Praxeology with Dr. T

1. With the sound on your computer system turned on and turned up, please Click on theGoldenSpeaker on the right to hear an important preliminary message: Praxeology with Dr. T

2. ECON104 Week 1

3. Plan for Week 1 • This PowerPoint presentation will provide a few insights on the first two chapters of the “Essentials of Economics” book. • The presentation herein is not a substitute for reading the chapters in detail, but it does provide some indication of what I see as the most important aspects of the material.

4. “Essentials of Economics”Chapter 1 • Definitions of Economics: • Economics is a study Of (the science of): • How scarce resources are allocated. • Productive activities. • Cooperation in providing goods and services for each other. • Exchange, Choice.

5. Important Initial Topics • Purposeful (Rational) Behavior • In economics we focus on behavior that is undertaken for a reason. We have an ends-means framework. • Scarcity • A situation where there is not as much of anything as people want at a zero price. • Scarcity necessitates choice. • Self-Interest vs. Selfishness • Self-interest can be directed towards helping others. • Economics assumes self-interest, but not “selfishness” in the pejorative sense.

6. More on Self Interest • What is the best way to get what we want in life? • Does the answer depend on the institutional framework of society? • In a framework where theft is not allowed, then cooperation with others is how we get most of what we want. • Are self-interest and the interests of other people in conflict? • The answer depends on the institutional framework of society.

7. Market Coordination • In a market economy, the best way to serve oneself is to serve others. • In a market economy, people’s presumably innate self-interest is turned toward meeting the needs of other people. • We specialize in what we do best, earn and income by doing so, then spend that income on things that others produce.

8. Opportunity Cost • Opportunity cost is the value of the next-best alternative. • Opportunity cost is what we give up in order to get what we want the most. • As opportunity cost is always associated with some human action, we can see that it can vary depending on (1) who is doing the action, and (2) what the person’s individual circumstances are. • Therefore, in economics, cost is considered subjective rather than objective.

9. The Framework of Society • Socialism vs. Capitalism • Who makes choices? • Can groups choose? • Is there a “social conscience” separate from the individuals who compose a group? • Is there a “social welfare” apart from the utility of individuals in society? • Our studies in this class will focus on capitalism, where it is understood that only individuals can really have preferences, choose, etc.

10. Incentives Matter • Peoples’ actions in pursuing their own interests affect the incentives of others. • The fact that I can make use of a computer to do my accounting provides an opportunity for someone else to be in the business of producing computers.

11. “Roundabout” Production Methods • How many people are typically involved in making a lead pencil at all the various stages? • Would it be cheaper if not so many were involved? • Not if each person can do his specific task more efficiently than others.

12. “Essentials of Economics”Chapter 2 • People try to maximize “Utility”. • Utility is satisfaction or happiness or well-offness. • Utility is personal and subjective. • It is in the minds of the market participants. • In an ordinary economic exchange, both parties gain utility. • If not, we must assume that they would not enter into the exchange.

13. “Social” Welfare • Since we cannot compare utilities interpersonally (because utility is subjective and personal to each person), assessing the increase or decrease in “social welfare” from a certain transaction is problematic. • The attempt to compare utilities between two parties is called an interpersonal utility comparison (IUC), and is NOT considered valid economic reasoning. • However, as long as an exchange is truly voluntary, then we know that both parties are better off (at least ex-ante) from an economic exchange. • And thus we CAN say that overall “social” welfare is enhanced by ordinary (voluntary) economic exchange.

14. A Side Note on Fairness How can we tell if some transaction is fair? • By seeing if a person is better off as a result of some transaction? (Would this entail an IUC?) • By seeing that a person voluntarily entered into an economic transaction? The second approach above seems more reasonable. • It requires only an assumption that people want to better their own lives. • It avoids making an interpersonal utility comparison (IUC).

15. The Production Structure • Higher-order goods • Producer goods • Capital goods • They provide indirect utility • Lower-order goods • Consumer goods • They provide direct utility to consumers

16. The Value of Various Goods • The value of consumer goods (lower-order goods) is determined by how well they provide utility. • The value of producer goods (higher-order goods) is imputed backwards from the value of the consumer goods that it produces. • Contrary to the popular view, the value of goods (of either variety) is NOT determined solely by objective costs of production.

17. Marginal Utility • Marginal Utility = The utility gained from the additional unit of a good. • The greater the supply of a good, the lower the marginal utility. • The smaller the supply of a good, the higher the marginal utility. • This “law” of marginal utility is true for sellers and buyers both.

18. One Common Myth • “A rich man with $1 million values an additional $1 less than a poor man with only $100 to his name.” • Does the principle of marginal utility suggest that the above statement is true? • No. That would entail an IUC. • The principle of marginal utility DOES suggest that a rich man values an additional $1 less than he valued his previous dollars obtained.

19. Thank you for viewing. • Dr. Glen Tenney • glent@gwmail.gbcnv.edu • 775-727-2009