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Economics

Economics. The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society. Basic Economic Decisions. for all types of Economic Systems. 1. What and how much to produce. 2. How to produce it.

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Economics

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  1. Economics The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.

  2. Basic Economic Decisions for all types of Economic Systems

  3. 1. What and how much to produce. 2. How to produce it. 3. For whom to produce it. 4. Can the system adjust?

  4. Unlimited wants Limited resources to satisfy wants Choose between alternatives

  5. Land (various degrees of fertility) Food (bread, milk, meat, eggs, vegetables, coffee, etc.) Natural (rivers, trees, minerals, Resources oceans, etc.) Clothing (shirts, pants, blouses, shoes, socks, coats, sweaters, etc.) Machines and other human-made physical resources Household (tables, chairs, rugs, beds, goods dressers, television sets, etc.) Space exploration Non-human animal resources Education Technology (physical and scientific “recipes” of history) National defense Recreation Human (the knowledge, skill, resources and talent of individuals) Leisure time Entertainment Clean air Pleasant (trees, lakes, rivers, environment open spaces, etc.) Pleasant working conditions Scarcity and Choice Scarce Goods Limited Resources

  6. Economic reasoning focuses on the impact of marginalchanges. • Decisions will be based on marginal costs • -the cost of buying or making one more unit • and marginal benefits(utility). • - The increase in satisfaction from buying or making one more unit MB > MC  Do it! MC > MB  Don’t do it! don’t necessarily consider sunk costs.

  7. The use of scarce resources to produce a good is always costly. • Someone must give up something if we are to have more scarce goods. • b. The highest valued alternative that must be sacrificed is the opportunity cost of the choice. This class? What must be given up to get one more unit of another good or service

  8. The Invisible Hand Market prices direct individuals pursuing their own interests to produce good that will benefit society

  9. The Invisible Hand the price mechanism that guides our actions in a market. The invisible hand is an example of a market force. • If there is a shortage, prices rise • If there is a surplus, prices fall

  10. The test of an economic theory is its ability to predict and explain events in the real world. It is very difficult to predict human behavior

  11. Thinking Like an Economist!!! 1. Gather data 2. Study the data “Need facts to support theories and theories to make sense of facts.”

  12. Methods a. Inductive Use facts to develop a model Take a survey and study the results b. Deductive See if the facts support a hypothesis Start with a theory and see if facts support it c. Abduction the combination of deduction and induction

  13. Economic Insights • Theories tie together economists’ terminology and knowledge about economic institutions • Theories are too abstract to apply in specific cases and are often embodied in economic models and principles • An economic model • places the generalized insights of the theory in a more specific contextual setting • An economic principle • a commonly held insight stated as a law or general assumption

  14. Theories, models, and principles are continually tested to see of the predictions of the model match the data • Models lead to… • theorems(propositions that are logically true based on the assumptions of the model)… • to arrive at policy precepts (policy rules that conclude that a particular course of action is preferable) • Then they are combined with knowledge of real-world economic institutions and value judgments to determine economic goals for society

  15. Predicting Behavior Positive Economic Statements - relationships that can be tested - The class is half full - Unemployment is 6% - if incomes rise people spend money

  16. Normative Economic Statements - statements about “what should be” or make a value judgment - It is too hot - Unemployment should be around 4% - we should raise the minimum wage.

  17. Pitfalls • Ceteris Paribus • – other things being equal • - only consider price changes

  18. Pitfalls 2. Cause and Effect – one event may not be the cause of another - sunrise and the rooster

  19. Pitfalls 3. Fallacy of Composition – what is good for some may not be good for others - increased wages -time of this class

  20. Economic graphs • Independent Variable • - Price, wages, $$$$$ • - Y axis • Dependent Variable • - Quantity, workers, • - X axis

  21. Economic graphs • Direct Relationship • - Graph slopes up from left to right • Inverse Relationship • - Graph slopes down from left to right 3. Slope Rise Run

  22. 1. When an economist states that a good is scarce, he means that: a. Production cannot expand the availability of the good. b. It is rare. c. Desire for the good exceeds the amount that is freely available from nature. d. People would want to purchase more of the good at any price. 2. The highest valued alternative that must be given up in order to choose an action is called its a. opportunity cost. b. utility c. scarcity d. ceteris paribus

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