Transcript economics 101 - Montville.net

ECONOMICS 101
INTRODUCTION AND BASICS
A QUESTION--WHY
DO MOST PRICES IN THE US
END IN .99?
IGNORING SALES TAX, WOULDN’T
IT BE EASIER TO HAVE EVERYTHING
IN EASIER INTERVALS? .25, .50, .00?
NATURAL SCIENCES vs. SOCIAL SCIENCES
“HARD”
•
STUDIES NATURAL DATA
DRIVEN PHENOMENOM
Examples include
BIOLOGY
CHEMISTRY
PHYSICS
ASTRONOMY
EARTH SCIENCE
“SOFT”
•
STUDIES HUMAN
BEHAVIOR IN A
SCIENTIFIC MANNER
Examples include
SOCIOLOGY
ECONOMICS
PSYCHOLOGY
ANTHROPOLOGY
POLITICAL SCIENCE
HISTORY
BUT…
ECONOMICS DREAMS TO BE A NATURAL SCIENCE AND TRIES
TO DRAW FROM ITS METHODS.
THE SCIENTIFIC METHOD IS “BORROWED”
OBSERVING
ECONOMIC PRINCIPLE – WELL TESTED, WIDELY
HYPOTHESIS
ACCEPTED THEORY
TESTING
ACCEPTING
REJECTING
MODIFYING
CONTINUED TESTING
COMPLEXITY vs. SIMPLICITY
ECONOMICS – THE SOCIAL SCIENCE ABOUT HOW WE MAKE OPTIMAL
CHOICES UNDER CONDITIONS OF SCARCITY.
OPTIMAL – PERSONAL BEST – DIFFERENT FOR EVERY PERSON.
EVERYBODY MAKES CHOICES THAT ARE OPTIMAL FOR THEMSELVES.
IN ECONOMICS, WE CALL THIS RATIONALITY AND IT IS ASSUMED
FOR THE MAJORITY OF OUR MODELS
WE ASSUME RATIONALITY, NOT PREFERENCES
LET ME ASK YOU AN IMPORTANT QUESTION
HOW MUCH IS ENOUGH?
SCARCITY – LIMITED RESOURCES vs. UNLIMITED WANTS
- IN CAPITALISM, MORE IS BETTER, SO WE ASSUME
UNLIMITED WANTS
SCARCITY
HOW DO WE DECIDE WHO SHOULD GET WHAT?
THERE IS ONLY A LIMITED AMOUNT OF ANYTHING (RESOURCES)
BUT MR. D… WHAT ABOUT THINGS LIKE AIR AND SUNLIGHT. THOSE DON’T RUN OUT.
SILENCE!!!!
WHAT I MEAN, IS GOOD POINT. BUT EVEN AIR IS LIMITED, THINK OF
CLEAN AIR IN INDUSTRIAL CITIES OR DIRECT SUNLIGHT THAT CAN BE
USED FOR SOLAR GENERATION.
WE FURTHER DEFINE RESOURCES INTO TWO CATEGORIES
RESOURCES CAN GENERALLY
BE SPLIT INTO TWO GROUPS
RENEWABLE
NON-RENEWABLE

