Introduction to Economics Dr. Dennis Foster Q =f(K,L) K Q A B Supply Demand Price Quantity PePe QeQe.

Introductionto

Economics

Dr. Dennis FosterDr. Dennis Foster

Q =f(K,L)

K

Q

AB

Supply

Demand

Price

Quantity

P

e

Qe

Economics

A framework for understanding. . .

ScarcityScarcity

ChoicesChoices

(Opportunity) Costs(Opportunity) Costs

Limited Resources

Unlimited Wants

Premise:Premise: Rational self-interest Rational self-interest

i.e., human action is not random; it is purposeful.i.e., human action is not random; it is purposeful.

Choices involve Opportunity Choices involve Opportunity CostsCosts

Making tradeoffs Weighing costs and benefits

The value of the next best choice:Attending class . . .

Affordable Care Act . . .

Every person/group/society makes choices.Every person/group/society makes choices. TANSTAAFL – look it up.TANSTAAFL – look it up.

Choices must be Choices must be mademade

What will be produced?What will be produced?

How will it be produced?How will it be produced?

Who will get what is produced?Who will get what is produced?

Efficiency - Efficiency - the “measure” of how well we answerthe “measure” of how well we answer

these questions.these questions.

First choice – markets …First choice – markets …

Methodology of Methodology of EconomicsEconomics

Use of logical reasoning. Assumption that “all else is equal.” Decisions are made at the margin. Theories cannot be proved.

Some rely on logic; others on data.Some rely on logic; others on data. Beware of logical fallacies. Use of models.

Descriptive modelsDescriptive models Graphical modelsGraphical models Mathematical modelsMathematical models

Ceteris paribus

Non sequitur

Post hoc …

Anecdotes

GraphingGraphing A picture is worth a thousand words . . .

Q = f(K,L)

K

Q

AB

C

D

What is Q?What is K?What is L?

What is the cause and what is the effect?

How to we move from A to B?

How do we move from A to C?How do we move from B to D?What is Q if K is zero?

How are K & Q related (+/-)?What is the nature of that relationship?If K doubles, Q will do what?

Classic Production FunctionQ=Output, K=CapitalL=Labor

Introductionto

Economics

Dr. Dennis FosterDr. Dennis Foster

Q =f(K,L)

K

Q

AB

Supply

Demand

Price

Quantity

P

e

Qe