Transcript CHAPTER 1 THE ECONOMY IS US!

CHAPTER 1
THE ECONOMY IS US!
Nature of Economics!
Why is the economy us?
What kind of economy do we have?
Why do some economies work
better than others?
Definition of Economics?
Do all countries regardless of type of economy deal with
scarcity?
Scarcity of what?
Even the U.S. has a problem with this?
The scarcity of resources causes most things to
have a cost.
Definition of Economics
The study of how people, both individually and
in groups, deal with the problem of scarcity.
Why is economics considered a social science?
Scarcity forces human beings to make choices
Why has there always been an economic problem?
man’s wants are virtually unlimited
scarcity of resources
*Have to prioritize
Remember****
Society has virtually unlimited wants BUT
limited resources
This means prioritization!
When did you last have to prioritize?
Companies? Are you seeing them
prioritize? Where
What about government?
What is your choice? Why?
Scarcity forces individuals and groups to
do what?
All economies evolve around a basic
conflict.. Want more than we can have.
What is the difference
between Micro and
Macroeconomics?
Micro vs Macro
Economists do not formulate economic objectives
 Economist’s job is to design policies that best achieve
economic goals. (who establishes those goals?) Name one in
existence today…..
 Microeconomics = study of individual behavior in the
economy by parts that comprise the larger economy…
businesses, individuals, govt agencies.) (CocaCola output/hour)
 Macroeconomics = study of the aggregate economic behavior
of economy as a whole (inflation/unemployment)
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Choices- Trade-offs (giving up one thing to get another)
Example: Barrel of crude oil?
What is thing given up called?
Examples of Opportunity Cost
Reality of Trade-offs
Just a few of the products getting a start from a barrel of
oil:
Aspirin
Candles
CD players
Clothing
Compact discs
Computers
Credit cards
Deodorant
Diapers
Dinnerware
DVDs
Eyeglass frames
furniture
not to mention gasoline
hair dryers
carpets
lipstick
paints
luggage
fertilizer
perfumes oils of all kinds
photographs
piano keys
roller blades
shampoo
soft contact lenses
toothpaste
vitamin capsules
Economics is a Social Science
What does that mean?
Economics is NOT Pure!!
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Hypothesis are formed (what if? This should?
Models are Created (trial and error)
Assumptions are made
Trial and error (revisited)
Rational Self-Interest
 Individuals
act as if motivated – self interest
 Idea first brought forth- Adam Smith- Wealth of Nations.
Father of Market Economics.
 Did
you arise this a.m. and say>>>> I want to make terrible
decisions all day that are NOT in my self-interest???
 Assumption then is that you will make decisions in your best
self-interest based on incentive.
 BUT… bottom line is we don’t always do that!
Rational Self-interest
What is your incentive to brush your teeth?
Why did you begin that habit?
Did you continue to do it later?
Do you think about it now?
So rationally you have deduced that it is in your best
interest to brush daily- preserving your self-interest.
RATIONAL BEHAVIOR/ CONSUMERS/GOVERNMENT
 If
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analyzing is so important to economics, what
are the pit falls in formulation of decisions?
How were those decisions derived?
Emotion
Biases
Illiteracy
Political
Some person you hear speak
Text from some book
Periodicals
Peers
Some people just can’t make a decision.
ARE WE RATIONAL IN OUR DECISION-MAKING?
Rational Decisions involve all
aspects of society!
 Governments
– (guns v butter)
 Individuals – (buy or rent house)
 Businesses – (expand or lay off)
 Non-profits – (providing for greater good)
Economic Wants
 These wants vary from culture to culture.
 One culture’s ideas may not be the goals of another cultures’.
 Ones we satisfy in the economic system.
 Ones that money will buy.
Do incentives work?
 Give
me some examples.
 What about negative incentives? Any ideas?
 Is Self-interest always a concept of greed?
 Can charitable acts be in one’s self-interest?
Economic wants vs non-economic wants
Economics Wants
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a concept underlying for all mankind.
