What is economics?

1. What is economics?

2. Economics is….. • the social science that studies the production, distribution, and consumption of goods and services • An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area • an economy delivers the goods

3. The Economy of the United States: • US has a market economy • production and consumption are the result of decentralized decisions by many firms and individuals • opposite is a command economy – where there is a centralized authority making decisions about production and consumption (Soviet Union)

4. Adam Smith, The Wealth of Nations • individuals, in pursuing their own interests, ended up serving the interests of society as a whole • invisible hand – refers to the way a market economy manages to harness the power of self-interest for the good of society

5. Microeconomics: • Microeconomics • individuals pursuing their own interests often do promote the interests of society as a whole • Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole • Fluctuations • series of ups and downs which are a feature of modern economies • the economy just does not always run smoothly • recessions – economic downturns

6. Macroeconomics: • concerned with the overall ups and downs of the economy • economic growth is the “growing” ability of the economy to produce goods and services

7. The Economic Perspective

8. The Economic Perspective: • Economic perspective is the economic way of thinking • There are four economic principles that underlie the economics of a individual choice

9. 1. Resources are scarce • A resource is anything that can be used to produce something else • Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers) • Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it • ex. natural resources, limited quantity of human resources, even clean air and water

10. 2. The real cost of something is what you must give up to get it • opportunity cost – what you must give up in order to get it • every choice you make means forgoing some other alternative

11. 3. “How much?” is a decision at the margin • usually the question Is not “whether” but “how much” • this is a question whose answer hinges on the costs and benefits of dong a bit more or bit less • decision usually involves a trade-off – a comparison of the costs and benefits • marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis

12. 4. People usually exploit opportunities to make themselves better off • it is a good bet that people will exploit opportunities to make themselves better off • incentives – anything that offers rewards to people who change their behavior

13. The Economic Way of Thinking

14. 1. Everything has a cost • “there is no such thing as a free lunch” • Everything action costs someone time, effort or lost opportunities to do something else • Opportunity costs

15. 2. People choose for good reasons • Everyone faces choices and everyone should chose the alternative that gives them the most advantageous combination of costs and benefits • Normative economics –economic analysis that makes predictions about the way the economy should work • Positive economics – economic analysis that describes the way the economy actually works

16. 3. Incentives matter • Economics is all about incentives • Supply and demand analysis if about incentives • Theory of the firm and factor markets are about incentives • Government decision making is about incentives • When incentives change, people’s behavior changes in predictable ways

17. 4. People create economic systems to influence choices and incentives • Cooperation among people is governed by written and unwritten rules that are the core of an economic system • As rules change, incentives and behavior change • The success of market systems and the failures of communism are rooted in incentives

18. 5. People gain from voluntary trade • Economics is about trade • People trade when they believe the trade makes them better off, if there are no benefits, they won’t trade • People, not countries, trade • Market system is about trade • Economics is about trade

19. 6. Economic thinking is marginal thinking • Marginal choices involves the effects of additions and subtractions from current conditions

20. 7. The value of a good or service is affected by people’s choices • Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers • Price of a good or service is set by supply and demand

21. 8. Economic actions create secondary effects • Good economics involves analyzing secondary effects • Example: • Rent controls make apartments more affordable to some consumers • Controls make it less profitable to build and maintain apartments • Secondary effect is a shortage of apartments and houses for rent

22. 9. The test of a theory is its ability to predict correctly • If the theory correctly predicts the consequences of actions it is a good theory • Nothing is “good in theory but bad in practice”

23. What is economics?

24. Economics is….. • the social science that studies the production, distribution, and consumption of goods and services • An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area

25. The Economy of the United States: • US has a market economy • production and consumption are the result of decentralized decisions by many firms and individuals • individual consumers make what they think will be most profitable • each consumer buys what he or she chooses • opposite is a command economy

26. Adam Smith, The Wealth of Nations • individuals, in pursuing their own interests, ended up serving the interests of society as a whole • invisible hand –

27. Microeconomics: • Microeconomics • individuals pursuing their own interests often do promote the interests of society as a whole • Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole • Fluctuations • series of ups and downs which are a feature of modern economies • the economy just does not always run smoothly

28. Macroeconomics: • concerned with the overall ups and downs of the economy • economic growth is the “growing” ability of the economy to produce goods and services

29. The Economic Perspective

30. The Economic Perspective: • Economic perspective is the economic way of thinking

31. 1. Resources are scarce • A resource is anything that can be used to produce something else • Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers) • Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it

32. 2. The real cost of something is what you must give up to get it • opportunity cost –

33. 3. “How much?” is a decision at the margin • usually the question is not “whether” but “how much” • decision usually involves a trade-off – a comparison of the costs and benefits • marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis

34. 4. People usually exploit opportunities to make themselves better off • incentives – anything that offers rewards to people who change their behavior

35. The Economic Way of Thinking

36. 1. Everything has a cost • “there is no such thing as a free lunch” • Everything action costs someone time, effort or lost opportunities to do something else

37. 2. People choose for good reasons • Normative economics –economic analysis that makes predictions about the way the economy should work • Positive economics – economic analysis that describes the way the economy actually works

38. 3. Incentives matter • Economics is all about incentives • When incentives change, people’s behavior changes in predictable ways

39. 4. People create economic systems to influence choices and incentives • Cooperation among people is governed by written and unwritten rules that are the core of an economic system • As rules change, incentives and behavior change

40. 5. People gain from voluntary trade • Economics is about trade • People, not countries, trade

41. 6. Economic thinking is marginal thinking • Marginal choices involves the effects of additions and subtractions from current conditions

42. 7. The value of a good or service is affected by people’s choices • Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers • Price of a good or service is set by supply and demand

43. 8. Economic actions create secondary effects • Good economics involves analyzing secondary effects • Example:

44. 9. The test of a theory is its ability to predict correctly • If the theory correctly predicts the consequences of actions it is a good theory • Nothing is “good in theory but bad in practice”