What is Economics College Notes Supplement Mathias.

What is Economics

College Notes Supplement

Mathias

Economics: The study of choices made by people faced with scarcity

A situation in which resources are limited and can be used in different ways so we must sacrifice one thing for another. How many of you had

breakfast? WHY? WHY NOT?

WHAT DID YOU GIVE UP to have or have not?

Breakfast Analogy for Scarcity

We all have the same amount of time ( a scarce resource) but we choose to allocate it differently. OPPORTUNITY COSTS:

What we give up. OPPORTUNITY

BENEFITS: What we get in our decision.

Scarcity

A situation in which resources are limited and can be used in different ways – so we must sacrifice one thing for another.

Positive v. Normative Analysis

Positive answers questions of fact. “What is?”

Normative answers “what ought to be.”

EXAMPLE: WHICH IS IT?

Mr. Alumni Bigbucks has donated 50-million dollars to UNL. It can be used to build a new football practice facility OR a state of the art library / technology center.

What would make the positive a normative analysis?

What do they think should be built and why?

TRIP DOWN MEMORY LANE: The Father of Economics – ADAM SMITH

1723 – 1790 Scottish professor First to propose

CAPITALISM The foundation of our

economy Wrote WEALTH OF

NATIONS in 1776. The “bible” of our

economy.

Adam Smith’s “radical” ideas.

Let the people decide for themselves the three basic economic questions: What to produce? How to produce? For whom to produce?

What was the INCENTIVES for people to decide the 3 questions?

PROFIT! It gives incentive to

others to work. Psychic Income

The “personal satisfaction” in working.

Adam Smith’s “radical” ideas

Government should stay out of people’s way. Not tax too much. Let people enjoy their

money how they want. Don’t regulate

business. LAISSEZ-FAIRE

Adam Smith didn’t mean NO government!

Provide INFRASTRUCTURE: Police and Fire

protection Public Education Transportation (roads) Communications

(mail) Military Civil Court System

Adam Smith’s INVISIBLE HAND

Working in one’s own SELF-INTEREST is also other people’s SELF-INTEREST. Self interest is NOT

selfishness.

The Invisible Hand

Individuals, business firms and governments come up with similar answers to: What goods and services

do we produce? How do we produce these

goods and services? Who consumes the goods

and services that are produced?

Economic Way of Thinking

ASSUMPTION 1: People act in their individual self-interest.

ASSUMPTION 2: People make informed decisions. Act in what we think is

a rational manner.

Economic Way of Thinking

The CETERIS PARIBUS is that when we consider changes in one variable we hold all other variables constant.

Economic Way of Thinking

THINKING ON MARGIN: Small, incremental

changes to determine if it is desirable to change the level of economic activity.

Adding on one more worker on the assembly line.

Do we get more product?

Eating the fourth piece of pizza when you aren’t hungry!

Productions Possibilities Curve

A curve that shows the possible combinations of good and services available to an economy GIVEN that all productive resources are fully employed and EFFICIENTLY used.

PPCs can show what is given up as well

PPCs can SHIFT if there is a change to: Natural Resources

Labor (physical / mental effort)

Physical Capital (machines, building, roads, etc)

Human Capital – knowledge and skills.

Entrepreneurship – effort to coordinate production and sales. ALSO comes up with the

idea of what to produce and how to produce!

Test Your Knowledge!

Economics is best defined as the study of: Financial decision-making How consumers make purchasing decisions Choices made by people faced with scarcity Inflation, unemployment, and economic

growth

Economics is best defined as the study of:

Financial decision-making

How consumers make purchasing decisions

Choices made by people faced with scarcity

Inflation, unemployment, and economic growth

Test Your Knowledge

Because resources are limited: Only the very wealthy can get everything they

want. Firms will be forced out of business. The availability of goods will be limited but the

availability of services will not. People must make choices

Because resources are limited:

Only the very wealthy can get everything they want.

Firms will be forced out of business.

The availability of goods will be limited but the availability of services will not.

People must make choices

Check Your Knowledge!

Resources are all the following EXCEPT: Unlimited and in abundance. The things we use to produce goods and

services. Limited in quantity and can be used in

different ways. Scarce and therefore requiring choices to be

made.

Resources are all the following EXCEPT: Unlimited and in abundance. The things we use to produce goods and

services. Limited in quantity and can be used in

different ways. Scarce and therefore requiring choices to be

made.

Check Your Knowledge!

An arrangement that allows buyers and sellers to exchange things is called: Contract Market Money efficient

An arrangement that allows buyers and sellers to exchange things is called: Contract Market Money efficient

Check Your Knowledge!

In which of the following markets is time exchanged for money? Consumer market Political market Labor market None of the above.

In which of the following markets is time exchanged for money? Consumer market Political market Labor market None of the above.

Check Your Knowledge!

Markets perform all the following functions EXCEPT: Determining the prices of goods and services. Helping firms decide what to produce Helping firms decide how to produce All the above are functions that markets

perform.

Markets perform all the following functions EXCEPT: Determining the prices of goods and services. Helping firms decide what to produce Helping firms decide how to produce All the above are functions that

markets perform.

An Adam Smith Question

Adam Smith used the metaphor of the invisible hand to explain how: Markets mismatch buyers and sellers. The butcher and the baker are benevolent People acting in their own self-interest

promote the interest of society as a whole. The production possibilities frontier illustrates

efficient outcomes.

Adam Smith used the metaphor of the invisible hand to explain how: Markets mismatch buyers and sellers. The butcher and the baker are benevolent People acting in their own self-interest

promote the interest of society as a whole. The production possibilities frontier illustrates efficient

outcomes.

Check Your Knowledge!

Deciding if a company will produce cars by manual labor or robotics answers the economic question of: Who consumes the products produced? What will be produced? Where will the products produced by

consumed? How will we produce it?

Deciding if a company will produce cars by manual labor or robotics answers the economic question of: Who consumes the products produced? What will be produced? Where will the products produced by

consumed? How will we produce it?

Positive v. Normative Economics

Positive Economics: Is the focus of most modern economic

reasoning. Concerns the forces that affect economic

activity Predicts the consequences of alternative

actions All of the above is correct.

Positive v. Normative Economics

Positive Economics: Is the focus of most modern economic

reasoning. Concerns the forces that affect economic

activity Predicts the consequences of alternative

actions All of the above is correct.

Positive v. Normative Economics

Which of the following is a question answered with normative economic reasoning? If the college offers free parking for students, will

more students drive to campus? If the college provided more financial aid assistance,

would more students benefit? If the college increases tuition, would class size

decline? Should the college cut tuition to stimulate

enrollments?

Positive v. Normative Economics

Which of the following is a question answered with normative economic reasoning? If the college offers free parking for students, will

more students drive to campus? If the college provided more financial aid assistance,

would more students benefit? If the college increases tuition, would class size

decline? Should the college cut tuition to

stimulate enrollments?

Question:

To think at the margin means to consider: How nothing remains constant over time. How a small change in one variable affects

another variable. How people behave in their own self-interest. How people will decide what to purchase.

Answer!

To think at the margin means to consider: How nothing remains constant over time. How a small change in one variable

affects another variable. How people behave in their own self-interest. How people will decide what to purchase.

LAST!

A student has a D grade average in her accounting course and a B grade average in Economics. She decides to study an extra hour for her accounting exam.