ECONOMICS ECONOMICS What does it mean to me? Part I: Part I: • The Ten Powerful Ideas of The Ten Powerful Ideas of Economics Economics
Dec 21, 2015
ECONOMICSECONOMICSWhat does it mean to
me?
Part I:Part I:•The Ten Powerful Ideas of EconomicsThe Ten Powerful Ideas of Economics
ECONOMICS:The study of the allocation of
our scarce resources to satisfy our unlimited wants for goods
and services.
Economics is:
*A social science concerned with how resources are used to satisfy wants.
*A study of how people and countries use their resources to produce, distribute, and consume goods and services.
*An examination of behavior related to how goods and services are acquired.
*A study of how people decide who will get the goods and services.
ECONOMIC way of thinking
…….making use of a common set of tools for economic analysis.
Factual ToolsFactual Tools
Institutions
Theoretical ToolsTheoretical Tools
StatisticsStatistics
ConceptsConcepts
History
ModelsModels
BASIC ECONOMIC QUESTIONSBASIC ECONOMIC QUESTIONS
WHAT TO PRODUCE?WHAT TO PRODUCE?
HOW TO PRODUCE?HOW TO PRODUCE?
FOR WHOM TO FOR WHOM TO PRODUCE?PRODUCE?
The FACTORS OF PRODUCTION include:
LAND (natural resources)
LABOR (human resources)
CAPITAL (capital resources)
ENTREPRENEURSHIP
NATURAL RESOURCES:
Water, oil, gems, land, and trees.
RESOURCES: materials from which goods and services are produced.
Those things such as people, tools, machinery, and factories.
CAPITAL RESOURCESCAPITAL RESOURCES are further divided into:
CAPITAL GOODS
Goods used in the production process that can be reused
for another product. (computers, trucks,
machines, et.al.)
INTERMEDIATE GOODS
Goods that are used up in the
production process. (paper, oil, ink,
et.al.)
ENTREPRENEURSHIP:ENTREPRENEURSHIP:*a particular
type of human
resource
*business innovator
*sees opportunity
to make a profit
*uses unexploited
raw materials
*takes RISK with new
product or process
*brings together land, labor, capital
FINANCIAL CAPITAL:
*NOT a real resource *ENABLES
ENTREPRENEURS AND MANAGERS TO
PURCHASE THE FACTORS OF
PRODUCTION
*Money to acquire capital goods and employ land and labor resources
How do we pay for resources?
RESOURCE PAYMENTS
LAND
LABOR
CAPITAL
ENTREPRENEUR
Rent
Wages & Salaries
Interest
Profit
There are 10 powerful ideas that serve as the foundation
of economics.
If you develop a good understanding of them and master the problem-solving skills inherent in them, they will serve you for the rest of
your life.
NUMBER 1:
WANTS AND DESIRES
How do we satisfy our unlimited wants and desires
in a world of limited resources?
“Goods” and “services” are those things that we value or desire.
GOODS tend to be TANGIBLETANGIBLE things--objects that can be seen, held, tasted, heard, or smelled.
INTANGIBLE GOODSINTANGIBLE GOODS are things we cannot reach out and touch, such as friendship, knowledge, and
fairness. SERVICES are intangible.
In contrast to goods, BADS are items that people do not desire or want---garbage, pollution, weeds, and crime.
The elimination of a bad becomes a good.
In economics, we assume that more goods lead to greater
satisfaction, or UTILITY, and that bads lead to dissatisfaction
or DISUTILITY.
NUMBER 2:
SCARCITY
We all face scarcity because it is not possible for an individual to have all
the goods and services that he or she desires.
However, because we all have differing wants and desires, scarcity
affects individuals differently.
The essential question in Economics is:
ScarcityScarcity
Insufficient supply of something Insufficient supply of something where “insufficient” is where “insufficient” is interpreted relative to the interpreted relative to the desires of a group of people.desires of a group of people.
For instance, antiques are valued For instance, antiques are valued for their scarcity. . .for their scarcity. . .
When our wants exceed our needs we have SCARCITYSCARCITY.
Scarcity Scarcity forcesforces us to us to make choices on make choices on
how to best use our how to best use our limited resources.limited resources.
the same as poverty. (eg. Goods can be scarce in United States AND Somalia. However, scarcity isn’t going away; poverty might.)
the same as shortage. (eg. Whether you have a shortage or not depends upon how you handle the rationing problem made necessary by scarcity)
Scarcity is NOT:
Oh, Scarcity(Tune: Oh, Christmas Tree)
Oh, scarcity! Oh, scarcity!
We can't have all the things we want.
Oh, scarcity! Oh, scarcity!
