Economics Today

Chapter 1

• The Nature of Economics

The Power of Economics Analysis

Defining Economics

• Economics is the study of how people make choices to satisfy their wants

• The purpose of economics is to understand choices

• Consumer

• Producer

• Employee

• Employer

Microeconomics versus Macroeconomics

• Microeconomics is the part of economic analysis that studies decision making undertaken by individuals (or households) and by firms. Examples

• Macroeconomics is the part of economic analysis that studies the behavior of the economy taken as a whole. Examples

The Economic Person:

• Rational

• Self Interest

• Economists assume that individuals act as if motivated by self interest and respond predictably to opportunities to gain.

The Rationality Assumption

• Economist assume that individuals do not intentionally make decisions that would leave them worse off.

• Realistic? No

• Useful? Yes

Self interest

• Self interest involves monetary gains but also:• Prestige• Friendship• Love• Power• Compassion• Others

Economics As A Science

• Economics is a social science.

• Models

• Theories

Models And Realism

• No model in any science are complete in the sense it captures every detail and interrelationship that exist.

• Model: Is an abstraction from reality.

• Maps serves as a Model

Assumptions

• Assumptions define the set circumstances.

• World is flat

• World is round

• Ceteris Paribus is an assumption that nothing changes except the factors being studied. “Other things equal”

Models of Behaviors

• Economic Models

• Do: Study the way people act

• Do not: Study the way people think

• Empirical Evidence

Substitution

• Substitution exits in virtually every decision you make.

• Consumption

• Production

• Substitution is not variety

• Same level of utility or satisfaction for each sustitution

Positive And NormativeEconomics

• Positive analysis, a scientific term that relates to the value-free nature of the inquiry.

• Positive Economics is concern with “what is” or facts.

• Normative analysis relates to values.

• Values are beliefs, things that are important to us as individuals.

Chapter 2

• Scarcity and the World of Trade-Offs

Scarcity

• Scarcity is the most basic concept in all of economics.

• Scarcity exits because human wants always exceed what can be produced with limited resources and time that nature makes available.

• Scarcity is not a shortage or poverty.

Scarcity And Resources

• Resources are scarce!

• Resources can be defined as inputs used in the production of things that we want.

• Resources produce goods and services

• Factors of Production

• Land

• Labor

• Capital

• Entrepreneurship

Wants And Needs

• Needs are not objectively definable.

• Individuals have competing wants but cannot satisfy all of them, given limited resources.

• In a world of scarcity, every want that ends up being satisfied causes one or more other wants to remain unsatisfied or to be forfeited.

Scarcity, Choice, And Opportunity Cost

• Scarcity leads to the necessity of making choices.

• Every choice made means that some other choice (opportunity) had to be sacrificed

• You have one hour. What choices can you make to use that one hour?

• You must choice the highest-valued activity.

Scarcity, Choice, And Opportunity Cost

• The value of the next-best alternative is called its opportunity cost.

• The opportunity cost of any action is the value of what is given up.

• When you choose do something, you choose not to do something, which is the opportunity cost.

• What is the opportunity cost to go to College?

The World of Trade-Offs

• Time is a very important limited resource.

• How do we use it?

• Graphic Anaylsis

• Study time: Accounting versus Economics

Production Possibilities Curve

• A curve representing all possible combinations of total output that could be produced assuming:

• 1. A fixed amount of productive resources of a given quality, and

• 2. The efficient use of those resources.

• PPC is a graphic representation of, among other things, opportunity cost.

Technology

• Technology is defined as society’s pool of applied knowledge concerning how goods and services can be produced

• Technology is the formula used to combine the factors of production.

Off The PPC

• The PPC indicates the maximum quantity of one good available given the quantity of the other.

• Points outward

• Points inward

Efficiency

• An economy is efficient whenever it is producing the maximum output with given technology and resources.

• A situation in which a given output is produced at minimum cost.

Law of Increasing Costs

• The observation that the opportunity cost of additional units of a good generally increases as society attempts to produce more of that good. This causes the bowed out shape of the PPC,

• Why?

Economic Growth and The PPC

• What happens to the PPC when economic growth occurs?

Trade-Off Between the Present and the Future

• Whenever we use productive resources to make capital goods, we are implicitly forgoing current consumption.

• Trade-off between consumption goods and capital goods

Specialization and Greater Productivity

• Specialization is the division of productive activities among persons and regions so that no one individual or one area is totally self-sufficient.

• Absolute Advantage is the ability to produce a good or service at an absolutely lower cost, usually measured in units of labor or resource input required to produce one unit of the good.

Comparative Advantage

• The ability to produce a good or service at a lower opportunity cost.

• Comparative advantage is relative.

• Example: Babe Ruth

The Division of Labor

• The segregation of a resource into different specific task.

• Example: automobile workers