Transcript Intro to Economics

Economics
The rule or management of resources,
whether by an individual or a society.
The Economic Problem
 We live in a world of scarcity. There isn’t
enough to go around.
 Each person must make choices and each
choice has a trade off, known as opportunity
cost.
 The economic problem involves three basic
questions: What goods and services should
be produced? How? For whom?
How do we determine value?
 Intrinsic Value
 Labor Theory of Value

Ricardo & Marx
 Subjectivist Value Theory

The Austrian School
 Objectivist Value Theory

Ayn Rand
Centrally Planned Economy
 In a planned economy, the government
decides what and how much should be
produced.
 Prices are set to what the authority thinks
they should be.
 This form of economics favors economic
egalitarianism (economic equality).
Market Economy
 In this economy, all decisions about price and
production are made by people or
businesses.
 Prices will rise and fall based on supply and
demand.
 This form of economics favors legal
egalitarianism (all are equal before law), but
not other forms of equality.
Positive vs. Normative
 Positive economics deals with what is. It is a
statement which can be proved in a scientific
(or quasi scientific) sense.
 Normative economics deals with what should
be and is thus subject to value judgments.
These statements cannot be proved and
represent the economic ideas which follow
from an ideology.
Factors of Production
 Land
 Labor
 Capital
 Entrepreneurship
Microeconomics
 The law of demand – more of any particular
good or service will be purchased as its price
falls; less will be purchased as its price rises.
 Price elasticity of demand – the percentage
change in the quantity demanded divided by
the percentage change in price.
Microeconomics
 If a product is price inelastic (PED<1), then
raising the price will raise profits because
demand doesn’t fall much
 If a product is unitary elastic (PED=1), then
percentage change is price gives same
percentage change in quantity.
 If a product is price elastic (PED>1), then
raising price will reduce quantity sold and profits.
Microeconomics
 The law of demand – at higher prices, the
quantities supplied will increase and vice versa,
other things held constant.
 Equilibrium – a condition of supply equaling
demand so that the market clears at an existing
price.
 Disequilibrium – when either a surplus or
shortage develops because demand does not
equal supply at the going price.
Microeconomics
 Cost Determinates of Supply
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Technology
Wages and input prices for resources.
Taxes or subsidies
Prices of certain other (like) goods offered for
sale.
 Marginal Cost – the cost to produce an
additional item.
Supply and Demand Curves
 Price Floor
 Price Ceiling
Division of Labor
 Worker used to do whole job of production
(i.e. blacksmith, carpenter, etc.)
 Division of Labor splits job into specialized
parts.
 Several specialized workers can produce
more than several general workers.
Law of Diminishing Returns
 Diminishing Marginal Productivity – if all factors
of productions are held constant except one, equal
additions of that one factor will eventually increase
output in decreasing increments.
 Marginal Physical Product of Labor – the added
input that occurs when one new worker is added to
the production process while all others inputs are
held fixed.
Microeconomics
 Pure Competition – there are many sellers
selling the same product, so no seller can set
the price.
 Pure Monopoly – one seller exists for a
product and can set the price.
 Price Searcher – seller which has some
degree of monopoly power and can strongly
influence price.
Macroeconomics
 Aggregate Demand – total spending in all
markets in the economy.
 Aggregate Supply – total amount of all goods
and services produced.
Macroeconomics
 Inflation – general rise in the prices of goods
and services. (This is common definition, not
the real one)
 Growth – increase in supply and demand for
products and services.
Macroeconomics
 Unemployment – When not all who want work
can find it.
 Underemployment – When you take a low
paying job or a job in a different field just to
try to bring in some money.
Macroeconomics
 GNP – Gross National Product is the value of
the final goods and services produced in the
economy in a given period of time.
 Does not count underground transactions and
barter.
 GDP – different accounting for profits from
multinational corps.
Macroeconomics
 CPI – Consumer Price Index measures
inflation/deflation by using a basket of goods
and services and valuing their price in the
current economy.
 Demand-Pull inflation – occurs when total
demand exceeds total production
 Cost-Push inflation – occurs when average
prices increase do to increase in input costs (i.e.
oil prices rise)
 Real inflation – occurs when the government or
banks issue more money.
Business Cycle
 Recession – when GDP drops for 2 quarters.
Layoffs occur.
 Depression - State of the economy where
there are large unemployment rates, a
decline in annual income, and
overproduction.
Business Cycle
 Recovery – Demand starts to increase,
businesses begin hiring.
 Peak – Demand reaches its peak and then
begins to slide into recession.
Business Cycle
 The business cycle didn’t exist until we had
paper currency.
 If we used hard money (silver and gold) then
this wouldn’t happen.
 The recovery is caused by massive inputs of
money into the economy and the recession is
caused when the banks reduce the increase
in money.
Government
 The government spends money on goods and
services (i.e. machine guns, roads, computers,
senators, secretaries, etc.).
 Expenditures + Transfers = Tax Rev + Debt
 Deficit Spending is when:
(Expenditures + Transfers) - Tax Rev > Zero
 Government then issues bonds which must be
repaid with interest.
As of 2002
What is money?
 Used two ways


an abstract accounting concept that
represents a claim on the general wealth of
the trading community. (currency should not
have intrinsic value)
a item which has intrinsic value which is used
in barter for sake of convenience instead of
using other items
What makes good money?
 Item which has universally ascribed value
(intrinsic value)

Item should be a commodity
 There is so much of the item that total amount
of money cannot easily change.

Reserve of commodity should be very large.
Legal Tender Laws
 Gresham’s Law – bad money drives good
money out of circulation
 Legal Tender is some currency which doesn’t
have intrinsic value so the threat of force
makes you accept the currency.
Money Supply
 M1 – total quantity of coins, legal tender
paper currency, and checking accounts.
 M2 – M1 plus savings account, small (less
than $100,000) time deposit accounts, and
small money market funds.
The Federal Reserve
 The Fed prints money and buys U.S.
securities with it. These securities are FRNs,
non interest bearing paper notes.
 Fed was given authority in 1913 by congress
to be private monopoly on money in U.S.
Fractional Reserve Banking
 When you deposit your money, the bank doesn’t
hold it all. The bank only holds a fraction of your
money in the vault.
 Money Multiplier = 1 ÷ Faction reserve Req.
 If fractional Reserve is 10%, then the $1000 the
Fed injects, become $10,000.