Introduction to Economics

1. Introduction to Economics D.W. Hedrick

2. Instructional Method • Primarily Lecture format with discussion, simulations, and video presentations • Constructive discussion is welcomed • Grading is based on Aplia Homeworks (20%), five of seven quizzes (20%), three midterms (20% each), and an optional comprehensive final (replaces lowest midterm) – NO MAKEUPS GIVEN

3. Instructional Method • Suggestions for the study of economics • Read the book before coming to class • Recopy lectures and reread the book within several hours of class • Identify what you don’t understand • Ask questions in class • Use the Aplia and the study guide (optional) • Go to tutors in supplemental instruction (if offered) • Visit the professor during office hours

4. Definition of Economics • Mankiw’s definition • How Society manages its scarce resources • Hedrick’s definition • How society chooses to allocate its scarce resources among competing demands to best satisfy human wants • Alternative definitions • Economics is the study of choice. • Economics is what economist do. • Wikipedia's perspective

5. Scarcity and the Fundamental Questions of Economics • Scarcity : Unlimited wants versus limited resources • Choices and tradeoffs • Opportunity Costs • All societies must answer the WHFM questions • What is to be produced? • How is to be produced? • For whom will it be produced?

6. Economics as a Science • The Scientific Method • Observation →Hypothesis →Testing • Observation: identifying and measuring important variables – orderly loss of information • Paraphrasing Einstein, “ Everything should be made as simple as possible, but no simpler.” • K. Boulding, “Knowledge is always gained by the orderly loss of information.” • Assumptions and ceteris paribus • Hypothesis: educated guesses about cause and effect of the variables • Theories • Models: realism or usefulness • Testing: theories can’t be proven and are supported by repeated failed attempts to disprove them. • Microeconomics vs. Macroeconomics • The Assumption of Rational Behavior • Max TNB = TB – TC • Boxes Example • MB=MC rule • People respond to incentives • Limits to the use of rational behavior (e.g. axe murders)

7. Normative vs. positive approaches • A brief history of economic thinking • The language of economics

8. Mankiw’sTen Principles of Economic Thinking

9. Categories of Basic Principles of Economics • How people make decisions? • How people interact? • How does the economy work overall?

10. How People Make Decisions • Principle #1 - People face tradeoffs • Time allocation – an example of tradeoffs • Production Possibilities Frontier • Efficiency versus equity

11. How People Make Decisions • Principle #2 - The cost of something is what you have to give up to get it • Opportunity costs come from Von Weiser, a German economist late 1800s • Opportunity costs are independent of monetary units • TINSTAAFL • The real costs of going to college

12. How People Make Decisions • Principle #3 - Rational people think at the margin • Rational or irrational decision-making • Marginal benefits and costs versus total benefits and costs • Weighing marginal costs and benefits leads to maximizing net benefits (total welfare)

13. How People Make Decisions • Principle #4 –People respond to incentives • Reactions to changes in marginal benefits and costs • Increases (decreases) in marginal benefits mean more (less) of an activity • Increases (decreases) in marginal costs mean less (more) of an activity • Example of seat belts leading to increased speeds • Example of SUV (with child car seat) in Issaquah

14. How People Interact • Principle #5 - Trade can make everybody Societybetter off • Adam Smith author of the “An Inquiry into the Causes and Consequences of the Wealth of Nations” 1776 • Gains from the division of labor and specialization • Mercantilists perspectives • Example of why Ellensburgians should trade with others

15. How People Interact • Principle #6 - Markets are usually a good way of organizing economic activity • Feudal times and haciendas in the new world • The power of trade: cooperation versus conflict • Markets: prices and quantities traded, typical and abstract

16. How People Interact • Principle #6 - Markets are usually a good way of organizing economic activity creativity and productivity and resource allocation • “Failure” of centrally planned economies • “set it and forget it” becomes “compete or be obsolete”

17. How People Interact • Principle #7 Governments can sometimes improve market outcomes • Market signals can fail to allocate resources efficiently or equitably • Public goods, the exclusion principle, the free-rider problem and non-rival consumption • External costs and benefits • Examples: vaccines, education, pollution

18. How People Interact • Principle #7 Governments can sometimes improve market outcomes • Equitable or fair distribution of resources • Efficiency and equity: the pie analogy • Government Failure: is government intervention always the proper solution?

19. How the Economy works as a Whole • Principle # 8 – A country’s standard of living depends upon its ability to produce goods and services • Adam Smith’s “An Inquiry into the Nature and the Consequences of the Wealth of Nations” • Materialism – more toys mean more welfare • wealth: a necessary or sufficient condition for happiness (are rich people happier, children with lots of toys)

20. How the Economy works as a Whole • Principle # 8 – A country’s standard of living depends upon its ability to produce goods and services • leisure time and productivity • the factors of production: land or natural resources, labor, capital, entrepreneurship • technology and productivity • the Rule of 72 and growth rates

21. How the Economy works as a Whole • Principle #9 – The general level of prices rises when the government prints and distributes too much money • Definition of money, and economic language

22. How the Economy works as a Whole • Principle #9 – The general level of prices rises when the government prints and distributes too much money • Examples: “Not worth a continental” and Argentina • Establish of the Federal Reserve and the introduction of sustained inflation in the US

23. How the Economy works as a Whole • Principle #10 – Society faces a short-run tradeoff between inflation and unemployment • Short-run and the long-run • Demand and supply shocks • Short-run increases (decreases) in output above (below) long-run potential output lead to adjustments

24. How the Economy works as a Whole • Principle #10 – Society faces a short-run tradeoff between inflation and unemployment • Counter-cyclical stabilization versus pro-cyclical destabilization • Political business cycles