SOMETHING THAT CAN
REPLENISH WITH THE PASSAGE
OF TIME

SOMETHING THAT IS FINITE AND
DOESN’T RENEW AT A
SUSTAINABLE RATE

CROPS

METALS

WOOD

MINERALS

SOLAR

HYDRO-CARBONS

WATER

NUCLEAR MATERIAL
OPPORTUNITY COST
- WHAT YOU GIVE UP TO OBTAIN
SOMETHING ELSE.
-THE VALUE OF THE BEST ALTERNATIVE
FORGONE.
• A SIMPLE DEFINITION THAT HAS MAJOR IMPLICATIONS.
• WHENEVER YOU MAKE A CHOICE, YOU ARE CHOOSING TO NOT DO
SOMETHING ELSE.
• THE COST YOU INCUR VS THE OTHER CHOICE IS THE OPPORTUNITY COST.
• IT IS USUALLY DESCRIBED AS EITHER “HIGH” OR “LOW”
OPPORTUNITY COST EXAMPLES
WHAT WOULD THE OPPORTUNITY COST BE
FOR THIS WOMAN TO OPEN UP A
NEWSPAPER STAND IN NY?
HIGH
OR
LOW
WHAT WOULD THE OPPORTUNITY COST BE FOR THIS
BASKETBALL MAN TO PLAY AFTER HIGHSCHOOL
INSTEAD OF ATTENDING COLLEGE ?
HIGH
OR
LOW
WE HAVE DEFINITION WITH SCARCITY OF
RESOURCES AND OPTIMIZATION
BUT WE NEED SOME SORT OF MEASUREMENT, AND ECONOMISTS HAVE
USED SEVERAL SYSTEMS OVER THE YEARS SUCH AS VALUE, TIME, AND
MONEY
MANY FOCUS ON A GREATER CONCEPT CALLED UTILITY
UTILITY – PLEASURE OR SATISFACTION GAINED FROM
CONSUMING A GOOD OR SERVICE
•
•
RATIONALITY OR RATIONAL SELF INTEREST WOULD REQUIRE MAXIMIZING UTILITY
EVERYONE DECIDES THEIR OWN UTILTY
UTILITY
CONCEPT IS INVENTED JEREMY BENTHAM
19TH CENTURY BRITISH PHILOSOPHER
CREATES UTILITARIANISM AS A MORAL AND LEGAL CODE
“THE ACTION SHOULD BE TAKEN THAT RESULTS IN THE GREATEST TOTAL UTILITY”
UTIL – ONE STANDARD UNIT OF BENEFIT/SATISFACTION
PROBLEMS
1. MEASUREMENT
2. TYRANNY OF THE MAJORITY
3. UTILITY OF ANIMALS
4. FUTURE GENERATIONS
PHILOSOPHY BREAK
WHAT SYSTEM OF MORALITY CAN WE USE TO MAKE A
“FAIR” SOCIETY?
ONLY MAKE DECISION “BEHIND THE VEIL”
DON’T KNOW WHERE YOU END UP
SO 90% GET FED AND 10% STARVE
JOHN RAWLS
WHEN YOU MANIPULATE SOCIETY,
YOU MUST BE INTRODUCED AT
RANDOM TO MAKE IT FAIR
Positive Economics
Normative Economics
“In my
opinion…”
Straight
facts
1. Can be tested
2. Scientific
3. In the economy
Positive [Scientific]
[describing “just the facts”]
1. The economy grew at 2.6%.
2. Unemployment is 5.4%.
1. Cannot be tested
2. Value judgment
3. Ought to be in the economy
v.
v.
Normative [Prescriptive (personal)]
[the economist being “a policymaker”]
1. The economy ought to grow more.
2. Unemployment is too high.
INTERESTINGLY ENOUGH, IT IS NOT COMMON TO DEBATE THE FACTS
AND FIGURES. MOST ARGUMENTS IN MOST SUBJECTS ARE FOCUSED ON
THE NORMATIVE ARGUMENTS. WE KNOW WHAT THE PROBLEMS ARE,
WE JUST DO NOT AGREE ON THE SOLUTIONS
.
1. Macro [national] economics – concerned with the economy
as a whole or with aggregates – like government,
business sectors, or households.
Macroeconomics is concerned with an
overview of the economy.
Macro examines the “forest, not the trees,
leaves, or specific pieces of bark.” It gives
us a “bird’s-eye view” of the economy.”
2. Micro [details of the big picture] – concerned with specific
economic units or individual markets under a microscope.
Emphasis is on individual households, industries, or firms
[like the # of workers employed by Ford] [Concerns the
components of the economy]
Micro examines the “trees, leaves, & pieces of bark,
rather than the forest.” It gives a “worm’s-eye
view” of a specific component of our economy.
Macro[large](telescope) “whole economy” [economy-wide issues]
Micro[small](microscope] “segment of the economy” [issues in the economy]
.
“Beautiful,
beautiful forest!”
“Check out those
pieces of bark!.
Production
Microeconomics
Macroeconomics
How much steel
How much office space
How many cars
Price of individual goods
Price of medical care
Apartment rents
Total industrial output
Gross Domestic Product
Total decline during recession
Prices
Aggregate price level
Consumer Price Index
Rate of inflation
Employment
Jobs in the steel industry
# of employees in a firm
# of doctors/accountants
Total number of jobs
Economy’s unemployment
# of discouraged workers
Is the following Micro or Macro?
1. The price of digital cameras increased 5% last year.
2. Unemployment was 5.4% for the U.S. workforce.
3. Unemployment in the auto industry was 8% last year.
4. Duck National Bank lowered its interest rates on CDs to 8%.
5. The Consumer Price Index rose to 2.7% last year.
6. The computer industry laid off 8% of its workers last year.
7. The price of gasoline rose 25% last year.
ADDITIONAL ECONOMIC PRINCIPLES

