general_idea

8/7/2019 general_idea

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Resources and Wants

We have limited resources.

We have wants which exceed thoseresources.

This leads to scarcity

Scarcityexists when there areinsufficient resources to satisfypeoples wants.


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Economics:

The Social Science which studies social andThe Social Science which studies social and

individual choices in a condition of scarcity withindividual choices in a condition of scarcity with

the objective of maximizing the satisfaction ofthe objective of maximizing the satisfaction ofhuman wants.human wants.


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Economic ResourcesEconomic Resources

Land - Natural Resources

Labor- Skills of People

Capital - Man made inputs to

production. (notmoney) Entrepreneurship - The organizing resource of

production; combines the other resources andaccepts risk.


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Payment to the Resources

Rent (for land)

Wages (for labor)

Interest (for

capital)

Profit (forentrepreneurial

ability)


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Circular Flow of EconomicActivity

Households Firms

Income $

Consumption $

Factors of Production

Goods andServices

Product

Market

Resource

Market

Wages, Interest,Rent, & Profit

Revenue $


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The Questions of Economics

Scarcity requires us to make choicesinvolving:

What to produce?

How to produce it?

For Whom? (how it should be distributed?)


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Methods of Social Choice

Society makes choices through:

Market Forces

Governmental Forces

Social Forces


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Economic Choice

In Capitalist economies the Market is

the major rationing device:

Markets ration through the forces of

Supply and Demand.

IfDemand > Supply the Price

and rations the shortage.


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Economic Choice

In Command Economies (centrallyplanned), the Government make choices

which allocate resources and decide:

What?

How?

For Whom?


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Economic Choice

In Mixed Economies (both market and governmentcombined), the society makes choices which allocateresources through a combination of government

intervention and market forces.

Government Forces: Government Spending

Regulation Taxes Subsidies


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Opportunity CostsOpportunity Costs

Opportunity Cost - is the highest valued alternativeforegone when choosing between alternatives.

When an activity is chosen, the opportunity cost isthe benefit expected from the best alternative

forgone. Example: If you choose to attend college this year,

your opportunity cost is the salary you would havereceived from the best available full-time job.


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Economic Choice

To choose, evaluate tradeoffs--theopportunity costof a choice is the value

of the best alternative you gave up


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Rational Self-Interest

Individuals rationallyselect alternativesthey perceive to be intheir best interests


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Incentives

Economists believe that incentives work.

They believe that people respond to incentives (that theyweigh the costs and benefits rationally).

If the cost of choices increase, less of thatchoice will be made.

If the benefit of a choice is increased, people will make that

choice more.


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Rational Choice

I will choose to make a choice ifMB > MC

Incentives change Benefit or Cost!

Incentives will cause:

MB > MC


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Rational ChoiceI will choose not to make a choice if

MB < MC

Incentives change Benefit or Cost!

Disincentives will cause:

MB < MC


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How Do Economists Think: Utility and Rationality

Economists assume that people act rationallyEconomists assume that people act to maximize theirown happiness and minimize their costs.

This happiness that economists assume peoplemaximize is called utility.

This does not mean people are greedy - some peopleget happiness from others happiness.


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Types of Economics

Microeconomics - Studies the behavior of individualdecision units (people and firms).

Macroeconomics - Studies the behavior of entireeconomies as a whole.


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Types of Economics

Positive Economics - The economics of what is. This isdescriptive of fact and theory without opinion.

A positive economic statement can be proved ordisproved by reference to facts.

Normative Economics - The economics of what shouldbe. This is economics where policy issues involve

evaluation and the opinion of the economist. A normative economic statement represents anopinion, which cannot be proved or disproved.


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What are our

goals andobjectives?

ECONOMIC GOALSECONOMIC GOALS


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ECONOMIC GOALSECONOMIC GOALS

ECONOMIC GROWTHECONOMIC GROWTH

FULL EMPLOYMENTFULL EMPLOYMENT

ECONOMIC EFFICIENCYECONOMIC EFFICIENCY

PRICE LEVEL STABILITYPRICE LEVEL STABILITY

ECONOMIC FREEDOMECONOMIC FREEDOM

EQUITABLE DISTRIBUTIONEQUITABLE DISTRIBUTIONECONOMIC SECURITYECONOMIC SECURITY

BALANCE OF TRADEBALANCE OF TRADE


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ECONOMIC GOALSECONOMIC GOALSECONOMIC GROWTHECONOMIC GROWTHFULL EMPLOYMENTFULL EMPLOYMENT

ECONOMIC EFFICIENCYECONOMIC EFFICIENCYPRICE LEVEL STABILITYPRICE LEVEL STABILITYECONOMIC FREEDOMECONOMIC FREEDOM

EQUITABLE DISTRIBUTIONEQUITABLE DISTRIBUTIONECONOMIC SECURITYECONOMIC SECURITYBALANCE OF TRADEBALANCE OF TRADE


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Economic Models

An economic model is asimplification of realitydesigned to capture theimportant elements of the

relationship underconsideration

A model is usually a

graph or a set ofmathematical equations


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Scientific Reasoning Tools:Scientific Reasoning Tools:

Inductive Reasoning:Reasoning from facts to generalizations.

- Gather, systematically arrange, and drawconclusions from the analysis of facts anddata (empirical analysis). Test the theory(hypothesis) against real-world situations.

Deductive Reasoning:- Starting with generalities ofhow the world

works, generate hypotheses and test those

predictions against real-world situations.


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What is theWhat is theScientific Method?Scientific Method?

