1. Chapter 1 The Principles and Practice of Economics

2. Chapter 1 Outline 1 The Principles and Practice of Economics Key Ideas
1.1 The Scope of Economics
1.2 Three Principles of Economics
1.3 The First Principle of Economics: Optimization
1.4 The Second Principle of Economics: Equilibrium
1.5 The Third Principle of Economics: Empiricism
1.6 Is Economics Good for You?
Key Ideas
1. Economics is the study of people’s choices.
The first principle of economics is that people try to optimize; they try to choose the best available option.
The second principle of economics is that economic systems tend to be in equilibrium, a situation in which nobody would benefit by changing his or her own behavior.
The third principle of economics is empiricism—analysis that uses data. Economists use data to test theories and to determine what is causing things to happen in the real world.

3. 1 The Principles and Practice of Economics
Evidenced-Based Economics Example: Is Facebook free? $0 but there is no free lunch

4. 1.1 The Scope of Economics
Economic Agent = Any group or individual that makes choices, such as consumers, firms, parents, politicians, etc. What does it mean if something is “scarce”?

5. 1.1 The Scope of Economics
Economics studies how agents make choices among scarce resources and how those choices affect society.
Positive Economics Propositions that can be verified Normative economics Propositions that cannot be verified

6. 1.1 The Scope of Economics
Positive Economics Some people took more than one and not everyone got a piece Normative economics Each student should just take one so that everyone gets a piece
Point out that normative economics requires a decision-maker that determines what the rules will be and why. You, as the “government” have decided that the fair allocation mechanism is that everyone gets one. But other allocation methods are viable (as discussed earlier) and you need to be able to explain why yours is superior. Or risk losing in the next instructor election!

7. Microeconomics The study of individuals, firms, government
1.1 The Scope of Economics
Microeconomics The study of individuals, firms, government
Macroeconomics
The study of the whole economy

8. 1.2 Three Principles of Economics
Three Principles of Economics: 1. Optimization = making the best choice possible with given information 2. Equilibrium = when everyone is optimizing; no one would be better off with a different choice 3. Empiricism = using data to figure out answers to interesting questions

9. 1.3 The First Principle of Economics: Optimization
Opportunity Cost
You want to buy a $1,000 computer. If you drive 3 miles, you can buy it for $990.
You want to buy a $20 book. If you drive 3 miles, you can buy it for $10.
Put this in the context of opportunity cost: if you didn’t make the drive, how much would it cost you if you were in the market for the book? ($10). If you didn’t make the drive, what would it cost you if you were in the market for a computer? ($10). The value of what you gave up is the same.

10. Costs Benefits 1.3 The First Principle of Economics: Optimization
Cost-Benefit Analysis
Costs
Benefits

11. 1.4 The Second Principle of Economics: Equilibrium
Equilibrium A situation in which no one benefits by changing his/her behavior
The Free Rider Problem Exists when an individual or group is able to enjoy the benefits of a situation without incurring the costs

12. Which one is experiencing equilibrium?
1.4 The Second Principle of Economics: Equilibrium
Which one is experiencing equilibrium?

13. Is there an incentive for him to change his behavior?
1.4 The Second Principle of Economics: Equilibrium
Is there an incentive for him to change his behavior?
The free rider is clearly in an equilibrium situation—there is no incentive for him/her to change his or her behavior.

14. 1.4 The Second Principle of Economics: Equilibrium
Is this an equilibrium?
But the group is not in equilibrium because one of their roommates is not pulling his/her own weight. To eliminate the free rider problem, two things need to occur. First the group needs to decide what is “fair”, and some sort of pressure needs to be brought to bear on the free rider to get him/her to conform—to encourage him/her to conform to a group equilibrium. Markets have no mechanism for deciding what is “fair”. Also the size of the group can change whether a free rider gets away with it. With a small group, it’s easy to see who is not pulling his/her own weight, but in a larger group, that becomes more difficult.
But the group is not in equilibrium because one of their roommates is not pulling his/her own weight. To eliminate the free rider problem, two things need to occur. First the group needs to decide what is “fair”, and some sort of pressure needs to be brought to bear on the free rider to get him/her to conform—to encourage him/her to conform to a group equilibrium. Markets have no mechanism for deciding what is “fair”. Also the size of the group can change whether a free rider gets away with it. With a small group, it’s easy to see who is not pulling his/her own weight, but in a larger group, that becomes more difficult.

15. So if we want to make it cooler, keep people from going to the beach!
1.5 The Third Principle of Economics: Empiricism
Crowded beaches and hot temperatures go together.
So if we want to make it cooler, keep
people from going to the beach!
Question: what’s wrong with that conclusion. Point out that sorting out cause and effect is an important part of economics

16. What are the costs and benefits of this course? Costs
1.6 Is Economics Good for You?
What are the costs and benefits of this course?
Costs
Tuition- only if they are not taking another course
Other courses
Sleep?
Stress?

17. Costs Tuition Other courses Sleep? Stress? BENEFITS
1.6 Is Economics Good for You?
Costs
Tuition
Other courses
Sleep?
Stress?
BENEFITS
Benefit—the major benefit of economics is that they will begin to see the world through “economists’ eyes”.