What is Economics College Notes Supplement Mathias
Dec 23, 2015
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.