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things we feel we need to have so we can live the
style of life we want to enjoy.
What are some non-economic wants?
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Friendship
Health
Self Esteem
Love
Are non-economic wants important????
Two things that allow economies to
progress
This is an Adam Smith concept:
Division of labor
Specialization of labor
4 Types of economic wants
1.
Basic or subsistence
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difference between developed and underdeveloped
countries is whether basic wants are taken care of.) (U.S.
poor are not as poor as other poor- relative to poor in
U.S. difference from absolute poverty like in Haiti ,
Afghanistan, or Iraq.
U.S. citizens have a higher plan of basic wants
which includes “social” wants. These wants
come out of our culture. Such as… airconditioning, television, education, internet
connections, going to dinner ….vast majority of
our wants are culturally determined.
2.
Individual or Collective Wants
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Individual = things we want as individuals
pizza vs hamburgers
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Ford truck vs Chevy truck
most of our wants are individual, but some are Collective
such as:
clean water
good schools
good roads garbage collection
3.
Public Wants
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Market does not take care of public wants- these are
decided usually by the federal government…
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defense – homeland security. We all enjoy the benefits
at the same time.
Consumptive
We want to be able to consume (buy things)
4.
Basic or ultimate aim of any economic system is consuming
goods and services.
Consumption is how we satisfy our wants.
But can’t completely satisfy all of our wants
because___??????_ ????
Economics depends on models
Models are used to predict behavior.
Models are simplified replica of real world
Empirical Evidence and data- material gathered by
observation or experience. Usually a working
hypothesis that is testable.
Enter Ceteris Paribus
Economists models do not relate to how people
think, but how they behave.
Economic models have to be tested on real world.
Marginalize in Economics
 Keeping
decisions within perspective involves marginal
analysis.
 Marginal Benefits vs Marginal Costs – is the benefit
greater than the cost or vice-versa. Obviously, either can
elicit changes in status quo.
You have an opportunity to go to Rose Bowl game!
You know it will cost you $1,000. Do you want to go to
the RB Parade while you are there? That is going to cost
another $300… On margin? Is it worth it?
 Scarcity is the key ingredient here also.
SO…..Are You Rational?
What is rational?
Are you pursuing opportunities to increase
your utility?
Are you allocating your time, energy and
money to maximize your well-being?
Do you weigh your decisions looking at
costs vs benefits? If you do you are
rational.
If you do not… you may be random or
haphazard with your decisions.
So… if you are rational, are you selfish?
We all make decisions for a reason
Answer: No………….Not necessarily…
Rational in the sense we have discussed
means that you are looking after your
self interest…
Your self-interest decisions will change
through your years…. Maybe it is in your
best interest to work for yourself after
working 15 years for IBM… Do you just
whimsically decide or do you have a
plan… cost of doing so vs benefit.
Terms to Know
Positive economics = deals with facts “what is”
Normative economics = involves someone’s judgment
“what ought to be”
Fallacy of Composition = it is not correct.. (the validity
of a particular generalization for an individual or part
does not necessarily ensure its accuracy for the group
or the whole) I stand up… everyone stands up…
Post Hoc Fallacy = Be careful concluding that because
event A precedes event B that A is the cause of B.
Wear purple shirt to ballgame…win.. Need to wear
purple shirt again to win. Rooster crows before dawn…
rooster responsible for sunrise.
Rational Behavior = based on rational self-interest.
People make different choices because their
circumstances and available information differs.
Marginalism = extra or less (one more unit, one less
unit)
What is Standard of Living?
How can you calculate it?
How well off people are!
How well off are you?
Divide total production by population…
If production is high and population is
low…. “get more stuff.”
3rd world countries… high
population/low production
What are the three questions every
economy asks?
What to produce?
How to produce?
For whom to produce?
Why do econ texts always include these
questions???????
Key is how the society or country answers these
questions.
Traditional economic forms are not part of the 3 basic, but
what does traditional entail?
3 Basic Economic Systems of the
World
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Capitalism
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Socialism
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Communism
Any Questions?