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Chapter 1

Chapter 1. Chapter 1. Chapter 1. What Is Economics?. Nariman Behravesh Edwin Mansfield. What do economists study?. MONEY!. What is Money?. What is Money?. Money has no value other than what we give it—it is a socially acceptable:. Measure of Value. Means of Transaction.

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Chapter 1

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  1. Chapter 1 Chapter 1 Chapter 1 What Is Economics? Nariman Behravesh Edwin Mansfield

  2. What do economists study? MONEY!

  3. What is Money?

  4. What is Money? Money has no value other than what we give it—it is a socially acceptable: • Measure of Value • Means of Transaction • Store of Value

  5. Numismaticsis the study of money

  6. So what is Economics?

  7. The Fundamental Economic Problem

  8. Unlimited Wants

  9. Scarce Resources

  10. People Face Tradeoffs. “There is no such thing as a free lunch!” tinstaafl

  11. What do economists study? How people make choices.

  12. The Basic Principles of Economics

  13. The 6 Basic Principles of Economics • Because of Scarcity, people have to make Choices • Choices have Costs • ProfitMatters. • People are Rational • People make decisions at the Margin • Trade is Good.

  14. Principle #:1 SCARCITY Because time is limited, people face trade-offs To get something, we usually have to give up something else: • Guns v. Butter • Food v. Clothing • Party v. Study Making CHOICES requires trading off one goal against another.

  15. Principle #2: OPPORTUNITY COST • All decisions have consequences. • Whether to go to college or to work? • Whether to study or go out on a date? • Whether to go to class or sleep in? The opportunity cost of an item is what you gave up, it is the NEXT BEST ALTERNATIVE.

  16. Principle #3: PROFIT MATTERS • People seek to maximize Profit • Profit is not simply measured in monetary terms; it is where benefit is greater than cost • Imperfect Information Changes in costs or benefits motivate people to respond to maximize their benefit and minimize their costs.

  17. Principle #4: RATIONAL BEHAVIOR • Rational Thinking involves making decisions based on long-term cost-benefit analysis rather than short-term gain. • Giving up something NOW in expectation of greater gain in the future is called an INVESTMENT People make decisions by thinking of the future costs and benefits.

  18. Principle #5: MARGINAL THINKING • Rational People Think at the Margin. • Decisions are NOT all or nothing actions • Marginal changes are incremental adjustments to an existing plan of action based on long-term analysis. People make decisions by comparing costs and benefits at the margin.

  19. Principle #6: TRADE IS GOOD • People gain from their ability to trade with one another. • Both sides in a trade gain—it is not a zero sum. • Trade allows people to specialize in what they do best. Trade Can Make Everyone Better Off.

  20. The Basic Principles of Economics • Scarcity -Choices: “There is no such thing as a free lunch.” 2. Opportunity cost -What you give up to get something. • People try to maximize their Profit. -All decisions have Risks. • People are Rational -They make Long-term investments based on Cost/Benefit Analysis • People make decisions at the Margin -Don’t look back, always look forward 5.Trade is a Win/Win situation.

  21. How do we make the most Efficient Use of our Scarce Resources to Maximize the Satisfaction of our Unlimited Wants? The Fundamental Economic Problem

  22. MSUW=EUSR

  23. MOST=LEAST

  24. ECONOMICS IS A SOCIAL SCIENCE

  25. ECONOMICS IS A SCIENCE

  26. POSITIVE ECONOMICS Scientific Method Hypothesis Testing Theory Induction Deduction

  27. ECONOMIC METHODOLOGY Theoretical Economics Theories Facts

  28. PITFALLS TO OBJECTIVE THINKING Bias Definition Fallacy of Composition Post Hoc (Causation)

  29. SOCIAL SCIENCE

  30. MACROECONOMICS...

  31. MACROECONOMICS... MICROECONOMICS...

  32. NORMATIVE ECONOMICS Policy Economics Theoretical Economics Theories Facts

  33. Barak Obama is President of the United States Not everyone in the United States can afford health insurance. Barak Obama is the best/worst President of the United States ever. The government ought to provide affordable health care for everyone Positive Statements: Capable of being verified or refuted by resorting to fact or further investigation Normative Statements: Contains a value judgement which cannot be verified by resort to investigation or research Positive and Normative Economics

  34. POSITIVE and NORMATIVE NORMATIVE Policy POSITIVE Facts

  35. Basic questions of production • What to produce? • How to produce? • Who gets it? • How do we get MORE?

  36. Resources(Factors of Production) • Resources used to make goods and services which provide satisfaction: • LAND • “Gifts”: All natural resources • LABOR • “Sweat”: Human effort that is compensated • CAPITAL • “Tools”: Human and Physical

  37. ECONOMIC MODELS SIMPLIFY OUR ALTERNATIVES CLARIFY OUR CHOICES

  38. Production Possibility Frontiers • Show the different combinations of goods and services that can be produced with a given amount of resources • No ‘ideal’ point on the curve • Any point inside the curve – suggests resources are not being utilized efficiently • Any point outside the curve – not attainable with the current level of resources • The curve can shift through changes in resources, technology, and trade • Useful to show opportunity cost and economic growth

  39. John’s PossibilitiesGiven: $20 cash Pizzas Burritos $2 pizza $1 burrito

  40. John’s Production Possibilities Pizzas 10 9 8 7 6 5 4 3 2 1 Unattainable Inefficient Burritos 2 4 6 8 10 12 14 16 18 20 In this case, we have a straight line because opportunity costs are constant; his resource is perfectly interchangeable

  41. Time Constraints YOUR POSSIBILITIES • Your choices in a typical 24 hour weekday: • 8 hours Sleeping • 8 hours Staring • 8 hours Studying • 8 hours Partying • Your Opportunity Cost is ALWAYS the next best alternative

  42. Production Possibility Frontier Production possibilities frontier represents an economy working at Full Employment. Any point on the curve is Efficient. STUDY Any point inside the line indicates an Underutilization or Unemployment of resources and is Inefficient. PARTY

  43. The Law of Increasing Cost Resources are not perfectly interchangeable

  44. Production Possibility Frontier When an economy grows, the production possibilities curve shifts to the right. The curve shifts due to changes in resources, technology, or trade. STUDY PARTY

  45. When a country’s production capacity decreases, the curve shifts to the left. STUDY PARTY

  46. Production Possibility Frontiers If it devotes all resources to capital goods it could produce a maximum of Ym. If it devotes all its resources to consumer goods it could produce a maximum of Xm If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods Assume a country can produce two types of goods with its resources – capital goods and consumer goods Capital Goods If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods. Ym A Yo B Y1 Consumer Goods Xo X1 Xm

  47. Production Possibility Frontiers • An Economy can grow through: • Increased Resources • Technology • Trade Capital Goods C Y1 A .B Yo Xo X1 Consumer Goods

  48. The Law of Increasing Cost

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