1. Economics Laissez-Faire Classical Microeconomic
Major U.S. Schools of Thought
Laissez-Faire Classical Microeconomic
Marxist (no longer a major school)
Keynesian Macroeconomic
Behavioral Finance School
Chicago/Monetarist School(sometimes called “neo-classical”)
Austrian School(small school until recent recession)

2. Economic basics Economy of three people on an island
Charlie, Able and Baker
Fish by hand all day
Catch one fish per day
Live to next day, to fish all day again
No savings, no credit, and no investment
Scarcity is the universal reality
All production of fish is consumed because their hunger (demand) equals the supply of fish

3. Invention of Capital Able goes hungry for a day and creates a net
The net can catch two fish per day
The net is a physical tool that can help with production, and is an example of capital
Able has several options to consider from there:

4. Able's options Get extremely fat eating two fish per day (consumption)
Go fishing only every other day, and loaf off on alternate days
Save up his fish for a vacation later (savings, which is deferred consumption)
Loan fish to Charlie and Baker at interest, so they can make a fish-net (credit) But there's also the risk that they might not pay the loan back, because they might be dishonest or not know how to make the nets.
Engage in capital investment by making two more nets himself and then renting them to Charlie and Baker for half a fish per day (then he'd never have to fish again!)

5. Marginal Theory of Value
Able has to weigh his options carefully, to decide which will bring him the most happiness
One day's labor is no longer a single fish, since Able could make many fish with a net leasing company
Every economic decision is good or bad based upon what the alternatives are
“Opportunity cost” (English economist John Stuart Mill)

6. The “Hidden Hand” of Self-Interest
Note that Able's options that involve interaction with Charlie and Baker each help all three persons
A loan to Charlie and Baker so they can make their own nets helps Charlie and Baker raise their standard of living so they will only have to fish every other day
Rental of nets to Charlie and Baker for half a fish per day means that Charlie and Baker can keep 1 ½ fish per day after their rental fee and take every third day off (instead of fishing every day)
Adam Smith called this self-interest that helps all the “hidden hand” in capitalist transactions

7. Charlie and Baker's options
They can do the same thing Able did and go hungry for a day making a net (underconsumption), or … why go hungry? … borrow fish from Able to make a net.
This is the birth of “credit”
Note that both Able the creditor and Charlie and Baker the borrowers benefit. Able gets interest (two fish later for one now) and Charlie and Baker have the opportunity to create capital that will make their lives easier!

8. What method of logic did I use for this Powerpoint?
Deduction or Induction
Preferred method of logic used by school:
Deduction: Classical Laissez-Faire, Austrian
Induction: Keynesian, Marxist, Monetarist

9. Able, Charlie and Baker, cont'd
With the island economy now creating a surplus of fish (food), thanks to Able's nets, we have savings and credit being extended.
We also have the beginning of money, the medium of exchange, which in this case is fish.
Money must have six characteristics: durability, portability, divisibility, uniformity, scarcity/limited supply, acceptibility/intrinsic value.
Surplus of needs, allows creation of a service economy to supply wants, so Able realizes he hates fishing and decides to go into the manufacturing and service sector to make and sell surfboards, suntan oil, and serve Margaritas by the sea shore.

10. Able's Manufacturing Economy
Able decides to charge 14 fish for each surfboard.
Charlie and Baker can each fish every day for two weeks, producing two fish per day and buy a surfboard, or they can go without. That's their opportunity cost. Charlie decides he's willing to pay 10 fish for a surfboard, but no more, while Baker really wants a surfboard and is willing to pay as much as 20 fish for a surfboard.

11. Able's Surfboard Supply/Demand Curve
Baker buys 30
Demand
Demand
Price for Surfboard in Fish
Price for Surfboard in Fish
Price for Surfboard in Fish
Supply (Able's labor) 20 10
Charlie buys
Total Surfboard Sales

12. Chapter 1 Vocabulary
Economics: The study of human decision-making to satisfy physical wants and needs
Need: Something people need to live, such as food, air, clothing and shelter
Want: something people desire but not essential to survival (e.g., video games, jewelry, etc.)
Scarcity: The natural state of things that reveals there isn't enough stuff to satisfy everybody's needs and wants.
Shortage: A man-made state brought about by a decision (such as a union “strike” or a government “boycott”) that denies needs and wants that would normally be available to people to satisfy the want/ need.

13. Chapter 1 – Vocab., cont'd
Goods: A physical object used to satisfy a want or a need
Services: Actions or activities that a person performs to satisfy a want or need
Factors of production: land (natural resources), labor and capital (human-made resources) used to make all goods and services
Capital: A human-made physical object that can be used by people to obtain a want or need
Human capital: The knowledge or know-how in the human brain that can be used by someone else to help attain a want or a need

14. Chapter 1 – Vocab., cont'd
Entrepreneur: A leader who combines land, labor and capital to create and market new goods and services (or existing ones more efficiently)
Opportunity Cost: The most desirable alternative given up as a result of a decision, i.e., the difference between the decision you make and the next most desirable alternative
Cost: See “opportunity cost”

15. Production possibilities curve for a farm/factory location (from textbook)15 14 12 12
Shoes millions of pairs
Shoes Millions of pairs 10 5 5 10 14 15 20
Watermelons millions of tons