1. Economic Systems & Economic Analysis

2. Resource Classifications
Factors of production:
Anything which is directly used in the production of goods and services
Land
Natural resources and raw materials
Labor
Worker’s time and effort
Capital
Physical Capital: Machines, factories, construction equipment
Human Capital: Education, skills, experience

3. Marginal Analysis Decision to rent a kayak
What is happening to the benefits?
Diminishing marginal benefits
Marginal: additional, extra, one more
Given the costs and benefits of kayaking, should you kayak for 3 hours?
Individuals make decisions “on the margin”
Results in an equilibrium outcome which maximizes net benefits

4. Equilibrium Analysis Equilibrium
Results after an individual has exploited all opportunities to make themselves better off
What’s the best line to wait in at the grocery store?
It doesn’t matter – all lines should be roughly the same speed!
Economic analysis is primarily concerned with equilibrium analysis

5. Types of Statements Positive statements Normative statements
Why do people disagree on economic and political issues?
Positive statements
Objective statements that can be proven or disproven
“If you decrease the cost of college, then more students will attend.”
Normative statements
Opinions or beliefs based upon subjective value judgments
“The NSA should stop spying on American citizens.”

6. Limits of Economic Analysis
Environmental Proposal
Suppose the government is proposing to impose a tax on gasoline in order to reduce carbon emissions
What would be the effects of imposing such a tax?
How could we forecast and quantifying the effects?
Should a tax on gasoline be imposed?
Common value conflicts

7. Efficiency vs. Equity Efficiency Visualizing the economic pie Equity
Achieving a goal with the fewest resources possible
Student printing policy
An outcome is efficient when it is impossible to make someone better off without making someone else worse off
Visualizing the economic pie
Equity
“Fairness”
Handicap parking laws

8. Economic Systems Three key tasks:
What to produce?
How to produce it?
Who gets what is produced?
Two distinct approaches to answering these questions
Command Economy vs Market Economy

9. Sources of Wealth What does it mean for a country to be wealthy?
What gives money its value?
Not money but standard of living that matters
How is wealth created?
Production of goods and services
Specialization and voluntary trade

10. Command Economies Examining Communism
What are the appeals of communism/criticisms of capitalism?
Why have command economies typically failed?
Unable to promote economic growth by ignoring human nature

11. The Power of Markets
Markets properly harness self-interest for societal good
Adam Smith’s insight
Is greed good?
Milton Friedman on greed:
Does capitalism promote international peace or war?
Friedman’s pencil:
Markets are consistent with freedom and economic growth
Economic freedom:

12. Economic Models Model: Simplified abstraction of reality
Why are models used?
Aid in understanding underlying concepts
Allow for predictive analysis
How much detail and realism is ideal?
Characteristics of a useful model
Highlights what matters
Makes reasonable assumptions
Enables one to isolate the effects of a single change at a time
Ceteris Paribus
“All other things equal”