1. Introduction to Economics

2. Introduction to Economics
What is the economic problem?
Scarcity
: resources on earth are finite
but human wants are unlimited
Definitions of economics
Webster: a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services
Tucker: the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants
Roberson: studies what rational people do when faced with choice

3. Introduction to Economics
Capitalism
Markets determine what is produced, how it’s produced and who consumes the output using the market price
Business owners may succeed or fail
Limited role for government
to protect private ownership, to protect
citizens, and to build common infrastructure
Socialism
Planning role for government
Society ownership (no private property)
Why is most of the world capitalist today?
Socialism failed to provide entrepreneur and worker incentives

4. Introduction to Economics
Resources used in production
Land is the resource provided by nature.
Labor is the mental and physical ability of workers to produce goods and services.
Capital is the physical plants, machinery, and other equipment used to produce goods and services.
Entrepreneurship
The creative ability of individuals to seek profits by taking risks and combining resources to produce goods and services.

5. Introduction to Economics
Microeconomics
the study of how households and firms make decisions and how they interact in markets (Mankiw)
microeconomics studies topics a business owner can change
Macroeconomics
the study of economy wide phenomena, including inflation, unemployment, and economic growth (Mankiw)
macroeconomics studies topics a business owner can’t change but must understand for planning
What is?
A householder buying food at the market:
microeconomics
A business planning to purchase a truck:
microeconomics
Ford planning to purchase a factory:
microeconomics
Ford planning to exit the auto industry :
microeconomics
The auto industry going away
microeconomics

6. Introduction to Economics
Scientific Method
Problem Identification
applying an scientific method to define the issue
Model Development
hypothesize an explanation using economics models
Economic models are mathematical equations derived by assumptions
models are a simplification of the real world
assumptions create the simplified world. Good assumptions will not impact the experiment outcome.
Testing a Theory
In the physical sciences “physics” researchers test the hypothesis under controlled lab experiments.
In the social sciences “economics” researchers don’t have the option to control the subject environment;
uses history and other observed relationships
Ceteris Paribus Assumption – while certain variables change, “all other things remain unchanged”

7. Introduction to Economics
Positive Statement
Claims that attempt to describe the world as it is (objective view)
Normative Statement
Claims that attempt to prescribe how the world should be (subjective view)
What is?
Donald should be fired:
normative
Donald was fired:
positive
Unemployment is 9.5%:
positive
Unemployment of 9.5% is too high:
normative
Positive Analysis
attempts to be objective, the scientific method, by removing bias from the research and conclusions

8. Introduction to Economics
Sometimes decision makers don’t listen to economists
Dr. Romer, Univ. of California at Berkeley
Examined if NFL teams punt too often
The conclusion was a resounding “Yes”
In fact NFL teams should “Never” punt (win more without punting)
Results were received and accepted by most all NFL coaches
Yet on Sunday, fourth and two, coaches continue to punt
Why?
Could there be another rational incentive to punt beyond trying to win the game?
Yes, at times a punt will not be successful, yielding better field position for an opponent.
This creates job risk for the coach often inconsistent with attempting to win the game.