We cannot have it all.
We really want a lot of stuff.
But sometimes there's just not enough.
Oh, scarcity! Oh, scarcity!
We cannot have it all.
NUMBER 3: CHOICESWe may all want a home, two cars,
gourmet food, all with a pristine environment with no pollution. If we had unlimited resources to produce
all of the goods and services everyone wanted, we would not have to choose
among these decisions.
If we did not have to make meaningful economic choices, the study of
economics would not be necessary.
Scarcity forces us to choose and choices
are costly because we always give up other
opportunities.
Economists call this OPPORTUNITY
COST.
Opportunity Cost:Opportunity Cost:
The next best The next best alternative given up alternative given up to get something.to get something.
Some economists argue that we are worse off because of the FDA (Food
and Drug Administration).
What are the “costs” of having a government administrative agency control the food and
drugs a society can consume?
TINSTAAFL
(There is no such thing as a free lunch)
This statement clarifies the relationship between scarcity and opportunity cost. If the cafeteria is offering “free” lunches, is it really free from society’s perspective?
Could the resources used to create the free lunch have been used to create something else of value?
Technically, this is called a “subsidized”
lunch.
Prices and Costs are NOT the same Prices and Costs are NOT the same thing.thing.
PRICES reflects the monetary value of a good or service, which is an objective fact.
COSTS are personal and subjective.
For example, would a $60,000 Lexus cost more to a poorer person than a richer one?
They both give up the same amount of money, however, the costs are different for
each person.
In market settings, goods have positive prices
x
Quadrant IQuadrant I
y
Quadrant IVQuadrant IV
Quadrant IIQuadrant II
Quadrant IIIQuadrant III
Economists generally use quadrant 1 to graph their equations.
Too often the long-termlong-term consequences of a choice is ignored.
“….must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone.”
--Henry Hazlitt
Especially in politics there is a tendency to stress the short term
benefits while completely ignoring the longer-term
consequences. . . . we hear an endless pleading for proposals to help specific industries, regions, or groups without consideration
given to their impact on the broader community, including
taxpayers and consumers.
--Common Sense Economics
Consider the rent controls imposed on apartments. Cities like Berkeley and Santa Monica, California, as well as New York City have adopted such controls, usually in response to claims that rent controls will keep rents from rising and make housing more affordable for the poor.
True, in the short run…..but what about the long-run consequences:
1) Market for apartments will stagnate.
*existing apartments will not go to those who need them
*expensive for someone to give up a rent controlled apartment
*hard to find place closer to work because others are holding onto theirs
2) Reduce investment in new housing
*no incentive to build new apartments for the future.
NUMBER 4:
THINKING MARGINALLY
Choices are not all or nothing.
Most choices are of the “little more” or “little less”
variety.Most of us do not dine in the nude so we can afford food.--Common Sense Economics
Economists call this “marginal thinking” because the focus is on the
additional, or marginal, choices.
People will alter their behaviors if they expect the marginal benefits from doing so will outweigh the
expected marginal costs they will bear.
This is called theThis is called the
RULE OF RATIONAL CHOICE.
NUMBER 5: INCENTIVES CREATE
RATIONAL BEHAVIOR
Much of human behavior can be explained and predicted as a response
to incentives.
Rational behavior exists as people respond to incentives--both positive
and negative--in the relative cost-benefit structure.
INCENTIVES are important in communist societies as well.
In the former Soviet Union, employees in a glass plant were rewarded by the number of tons of sheet
glass they produced.
This led to factories producing sheet glass so thick, one could barely see through it.
So they changed the strategy and employees were rewarded by the number of square meters they could
produce.
This led to production of glass so thin that it broke easily.
**Taken from “Common Sense Economics” 2005
Incentives can be either positive or negative.
POSITIVE incentives will either increase benefits or reduce costs.
NEGATIVE incentives will either decrease benefits or increase costs.
Would a tax on cigarettes be a negative or positive incentive?
Would a subsidy to electric cars be a positive or negative
incentive?
NUMBER 6:
SPECIALIZATION AND TRADE
People tend to dedicate their resources to one lifetime activity, whether it be teaching school,
child-rearing, or cooking food. Why is this?
The answer is simple: OPPORTUNITY COST.
By concentrating their energies into a single, best- suited activity, individuals
incur lower opportunity costs. In this way, they make better use of their limited
resources.
If a country, region, firm, or person can produce a good or
service for a lower cost, economists would say they have a COMPARATIVE ADVANTAGE.
The advantages of specialization include greater skill, lower costs,
greater efficiency, higher production, and increased wealth.
