Transcript Introduction to Economics

Introduction to Economics
What is Economics?


Scarcity – a basic human dilemma

Limited resources vs. unlimited wants

The human condition requires making choices
Definitions of Economics

Mankiw’s definition


Hedrick’s definition


…is the study of how society manages its scarce resources
…is how society chooses to allocate its scarce resources
among competing demands to improve human welfare
Alternative definitions

… what economists do.

… is the study of choice.
Demonstration
Scarcity
Opportunity
cost

Fundamental Questions of Economics
- Scarcity requires all
societies to answer the
following questions:
What is to be produced?
How is to be produced?
For whom will it be
produced
WHFW Questions
The Fundamental Economic Problem
Scarcity is the condition where unlimited
human wants face limited resources. 
Economics is the study of how people satisfy
wants with scarce resources. 
Needs are required for survival; wants are
desired for satisfaction. 
Someone has to pay for production costs, so
There Is No Such Thing As A Free Lunch
(TINSTAAFL).
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Discussion Question
Why do you think scarcity is an issue
with the rich as well as the poor?
It is a human trait that few people, regardless of
their economic status, are satisfied with what
they have.
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Three Basic Questions
What must we produce? Society must
choose based on its need. 
How should we produce it?
Society must choose
based on its resources.
For whom should we
produce? Society must
choose based on its
population and other
available markets.
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How the three basic questions
work in your life
 Think
of three things you want for
your future…think big. New car,
private college, trip outside the
United States, children, a house, etc.
 How
do you make the choice of what
to have and what to give up? What do
you really want, how are you going to
get it, should you have it at all?
If a society is going to
produce goods and
services, it needs the
four factors of
production.
The Factors of Production
Factors of production are resources
necessary to produce what people want or
need.
Land is the society’s limited natural
resources—landforms, minerals,
vegetation, animal life, and climate.
Capital is the means by which something is
produced such as money, tools,
equipment, machinery, and factories.
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The Factors of Production (cont.)
Labor is the workers who apply their efforts,
abilities, and skills to production.
Entrepreneurs are risk-takers who combine
the land, labor, and capital into new
products.
Production is creating goods and services—
the result of land, capital, labor, and
entrepreneurs.
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The Factors of Production (cont.)
Figure 1.2
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Crash Course Econ
Categories of Basic Principles
of Economics

How do people make decisions?

How do people interact?

How does the economy work overall?

10 basic principles
How Do People Make
Decisions?
 Principle
#1 - People face
tradeoffs
Time
allocation – an example
of tradeoffs
Efficiency
versus equity
Production
Frontier
Possibilities
 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
 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)

Marginal benefit is the gain you receive for doing anything "one
more time."
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If you owned, say, a cake shop, and you could sell an unlimited
number of cakes for $15 apiece, then your marginal benefit for
each additional cake you produced would be $15.
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In the real world, though, you'll always reach a limit on how
much you can sell at a given price. If your market is saturated,
you might have to drop your price to sell another cake.

So your marginal benefit for the next cake might be $9. For a
business, marginal benefit is typically measured in terms of
revenue -- how much you can get for the next unit you produce.
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Marginal cost is the additional cost you incur to produce one
more unit. In the example, it's what it costs to make one more
cake.

As long as your marginal benefit -- that is, your marginal revenue
-- from producing one more item exceeds your marginal cost of
producing that item, you'll continue to make a profit.

Consumers experience marginal benefits.

If a customer thinks she can get $15 worth of use or satisfaction
from buying one of your cakes, she'll buy one.
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But once she has one, the question is how much benefit she would
get from buying a second one. If it's still $15 worth of benefit,
she'll buy a second.

If it's less, she won't, and the only way you can get her to buy is to
drop your price or offer some other promotion.

Consumers' marginal benefit is also referred to as "marginal
utility.“

Under an economic precept known as the law of diminishing
marginal utility/return, consumers' marginal benefit goes down as
they consume more and more of something.

As the marginal benefit for cakes declines among your customer
base, so does the price they're willing to pay -- which in turn
affects your marginal benefit as a cake maker.

EX. Once you are full, you no longer want cake as much.

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
speeds
of seat belts leading to increased
How Do 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

Principle #6 - Markets are usually a good way
of organizing economic activity
 feudal
times where feudal states were selfsupporting, also haciendas in the new world
 the
benefits of trade are so powerful that people
began to trade
 markets for economists are more abstract than
the notion of a middle eastern bazaar or a flea
market and simply determine the prices and
quantities traded of different goods and services
 the “failure” of centrally planned economies and
the movement towards markets for the WHFW
questions
Markets
 Principles
1-5 combine with markets to turn
the pursuit of self-interest into promoting the
interests of society
 Adam
Smith and the “invisible hand”
 creativity
and productivity are stimulated by
the pursuit of self-interest into improving
resource allocations
 “set
it and forget it” becomes “compete or be
obsolete”
 in
some cases markets fail to allocate
resources effectively so,

Principle #7 Governments can
sometimes improve interaction that
occurs in markets
 there
are circumstances when market
signals fail to allocate resources efficiently
or equitably
 Public Goods, Externalities and Income
Distribution
 Some goods or services that people desire
will not be produced by markets (e.g.
lighthouses).
 Some goods or services will either be
underproduced (vaccines) or overproduced
(pollution) because markets fails to register
certain benefits or costs.
markets
may also fail to provide
an equitable or fair distribution of
resources
government
intervention with its
ability to coerce (the opposite of
voluntary) can regulate, tax and
subsidize to change market
outcomes
efficiency
and equity: the pie
analogy
if
government intervention always
the proper solution?
How Does the Economy Work
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)
 leisure time and productivity
the
factors of production: land
or natural resources, labor,
capital, entrepreneurship
technology and productivity
the rule of 72 for growth
the
rule of 72, is the method for
estimating an investment's doubling
time. The rule number (e.g., 72) is
divided by the interest percentage per
period to obtain the approximate
number of periods(usually years)
required for doubling.

Principle #9 – The general level of prices
rises when the government prints and
distributes too much money
 definition
of money, the concept of snow to
Inuits, and economic language
 inflation
is an increase in the general or
average level of prices in an economy
 “not worth a continental” and recent
example in Argentina
 the establish of the Federal Reserve and the
introduction of sustained inflation in the US

Principle #10 – Society faces a short-run
tradeoff between inflation and
unemployment
 Short-run
 demand
and the long-run
and supply shocks
 short-run
increases (decreases) in output
above (below) long-run potential output lead
to adjustments
 countercyclical
stabilization versus procyclical destabilization
 political
business cycles