Transcript Lecture 2

Lecture 2: ECN 111 The
Basics
 Scarcity
 Choice and opportunity cost
 Defining Economics
 Policy and Economic Science
 Market Institutions
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From Last Time
 Course Home Page
 www.public.asu.edu/~ifdlh/
 Econ 111 Macro Happens (MW)
 Econ 111 Macro Plus (MWF)
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Assignment for the
Weekend.
 Reading chapters 1 and 2 - begin 3
 Experiment with EIA
 Work on EIA chapters 2and 3
 Those in Section xxxxx, names listed
in class, who meet
MWF, we will see you in BAxxx at
10:40am on Friday.
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Scarcity
 When wants exceed the resources
available to satisfy them, there is
scarcity.
 People have unlimited wants.
 Resources to satisfy those wants are
limited.
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Scarcity and Poverty
 Scarcity is not poverty.
 The poor and the rich alike face
scarcity.
 Faced with scarcity, people must
make choices.
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Big Ideas of Economics
 The questions give you a sense of
what economics is about.
 The Big Ideas of Economics describe
how economists think about these
questions and seek answers to them.
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Big Ideas of Economics
 IDEA 1
 A choice is a tradeoff — we give up
something to get something else — and
the highest valued alternative we give
up is the opportunity cost of the activity
chosen.
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Big Ideas of Economics
 IDEA 2
 We make choices in small steps, or at
the margin, and choices are influenced
by incentives.
• Marginal Benefit vs. Marginal Cost
• Incentives are inducements to take particular actions
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Big Ideas of Economics
 IDEA 3
 Voluntary exchange makes both buyers
and sellers better off, and markets are
an efficient way to organize exchange.
• Buyers receive goods or services
• Sellers receive money.
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Big Ideas of Economics
 IDEA 3 (cont.)
 Markets are efficient because they
ensure that resources will be used
where they are valued most highly.
 Alternative to Market Economy
• Command Economy
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Big Ideas of Economics
 IDEA 4
 The market does not always work
efficiently and sometimes, government
action is necessary to overcome market
failure and lead to a more efficient use
of resources.
 Market failure is a state in which the
market does not use resources
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efficiently.
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Big Ideas of Economics
 IDEA 5
 For the economy as a whole,
expenditure equals income equals the
value of production.
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Big Ideas of Economics
 IDEA 6
 Living standards improve when
production per person increases.
• This increase in output per person will enable more
people to own goods and services.
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Big Ideas of Economics
 IDEA 7
 Prices rise when the quantity of money
increases faster than production.
• Inflation results from “too much money chasing too
few goods”.
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Big Ideas of Economics
 IDEA 8
 Unemployment can result from market
failure but some unemployment is
productive.
• Unemployment rates vary
• Some unemployment results from employees
searching for a suitable job and employers searching
for suitable workers.
– This unemployment improves productivity.
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What Economists Do
 Economic questions can be divided
into two big groups:
microeconomics and
macroeconomics.
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Microeconomics
 Microeconomics is the study of the
decisions of people and businesses
and the interaction of those
decisions in markets.
 Goal: to explain the prices and
quantities of individual goods and
services.
 these topics are covered in ECN112
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Macroeconomics
 Macroeconomics is the study of the
national economy and the global
economy and the way that economic
aggregates grow and fluctuate.
 Goal: to explain average prices and
total employment, income, and
production.
 these topics are covered in ECN111
Positive Versus Normative
Statements
 A positive statement can be tested by
checking it against facts. e.g. When prices
rise the quantity of a good demanded will
fall.
 A normative statement depends on values
and cannot be scientifically tested. e.g. We
should redistribute income from the rich
to the poor.
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The Task of
Economic Science
 Economic science discovers and
catalogs positive statements that are
consistent with what we observe.
 Normative issues are typically
tackled in political and social debate.
 Our discussion will be primarily
about positive issues. But the role of
normative issues will also be
addressed.
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Unscrambling Cause
and Effect
 The nature of economic data makes
it difficult to identify what is a cause
and what is an effect.
 The logical tool all scientists use is
ceteris paribus, a Latin term that
means “other things being equal.”
 By changing one factor at a time, we
can investigate its effects clearly.
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Post Hoc Fallacy
 Post hoc ergo propter hoc is a Latin
phrase meaning “after this, therefore
because of this.”
 Just because two events happen
together does not mean one caused
the other.
 e.g. are Presidents(or Governors)
responsible for Economic
performance. What do you think?
Markets
 A market is any arrangement that
enables buyers and sellers to get
information and to do business with
each other.
 Goods markets are markets for
goods and services.
 Factor markets are markets for
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factors of production.
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Factors of Production
 Factors of production are the
economy’s productive resources,
including:
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Labor, what is the return
Land, what is the return
Capital, what is the return
Entrepreneurial ability, what is the
return? Who can name an
entrepreneur?
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Coordinating Decisions
 Conflicting choices by households,
firms, and governments are resolved
by markets.
 This is depicted in the following
picture of the economy
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Alternative Coordinating
Mechanisms
 A command mechanism is a method
of determining what, how, when, and
where goods and services are
produced and who consumes them,
using a hierarchical organization
structure in which people carry out
the instructions given to them.
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 Is this better than a market
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Market Economies
 An economy that uses a market
coordinating mechanism is called a
market economy.
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Remember Your
Assignment for the
Weekend.
 Reading chapters 1 and 2 - begin 3
 Experiment with EIA
 Work on EIA chapters 2
 Those in Section xxxxx, names listed
in class, who meet
MWF, we will see you in BAxxx at
10:40am on Friday.
ECON
111
HOFFMAN
MACRO HAPPENS