NUMBER 7:MARKETS AND THE PRICE SYSTEM
How do we determine who gets
what?
The market system allows communication between consumers and
producers regarding the allocation of scarce resources. This is done through PRICES.
The remarkable thing about an economy based on private
property is that self-interest will further the general
prosperity of a community or nation. The individual
“intends only his own gain” but he is directed by the
“invisible hand” of market prices to promote the goals of
others…….--Common Sense Economics
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society….He intends only his own gain, and he is in this, as in many other cases, let by an invisible hand to promote an end which was not part of his intention.
--Adam Smith
Government policy sometimes interferes with the market
system.
Consider how minimum-wage legislation censors effective communication from
teenagers to employers.
While it is true that minimum wage protects teenagers from being paid extremely low wages for unskilled
labor, the increase in minimum wage has two effects on teenage
employment:
1) the higher minimum wage 1) the higher minimum wage increases the number of increases the number of teenagers who want jobs, teenagers who want jobs, sometimes even causing them sometimes even causing them to drop out of school,to drop out of school,
2) the higher minimum wage 2) the higher minimum wage for low-skilled workers for low-skilled workers discourages hiring.discourages hiring.
There are seven reasons to justify
government involvement into
the economic decision-making
process:
NUMBER 8:GOVERNMENT POLICIES
Governments are institutions devised by
humans to serve the collective group or will.
•government provides legal framework
•some goods and services are inherently “public”
•lack of competition has led markets to operate inefficiently
•government can help participants in market activity make better decisions
•the existence of externalities--like pollution--can cause inappropriate market signals
•income distribution as determined by the market may be considered unfair or inappropriate
•overall level of output may be viewed as inappropriate in the market.
NUMBER 9:
ECONOMIC GROWTH
Economic growth enhances the potential amount of individual consumption---the greater the economic growth, the more
goods we and our descendants will have to consume in the future.
Americans produce and earn approximately 30 times as much per person today as in 1750.
Why are Americans so much more productive than 250 years ago?
1) Scientific knowledge and technological abilities
2) Complex machines and factories, better roads, extensive systems of communication
3) Families in 1750 directly produced most of the items they consumed; today we purchase them from others
--Common Sense Economics
Other sources of economic growth:
1) Investments in people (skills) and machines (assets)
2) Improvements in technology (brain power, less cost)
3) Improvements in Economic Organization
*human activities
*entrepreneurship
*open markets promote free exchange of ideas
*competition
PRICE STABILITY
NUMBER 10:
When overall prices increase in an economy, it is called INFLATION.
When overall prices decrease, it is called
DEFLATION.
When either of these conditions exist, the
PURCHASING POWER of money is changing.
Inflation will cause the purchasing power of money to decrease.
It can raise one nation’s prices relative to prices in other countries , which will lead to difficulties in financing foreign goods.
In extreme situations, it can erode the faith the people have in the currency resulting in the refusal to accept paper money as a form of payment.
In a deflationary period, the purchasing power of an
individual will rise, however, businesses may be forced to lay off workers in an effort to
reduce costs to offset the lower prices of the product.
Economics is very similar to the other Economics is very similar to the other social sciences--psychology, history, social sciences--psychology, history, sociology, anthropology, and political sociology, anthropology, and political science--in thatscience--in that it is concerned with it is concerned with
reaching conclusions based on human reaching conclusions based on human behavior.behavior.
Social scientists may study the same Social scientists may study the same issue but have a different perspective issue but have a different perspective
on the subject.on the subject.
The two main branches of
Economics are:
Macroeconomics--looks at problems in
the economy which affect society as a
whole.
Microeconomics--looks at the smaller areas in the economy trying to understand
how firms and businesses make their
decisions.
Despite the fact that the Despite the fact that the two areas stress different two areas stress different
topics, they both still strive topics, they both still strive to understand people’s to understand people’s
behavior.behavior.
The disciplined mind developed by the study of economics will give one the problem-solving
tools which will be valuable to anyone regardless of career
choice.
The study of economics can help you to
understand education, pollution concerns,
global warming, welfare reform, health care, in that we all must make choices between our
unlimited wants/desires and our basic needs.
Is it rational for people to strive for a better situation in their own lives?
Economists believe that
self-interest = rational behavior
They also believe that rational
behavior includes the idea that individuals will attempt to anticipate the
future consequences of
their acts.
What tradeoffs occur when a driver with a suspended license
drives a car illegally?
What are the consequences of
smoking cigarettes?
What are the tradeoffs of not finishing high
school?
What are the consequences of not
going to college?
Not all humans react in similar ways, however, by looking at large groups of people, economists can make many reliable predictions about human behavior.