WE IDENTIFIED THAT PEOPLE ARE OPTIMIZERS.
THEY DO WHAT IS RATIONAL AND BEST FOR
THEMSELVES.
 CETERIS
PARIBUS – LATIN FOR “WITH OTHER
THINGS THE SAME”

A CONCEPT INVOKED WHEN YOU WANT 1 ON 1
COMPARISON

SIMILAR TO THE HEISENBERG’S UNCERTAINTY PRINCIPLE
 WHEN
WE WANT TO MANIPULATE SOMETHING (GRAPH,
EXAMPLES, REAL WORLD INSTANCES) WE ASSUME THAT EVERYTHING
ELSE IS EQUAL TO ISOLATE THE VARIABLE.
MORE ECONOMIC CONCEPTS
MARGINAL ANALYSIS – COMPARISONS OF MARGINAL
BENEFITS AND MARGINAL COSTS
•
•
•
•
•
MARGINAL MEANS THE NEXT UNIT
FOR ECONOMISTS, IT IS NOT JUST A QUESTIONS OF MORE
THERE NEEDS TO BE A COST / BENEFIT ANALYSIS
HOW MUCH DID IT COST TO MAKE THE ADDITIONAL UNIT?
IF A COMPANY SELLS A PRODUCT AND MAKES A MILLION
DOLLARS; IS THAT GOOD? BAD?
MARGINAL ANALYSIS PROVIDES CONTEXT FOR THE
DECISIONS.
DIAMOND - WATER PARADOX
SITUATIONAL SCARCITY AND MARGINAL UTILITY
WHY DO DIAMONDS COST SO MUCH MORE THAN WATER?
WATER IS NOT SCARCE AND PEOPLE USUALLY HAVE A LOW MARGINAL
UTILITY FOR WATER
DIAMONDS ARE (REASONABLY) SCARCE AND PEOPLE HAVE A HIGH
MARGINAL UTILITY FOR DIAMONDS
BUT IN A DESERT…
A GLASS OF WATER IS WORTH
DOZENS OF DIAMONDS
THERE’S NO SUCH THING AS A FREE LUNCH

THE ECONOMIC HANDSHAKE

IT IS IMPOSSIBLE TO GET SOMETHING FOR NOTHING

EVEN IF SOMEONE ELSE IS PAYING, THERE IS STILL A
COST

EVEN IF THE ITEM IS FREE, THERE IS STILL A COST

TIME AND EFFORT HAS BEEN MADE TO CREATE OR
OBTAIN ANYTHING

SOOO…. THERE IS NO SUCH THING AS A FREE LUNCH
SUNK COST – A COST THAT HAS ALREADY BEEN
INCURRED, AND CANNOT BE RECOVERED.

YOU BUY TICKETS FOR A CONCERT, MONTHS IN ADVANCE.
BUT YOU GET SICK AND SHOULDN’T GO. WHAT DO YOU DO?

I BOUGHT ALL THIS FOOD, I GUESS I SHOULD KEEP EATING…

WOW, THIS MOVIE IS TERRIBLE, I GUESS IT WILL BE OVER SOON

WELL, WE HAVE BEEN IN A RELATIONSHIP FOR SO LONG… I
GUESS WE’LL GET MARRIED
WHICH IS BETTER?

$5 OFF A DVD?


OR
$5 OFF A CAR?