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ECON 101. What is economics?. An Economic Way of Thinking. Economics: study of choices people make to satisfy their needs & wants Economist: one who studies economic choices.
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ECON 101 What is economics?
An Economic Way of Thinking • Economics: study of choices people make to satisfy their needs & wants • Economist: one who studies economic choices
Microeconomics is the study of the small picture, such as the behavior and choices of individuals or a single business or industry. Microeconomics - economists would study and discuss the unemployment that exists within an industry, such as the auto industry. Think individuals and households Macroeconomicsis the study of the big picture. Economists studying macroeconomics may look at the behavior and choices of the entire economy. Think unemployment and GDP
Incentives • Think of something that you get for free. How is this free good or service actually paid for? TINSTAAFL- “There’s no such thing as a free lunch”- someone has to pay for a supposedly “free” good. • Economists always think about incentives. They believe that people respond to incentives - that they weigh the costs and benefits rationally.
Scarcity Chap 1.1
Scarcity Isn’t Optional Fact: Resources ARE limited Land (natural resources) Labor (human effort) Capital (buildings, machines, & technology) Entrepreneurship (willingness to risk) Time Fact: Human desires are boundless
Why can’t we have all we want? Available resources are limited Land (57,506,000 sq mi. & not even all habitable!) Labor (6.7 bil. souls x 24 hrs a day) Capital Entrepreneurship (not everybody is Bill Gates) Human wants and needs are unlimited: 6.9 billion & increasing Not enough to around
Because of scarcity, we need a rationing device to determine who gets what portion of all the resources and goods available. Money is the most widely used rationing device in our society. Because people compete for the rationing device, competition is a consequence of scarcity. If scarcity did not exist, everyone would get everything that he or she wanted.
Scarcity Choice Although we cannot have it ALL… …we still can have SOME . Scarcity implies the need to make CHOICES So: What shall we have? How much of it? How shall we produce it? Who will get it? Would you cheat on a test? Cheat on girlfriend/boyfriend? Yes if . . . MB ≥ MC
Societies face trade-offs. For example, the federal government has only so much money from tax revenues. If more of its tax dollars go to education, fewer are available to be spent on road and highway maintenance. Suppose the federal government sets aside funds for a new interstate highway system. Thousands of people are hired to work on the project, and the benefits are easy to see—more jobs and better roads.
Costs and Benefits A person will want to do a particular activity only if the benefits are greater than the costs. This is called a cost-benefit analysis. The word marginal means additional. Suppose that your lunch costs $5, and that you are considering buying a soda to go with your lunch. This soda will have a cost that is in addition to your $5 meal. The additional cost is called the marginal cost. Or, what is the cost for one additional item? - 16 students compared to 15 students100 cattle compared to 10
Economics (life) is about making decisions to gain the greatest benefit Cost/benefit analysis(drugs + stigma/contract + endorsements + HOF) Cost of drugs = $100kBenefits = $500 million All decisions are made based on: MB ≥ MC What would you do?
Economic Growth Economic growth raises standards of living, even in the continuing face of scarcity WHY?
What Factors Lead to Economic Growth? Economic growth raises standards of living, even in the continuing face of scarcity WHY? Free trade creates wealth What does the evidence tell us? Look at the following graphs.
Low, Middle, & High Income Nations Why are some countries rich and others poor?
Economic Growth Economic growth raises standards of living, even in the continuing face of scarcity Growth does not eliminate scarcity but may attenuate it (some things become less scarce) Growth is Not even across times and countries Not automatic Not irreversible BUT! It is the most powerful weapon against poverty ever discovered!
Measuring Standard of Living Gross Domestic Product (GDP) Total dollar value of all goods and services produced in a country in any one (calendar) year. Nominal GDP = value in current dollars Real GDP = value adjusted for purchasing power GDP per capita = GDP / Population
World Per Capita REAL GDP: 1500 - 2000 http://www.ggdc.net/maddison/ Source: GDP data from Angus Maddison, "Historical Statistics of the World Economy: 1-2003 AD.“
Opportunity Costs Chap 1.2
Opportunity Costs • All decisions involve trade-offs – the thing we sacrifice to get what we want • When countries make trade-offs they often use the “guns or butter” example • The most desirable alternative is called opportunity costs ie. Study or sleep • Most decisions involve adding or subtracting one more ie. Hiring another worker • This is called thinking at the margin • Economists use opportunity costs to make decisions at the margin • The cost of adding one more unit is called the marginal benefit
Opportunity Cost - The value of the next best or forgone alternative.
Options 1st hour of extra study time 2nd hour of extra study time 3rd hour of extra study time Benefit Grade of C on test Grade of B on test Grade of B+ on test Opportunity Cost 1 hour of sleep 2 hours ofsleep 3 hours of sleep Thinking at the Margin • When you decide how much more or less to do, you are thinking at the margin.
Goods and services cannot be produced without resources: land, labor, capital, and entrepreneurship. Land includes all the natural resources found in nature. An acre of land, mineral deposits, and water in a stream are all considered land. Labor refers to the physical and mental talents that people contribute to the production of goods and services. Capital is the produced goods that can be used as resources for further production. Factories, machines, and farm tractors are capital. *Entrepreneurshipis the special talent that some people have for searching out and taking advantage of new business opportunities and for developing new products and new ways of doing things.
1.Natural resources- items provided by nature that can be used to produce goods or provide services (aka land) 2. Human resources- human effort exerted during production (can be physical or intellectual) (aka labor)
3. Capital Resources- manufactured materials used to create products (not money) Technology- use of technical knowledge and methods to create new products or make existing products more efficiently
Factors of production are great but you need ideas Ideas come from entrepreneurs Bill Gates is an entrepreneur He creates ideas from what people want We need to consider allocative efficiency which is subjective and based on our preferences ie. Carnivore or herbivore Entrepreneurs
Economists refer to cost (the alternative we give up) • The law of increasing costs – as production switches from A to B, more resources are needed to increase production • In other words, opportunity costs increase • The cost increases because not all resources are suitable ie. Think poor farm land
What will competition do to an invention? Improve upon it… Make (ever lower) profits on it… Help spread it… Maybe even make it obsolete…
Production Possibility Frontier(PPF) Chap 1.3
Production Possibility Frontier Representation of all possible combinations of two goods that an economy can produce. Scarcity, choice, and opportunity cost work together in a production possibilities frontier.
Production Possibilities Graph 25 20 15 10 5 S Shoes (millions of pairs) a (0,15) b (8,14) c (14,12) g (5,8) d (18,9) A point of underutilization e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Efficiency • Efficiency means using resources in such a way as to maximize the production of goods and services. An economy producing output levels on the production possibilities frontier is operatingefficiently
Production Possibilities Graph 25 20 15 10 5 Future production Possibilities frontier T S a (0,15) Shoes (millions of pairs) b (8,14) c (14,12) d (18,9) e (20,5) f (21,0) 0 5 10 15 20 25 Watermelons (millions of tons) Growth • Growth If more resources become available, or if technology improves, an economy can increase its level of output and grow. When this happens, the entire production possibilities curve “shifts to the right.”
