISTRIBUTION
ECONOMIC SECURITY
BALANCE OF TRADE

23. ECONOMIC GOALS ECONOMIC GROWTH FULL EMPLOYMENT ECONOMIC EFFICIENCY
TRADEOFFS
PRICE LEVEL STABILITY
ECONOMIC FREEDOM
EQUITABLE DISTRIBUTION
ECONOMIC SECURITY
BALANCE OF TRADE

24. Economic Models
An economic model is a simplification of reality designed to capture the important elements of the relationship under consideration
A model is usually a graph or a set of mathematical equations

25. How are models created? Inductive Reasoning:
Reasoning from facts to generalizations.
- Gather, systematically arrange, and draw conclusions from the analysis of facts and data (empirical analysis). Test the theory (hypothesis) against real-world situations.
Deductive Reasoning:
- Starting with generalities of how the world works, generate hypotheses and test those predictions against real-world situations.

26. What is the Scientific Method?
Problem identification
Model development
Testing a theory

27. Either Can Lead to Policies
THEORETICAL
ECONOMICS
THEORIES
INDUCTION
DEDUCTION
FACTS

28. Scientific Reasoning Issues
In complicated, real-world systems, how do you unscramble cause and effect?
Hold other things equal (ceteris paribus).
Fallacy of composition
Post hoc Fallacy If A happens before B, did A cause B?
Confusing correlation with causation

29. Scientific Reasoning Tool
Ceteris Paribus:
It is Latin for “all else equal” and
it means that we are assuming that all other variables which might be related are held constant.

30. Scientific Reasoning Fallacies:
The Fallacy of Composition: What is true for one individual is not always true for the whole group.
What is true at the Micro level is not always true at the Macro level.
Example: If I stand up at a basketball game, I can see better. If everybody stands up, we can not see any better.

31. Scientific Reasoning Fallacies
Post hoc, ergo propter hoc (after this, therefore because of this).
Just because one thing occurs before another does not mean that it caused it.
Example: The sun comes up and people drive to work. Did the sunlight cause this activity? Don’t they drive to work on cloudy days?

32. Scientific Reasoning Fallacies:
Correlation vs. Causation :
Because two variables are systematically related, (they may increase together or always seem to move in opposite direction)
this correlation is not proof of a cause-effect relationship between them.
Example: Change in the Money Supply and change in GDP, which causes which?

33. Graphs Used in Economic Models
Patterns to Watch For:
variables that move in the same direction
variables that move in opposite directions
variables that are unrelated 14 16

34. A Line with Positive Slopex y
change in x
change in y >0

35. Two-Variable Diagram Representing a Direct Relationship
Income

36. A Line with Negative Slopex y
change in x
change in y < 0

37. Two-Variable Diagram Representing an Inverse RelationshipQ P

38. Two Diagrams Representing Independence between Two Variables

39. Calculating the Slope of a Line

40. Calculating Slopes

41. Calculating the Slope of a Curve at a Particular Point

42. Graphing Relationships Among More Than Two Variables
Price Ice cream consumption
(cents per scoop) (gallons per day)
30ºF 50ºF 70ºF 90ºF 15 29

43. Functional Relationships
DIC = f (P T)
Ice Cream demand depends on
price and temperature.
If temperature increases
Demand Increases

44. A Change in Demand
Ceteris paribus, if temperature rises, people will buy more Ice Cream at each price 1 2 3 4 5 6
Price
New Demand for Ice Cream
Demand for Ice Cream
Quantity Ice Cream 1 2 3 4 5 6 7

45. A Movement Along a Curve vs. A Shift in the Curve
Price
A change in quantity demanded P0 P2 Q2 D0 Q0
Quantity

46. A Change in the Quantity Demanded Versus a Change in Demand
Price
A change in quantity demanded P1 P0 D0 Q1 Q0
Quantity

47. A Change in the Quantity Demanded Versus a Change in Demand
Price
A change in demand
Decrease in
Increase in
demand
demand D1 D0 D2
Quantity

48. Key Terms and Concepts Scarcity Economics Utility Land Labor Capital
Entrepreneurship
Opportunity Cost
Marginal Analysis
Rational Behavior
Induction
Deduction
Fallacy of Composition
Ceteris Paribus
Positive Economics
Normative Economics
Microeconomics
Macroeconomics
Inverse Relationship
Direct Relationship
Slope of a line