ProblemProblemidentificationidentification

ModelModeldevelopmentdevelopment Testing a theoryTesting a theory


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INDUC

TION

Organized Facts Which LeadOrganized Facts Which Lead

totoGeneralizations or PrinciplesGeneralizations or Principles

FACTSFACTS

THEORIESTHEORIES


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THEORETICALTHEORETICAL

ECONOMICSECONOMICS DEDUCTION

Theories Which Lead toTheories Which Lead to

Verification or Rejection ByVerification or Rejection Bythe Factsthe Facts

INDUC

TION

FACTSFACTS

THEORIESTHEORIES


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THEORETICALTHEORETICAL

ECONOMICSECONOMICS

POLICIESPOLICIES

Either Can Lead to PoliciesEither Can Lead to Policies

DEDUCTION

INDUC

TION

FACTSFACTS

THEORIESTHEORIES


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Scientific Reasoning Issues In complicated, real-world systems, how

do you unscramble cause and effect? Hold other things equal (ceteris paribus).

Fallacy of composition

If A happens before B, did A cause B?

Confusing correlation with causation


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Scientific Reasoning ToolCeteris Paribus: It is Latin forall else equal and

is a tool of scientific reasoning thatwe will use OFTEN.

it means that we are assuming thatall other variables which might berelated are held constant.


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Scientific Reasoning Fallacies:

Correlation vs. Causation :

Because two variables are systematically related,

(they may increase together or always seem tomove in opposite direction)

this correlation is not proof of a cause-effectrelationship between them.

Example: Change in the Money Supply andchange in GDP, which causes which?


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Graphs Used in

Economic Models Patterns to Watch For:

variables that move in the same direction variables that move in opposite directions

variables that are unrelated


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A Line with Positive Slope

x

y

change in x

change in y >0

T V i bl Di R tiT V i bl Di R ti


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Two-Variable Diagram Representing aDirect Relationship

Two-Variable Diagram Representing aDirect Relationship

360

300

240

180

120

60

0

Consumption ($)

Income ($)

100 200 300 400 500

The variables

income and

consumption are

directly related.

A

B

C

D

E

F

C

Di t R l ti hi


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Direct RelationshipsVariables Moving in the

Same Direction

B


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A Line with Negative Slope

x

y

change in x

change in y < 0

T V i bl Di R tiT V i bl Di R ti


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Two-Variable Diagram Representing anInverse Relationship

Two-Variable Diagram Representing anInverse Relationship

20

18

16

14

12

0

Price of CDs ($)

Quantity Demanded of CDs100 120 140 160 180

The variables price

and quantity

demanded are

inversely related.

Demand for CDs

A

B

C

D

E


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Inverse RelationshipsVariables Moving in

Opposite Directions

A B T Di R tiT Di R ti


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Two Diagrams RepresentingIndependence between Two Variables

Two Diagrams RepresentingIndependence between Two Variables

(b)(a)

40

30

20

10

010 20 30 40

A B C D

Y

X

Variables XandYareindependent (neither variable

is relatedtothe other).

40

30

20

10

010 20 30 40

A

B

C

D

Y

X

Variables XandYare independent.

C l l ti th Sl f LiC l l ti th Sl f Li


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Calculating the Slope of a LineCalculating the Slope of a Line

Y

X=

+10

+5= +2Slope =Slope=

Y= = 110

10

40

30

20

10

010 20 30 40

(a)

A

B

C

D

X

Y

Y

X

40

30

20

10

010 20

(b)

A

B

C

D

X

Y

15

(negative slope)

X (positive


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C l l ti th Sl f C tC l l ti th Sl f C t


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Calculating the Slope of a Curve at aParticular Point

Calculating the Slope of a Curve at aParticular Point

10 20 30 40

A

B

C

X

Y

0

40

30

20

10

Line drawn tangent

to the curve at

pointA.

Slope= = = +.67YX

20

30

30

20


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Graphing Relationships AmongMore Than Two Variables

Price Ice cream consumption(cents per scoop) (gallons per day)

30F 50F 70F 90F

15 12 18 25 50

30 10 12 18 37

45 7 10 13 27

60 5 7 10 20

75 3 5 7 14

90 2 3 5 10

105 1 2 3 6


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Functional Relationships

DIC = f (P T)

Ice Cream demand depends on

price and temperature. If temperature increases Demand Increases


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A Change in Demand

Quantity

Ice Cream

Price

0 1 2 3 4 5 6 7

1

2

3

4

5

6

Demand for

Ice Cream

New Demand for

Ice Cream

Ceteris paribus, iftemperature rises,people will buy

more Ice Cream ateach price


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A Movement Along a Curve vs.A Shift in the Curve

Quantity

Pr

ice

D0

P0

P2

Q0

Q2

A change inquantitydemanded


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A Change in the Quantity DemandedVersus a Change in Demand

Quantity

Pr

ice

D0

P0

P1

Q0Q1

A change in

quantitydemanded


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A Change in the Quantity Demanded

Versus a Change in Demand

Pr

ice

Quantity

D0

D1

D2

Increase inDecrease in

demand

demand

A change indemand

Key Terms and ConceptsKey Terms and Concepts


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Key Terms and ConceptsKey Terms and Concepts

Scarcity Economics Utility Land

Labor Capital Entrepreneurship

Opportunity Cost

Marginal Analysis

Rational Behavior

Induction Deduction Fallacy of Composition Ceteris Paribus

Positive Economics Normative Economics Microeconomics Macroeconomics

Inverse Relationship Direct Relationship Slope of a line

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