Econ 10 - 951

1. Econ 10 - 951 UNC-Chapel Hill Spring 2001 Instructor: Travis Raines T, R 6:00 - 7:15

2. Econ 10 - 951 UNC-Chapel Hill Spring 2001 Lecture 1 Introduction to Class / Economics 01/09/2000

3. About This Course • Instructor: Travis Raines • Office: 300-F Hanes • Office Hours: By appt. • E-mail: traines@unc.edu • AOL Instant Messenger Screen Name: Azariadas • course homepage: http://www.unc.edu/~straines/econ10/ • Will contain various information including homework, lecture slides, old exams, etc.

4. About This Course • Grading • Attendance - not required • Participation (5%) • 3 Unannounced Quizzes (20%) ~ drop the lowest • Homework (15%) • 2 within semester exams (30%) • January 30th and March 6th • Final Exam (30%) • May 8th

5. 1. What is Economics About?

6. Scarcity and Choice • Scarcity and choice are the two essential ingredients of an economic topic. • Goods are scarce because desire for them far outstrips their availability from nature. • Scarce goods are called economic goods. • Scarcity forces us to choose among available alternatives.

7. Scarcity and Choice ECONOMIC GOODS LIMITED RESOURCES Food (bread, milk, meat, eggs, vegetables, coffee, etc.) Land (various degrees of fertility) 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,Goodsdressers, television sets, etc.) Non-human animal resources Space exploration Technology (physical and scientific “recipes” of history) Education National defense Human (the knowledge, skill, Resources and talent of individual human beings) Recreation Leisure time Entertainment Clean air Pleasant (trees, lakes, rivers, Environmentopen spaces, etc.) Pleasant working conditions • History is a record of our struggle to transform available, but limited resources . . . into things that we would like to have, which we call economic goods.

8. Scarcity and Poverty • Scarcity and poverty are not the same thing. • Absence of poverty implies some basic level of need has been met. • An absence of scarcity would imply that all of our desires for goods are fully satisfied. • We may someday eliminate poverty, but scarcity will always be with us.

9. Scarcity Necessitates Rationing • Every society must have a means to ration scarce resources among competing uses. • Various factors can be used to ration (e.g. first-come, first served). • In a market setting, price is used to ration goods and resources. • When price is used, the good or resource is allocated to those willing to give up “other things” in order to obtain ownership rights.

10. Competition Results from Scarcity • Competition is a natural outgrowth of the need to ration scarce goods. • Changing the rationing method used will change the form of competition, but it will not eliminate competitive tactics.

11. 2. The Economic Way of Thinking

12. Guideposts to Economic Thinking • 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. • The highest valued alternative that must be sacrificed is the opportunity cost of the choice.

13. Guideposts to Economic Thinking • Individuals choose purposefully; therefore they will economize. • Economizing: gaining a specific benefit at the least possible cost. • Incentives Matter • As personal benefits (costs) from choosing an option increase, other things constant, a person will be more (less) likely to choose that option.

14. Guideposts to Economic Thinking • Economic reasoning focuses on the impact of marginal changes. • Decisions will be based on marginal costs and marginal benefits (utility). • Since information is scarce, uncertainty is a fact or life. • In addition to their initial impact, economic events often generate secondary effects that may be felt only with the passage of time.

15. Guideposts to Economic Thinking • The value of a good is subjective and varies with individual preferences. • The test of an economic theory is its ability to predict and explain events in the real world.

16. 3. Positive and Normative Economics

17. Positive Economics • Positive Economics: - The scientific study of “what is” among economic relationships. • Positive economic statements can be proved either true or false. • Ex: The inflation rate rises when the money supply is increased

18. Normative Economics • Normative Economics: - Judgements about “what ought to be” in economic matters. • Normative statements reflect subjective values. They cannot be proved true or false. • Ex: The inflation rate should be lower.

19. 4. Pitfalls to Avoid in Economic Thinking

20. Pitfalls • Violation of the the ceteris paribus condition. • Ceteris paribus is a Latin term meaning “other things constant.” • When describing the effect of a change, the outcome may be influenced by changes in other things. • Association is not causation. • Statistical association alone cannot establish causation.

21. Pitfalls • The fallacy of composition is the erroneous view that what is true for the individual (or the part) will also be true for the group (or the whole). • Microeconomics focuses on narrowly defined units, while macroeconomics is focused on highly aggregated units. • One must beware of the fallacy of composition when shifting from micro- to macro-units. • Fallacy of composition

22. 1. Why is scarcity a key economic concept, even in an affluent economy? 2. “The government should provide goods such as health care, education, and highways because it can provide them free.” Is this true or false? Questions for Thought: 3. Indicate how each of the following changes would influence your incentive to undertake the action described: (a) A change in the meeting time of the introductory economics course from 11:00 a.m. to 7:30 a.m. on a student’s decision to attend the lectures. (b) A reduction in the number of exam questions that relate directly to the text on the your decision to read the text. (c) A reduction in the prices of off-campus apartments on your decision to live on-campus.