1. Introduction to Economics

2. What is Economics? Scarcity – a basic human dilemma
Limited resources vs. unlimited wants
The human condition requires making choices
Definitions of Economics
Mankiw’s definition
…is the study of how society manages its scarce resources
Hedrick’s definition
…is how society chooses to allocate its scarce resources among competing demands to improve human welfare
Alternative definitions
… what economists do.
… is the study of choice.

3. Fundamental Questions of Economics - Scarcity requires all societies to answer the following questions:
What is to be produced?
How is to be produced?
For whom will it be produced
WHFM Questions

4. The Fundamental Economic Problem
Scarcity is the condition where unlimited human wants face limited resources. 
Economics is the study of how people satisfy wants with scarce resources. 
Needs are required for survival; wants are desired for satisfaction. 
Someone has to pay for production costs, so There Is No Such Thing As A Free Lunch (TINSTAAFL).
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5. Discussion Question
Why do you think scarcity is an issue with the rich as well as the poor?
It is a human trait that few people, regardless of their economic status, are satisfied with what they have.
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6. Three Basic Questions
What must we produce? Society must choose based on its need. 
How should we produce it? Society must choose based on its resources. 
Figure 1.1
For whom should we produce? Society must choose based on its population and other available markets.
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7. Discussion Question
How might the economic decisions of a mountainous island society differ from those of a mountainous landlocked society?
An island society has water resources to consider and likely a more limited population.
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8. Categories of Basic Principles of Economics
How do people make decisions?
How do people interact?
How does the economy work overall?
10 basic principles

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

10. 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

11. 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)
The boxes example

12. . 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

13. How Do 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

14. Principle #6 - Markets are usually a good way of organizing economic activity
feudal times where feudal states were self- supporting, also haciendas in the new world
the benefits of trade are so powerful that people began to trade
markets for economists are more abstract than the notion of a middle eastern bazaar or a flea market and simply determine the prices and quantities traded of different goods and services
the “failure” of centrally planned economies and the movement towards markets for the WHFM questions

15. Markets
Principles 1-5 combine with markets to turn the pursuit of self-interest into promoting the interests of society
Adam Smith and the “invisible hand”
creativity and productivity are stimulated by the pursuit of self-interest into improving resource allocations
“set it and forget it” becomes “compete or be obsolete”
in some cases markets fail to allocate resources effectively so,

16. Principle #7 Governments can sometimes improve interaction that occurs in markets
there are circumstances when market signals fail to allocate resources efficiently or equitably
Public Goods, Externalities and Income Distribution
Some goods or services that people desire will not be produced by markets (e.g. lighthouses).
Some goods or services will either be underproduced (vaccines) or overproduced (pollution) because markets fails to register certain benefits or costs.

17. markets may also fail to provide an equitable or fair distribution of resources
government intervention with its ability to coerce (the opposite of voluntary) can regulate, tax and subsidize to change market outcomes
efficiency and equity: the pie analogy
if government intervention always the proper solution?

18. How Does the Economy Work 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)
leisure time and productivity

19. the factors of production: land or natural resources, labor, capital, entrepreneurship
technology and productivity
the rule of 72 for growth rates

20. Principle #9 – The general level of prices rises when the government prints and distributes too much money
definition of money, the concept of snow to Inuits, and economic language
inflation is an increase in the general or average level of prices in an economy
“not worth a continental” and recent example in Argentina
the establish of the Federal Reserve and the introduction of sustained inflation in the US

21. 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
countercyclical stabilization versus pro- cyclical destabilization
political business cycles