EVSC 239 - welcome

1. EVSC 239 - welcome Project: agricultural please Same website: forthcoming

2. Readings… • Two readers (Reader 1.a and Reader 1.b) thus far at the bookstore • Familiarize yourself with them. We’ll be flipping through both.

3. Economics in Context: Goals, Issues, and Behavior • What is economics? • economics: the study of the way people organize themselves to sustain life and enhance its quality

4. The Goals of Economic Activity Positive vs normative questions • Positive questions: how things are • Normative questions: how things should be • Examples? • “Defining poverty is both a positive and a normative task. …It requires us to decide whether poverty should be defined in terms of people’s opportunities in life, or only with respect to what they have made of those opportunities; whether a definition should look only at what people possess as private property, or should also take into account access to goods and services that are provided by the society.”

5. What for? • In discussing goals  need to start with normative question. • What is economic activity FOR? • Intermediate and final goals • A final goal requires no further justification: it is an end in itself • An intermediate goal is something that is desirable because its achievement will bring you closer to your final goal(s) • Wealth is whatever confers the ability to produce and procure valued goods and services. What does that mean?

6. “Wealth”… “Efficiency” • Recently: …efficiency as a key goal in economic policymaking • Efficient process: uses the min value of resources to achieve desired result • An efficient use of resources is one that does not involve any waste. Inputs are used in such a way that they yield the highest possible value of output, or a given output is produced using the lowest possible value of inputs.

7. Your turn… • Can market values always provide a standard of value? • What are some things we value? • What is your final goal? What are your final goals? • From whose point of view should economics be taught? (Traders? Consumers? Producers? Other?)

8. Our assumption • Here: we start with individuals • We assume that most normal people want to have happy, pleasant lives in a healthy social and physical environment – and that most people would like to contribute to ensuring that the social and physical conditions for a good life can continue into the future. • Is this a reasonable starting point?

9. So what is well-being? • Well-being is a shorthand term for the broad goal of promoting the sustenance and flourishing of life • What are some final goals?

10. Sample list of final goals • Satisfaction of basic physical needs; • happiness; • realization of one’s potential; • fairness (what is ‘fair’?); • freedom in economic and social relations; • participation in social decision making; • a sense of meaning in one’s life; • good social relations; • ecological balance

11. Economics and well-being • An economic actor (economic agent) is an individual, group, or organization that is involved in the economic activities of resource maintenance or the production, distribution, or consumption of goods and services. Examples? • Negative externalities are harmful side effects, or unintended consequences, of economic activity that affect persons, or entities such as the environment, that are not among the economic actors directly responsible for the activity. Examples? • Positive externalities are beneficial side effects, or unintended consequences, of economic activity that accrue largely to persons or entities that are not among the economic actors directly involved in the activity. Examples? • Transaction costs are the costs of arranging economic activities

12. Issues that define economics • Four essential economic activities. Any activity is ‘economic’ when it touches on 1 or more of 4 important tasks • Resource maintenance means managing natural, produced, human, and social resources so that their productivity is sustained [note: sometimes means not engaging in production, consumption, or distribution] • Production: conversion of resources into products – into goods or services • Distribution: the sharing of products and resources among people (exchange: trading one thing for another; transfer: giving something, with nothing specific expected in return) • Consumption is the final use of a good or service. Example?

13. 3 basic economic questions • • What should be produced, and what should be maintained? • What kinds of products should be made? How much of each? What resources need to be preserved? • • How should production and maintenance be accomplished? • By whom and using what kinds of resources, technologies and methods? • • For whom should economic activity be undertaken? • What are the principles and practices that will determine how the produced goods and services are distributed among different people?

14. Let’s talk • The admissions office at UOB decides who will be admitted and who will not be. Is this an economic activity? Of what kind?

15. Motivation and behavior • Economists generally assume that people engage in purposeful (or instrumental) behavior - actions taken with the expectation that these acts will lead to desired goals. • Extrinsic motivations arise for reasons “outside” of a person, such as doing an action for a reward or to avoid punishment. • Intrinsic motivations arise for reasons “inside” of a person, such as doing an action for enjoyment or because of ethical values. • Economists thus talk of various incentives set up by systems of reward and punishment. Examples? • Incentive: a reward or punishment that motivates action • What motivates us?

16. Self-interest, altruism, and the common good • Many economists believe that the goal of societal well-being can be obtained if individuals act in a way that promotes their own self-interest (motive for action based on the goal of improving one's own well-being ). • In a famous statement from The Wealth of Nations, written in 1776, Adam Smith declared, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” • This has been used as an ethical justification for following unfettered economic self-interest. • But: Adam Smith, in his other most notable work, The Theory of Moral Sentiments, addressed at great length the need to take into account the welfare of others • Opposite: altruism (motive for action that is especially concerned with the well-being of others) • Common good: motive for action with the goal of improving social well-being, including one’s own well-being

17. Self-interest • Even here…Many economists believe that the goal of societal well-being can be obtained if individuals act in a way that promotes their own self-interest. • Why could this be a problem? • inaccurate information, externalities, or ethics.

18. Ultimatum game • 2 people are told they will be given a sum of money, say $20, to share. One person gets to propose a way of splitting the sum. The second person can’t offer any input to this decision but gets to decide whether to accept the offer or reject it. If the second person rejects the offer, both people will walk away empty-handed. If the offer is accepted, they get the money and split it as planned. • Break into teams of two • Bonobos…

19. Behavior: Habit, Constraint, or Choice? • What did you eat at your last meal? Why did you eat that, in particular? • Habitual behavior is repetitive behavior that involves minimal thought and is often based on social custom. • Why?... • People’s behavior is often limited by constraints (limits set by others or by physical circumstances). • Choice behavior involves making a selection from a range of alternatives.

20. Rationality, Goals, and Information • “How do people choose?” • Economists generally assume that people have the capacity to make rational choices. [Freud’s family argued that people are irrational and need to be conditioned to make the right choices: hence, advertising/marketing] • Rational choices are choices that would normally be expected to move people towards their goals. This doesn’t mean that people always make perfect decisions because sometimes their information or decision-making may be imperfect. • Rationality means that people weigh the costs and benefits of alternative actions, relative to their goals, and not that people always make perfect decisions.

21. Optimization vs. Bounded Rationality • Optimizing means to choose the single alternative that best achieves what is desired. • The psychologist Herbert Simon demonstrated that it is normally not possible for people to optimize because they can’t obtain information on the full range of alternatives. Instead, people tend to satisfice - choosing an outcome that would be satisfactory and then seeking an option that at least reaches that standard. • Another behavioral explanation other than optimizing is meliorating – starting from a current level of achievement and continuously trying to do better. • Satisficing and meliorating are examples of “bounded rationality” – people generally consider only a subset of all the alternatives. • [see handout]

22. Now or later? • What time frame do people consider when they have the chance to make significant choices about how they are going to behave? • A high discount rate means that future benefits are very much discounted or diminished. • A low discount rate means that later benefits loom large. • Different people have different discount rates, and different rates may be appropriate to different circumstances – there is no one “correct” rate. • Environmentally – what does this mean?