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Introduction to Economics

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1 Introduction to Economics
D.W. Hedrick

2 Instructional Method Primarily Lecture format with discussion, simulations, and video presentations Constructive discussion is welcomed Grading is based on Aplia Homeworks (20%), five of seven quizzes (20%), three midterms (20% each), and an optional comprehensive final (replaces lowest midterm) – NO MAKEUPS GIVEN

3 Instructional Method Suggestions for the study of economics
Read the book before coming to class Recopy lectures and reread the book within several hours of class Identify what you don’t understand Ask questions in class Use the Aplia and the study guide (optional) Go to tutors in supplemental instruction (if offered) Visit the professor during office hours

4 Definition of Economics
Mankiw’s definition How Society manages its scarce resources Hedrick’s definition How society chooses to allocate its scarce resources among competing demands to best satisfy human wants Alternative definitions Economics is the study of choice. Economics is what economist do. Wikipedia's perspective

5 Scarcity and the Fundamental Questions of Economics
Scarcity : Unlimited wants versus limited resources Choices and tradeoffs Opportunity Costs All societies must answer the WHFM questions What is to be produced? How is to be produced? For whom will it be produced?

6 Economics as a Science The Scientific Method
Observation →Hypothesis →Testing Observation: identifying and measuring important variables – orderly loss of information Hypothesis: educated guesses about cause and effect with the variables Theories Models: realism or usefulness Testing: theories can’t be proven and are supported by repeated failed attempts to disprove them. Microeconomics vs. Macroeconomics The Assumption of Rational Behavior Max TNB = TB – TC Boxes Example MB=MC rule People respond to incentives Limits to the use of rational behavior (e.g. axe murders)

7 Microeconomics versus macroeconomics
Normative vs. positive approaches A brief history of economic thinking The language of economics

8 Mankiw’sTen Principles of Economic Thinking

9 Categories of Basic Principles of Economics
How people make decisions? How people interact? How does the economy work overall?

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

11 How People Make Decisions
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

12 How People Make Decisions
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)

13 How People Make Decisions
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

14 How 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 Ellensburgians should trade with others

15 How People Interact Principle #6 - Markets are usually a good way of organizing economic activity Feudal times and haciendas in the new world The power of trade: cooperation versus conflict Markets: prices and quantities traded, typical and abstract

16 How People Interact Principle #6 - Markets are usually a good way of organizing economic activity creativity and productivity and resource allocation “Failure” of centrally planned economies “set it and forget it” becomes “compete or be obsolete”

17 How People Interact Principle #7 Governments can sometimes improve market outcomes Market signals can fail to allocate resources efficiently or equitably Public goods, the exclusion principle, the free-rider problem and non-rival consumption External costs and benefits Examples: vaccines, education, pollution

18 How People Interact Principle #7 Governments can sometimes improve market outcomes Equitable or fair distribution of resources Efficiency and equity: the pie analogy Government Failure: is government intervention always the proper solution?

19 How the Economy works 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)

20 How the Economy works as a Whole
Principle # 8 – A country’s standard of living depends upon its ability to produce goods and services leisure time and productivity the factors of production: land or natural resources, labor, capital, entrepreneurship technology and productivity the Rule of 72 and growth rates

21 How the Economy works as a Whole
Principle #9 – The general level of prices rises when the government prints and distributes too much money Definition of money, and economic language

22 How the Economy works as a Whole
Principle #9 – The general level of prices rises when the government prints and distributes too much money Examples: “Not worth a continental” and Argentina Establish of the Federal Reserve and the introduction of sustained inflation in the US

23 How the Economy works as a Whole
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

24 How the Economy works as a Whole
Principle #10 – Society faces a short-run tradeoff between inflation and unemployment Counter-cyclical stabilization versus pro-cyclical destabilization Political business cycles


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