Check this out! At the beginning of each chapter you see a list like the following, which is a list in chapter 1: After reading this chapter, you should be able to: Define economics and the features of the economic perspective. Describe the role of economic theory in economics. Distinguish microeconomics from macroeconomics and positive economics from normative economics. List the categories of scarce resources and delineate the nature of the economizing problem. Apply production possibilities analysis, increasing opportunity costs, and economic growth. Explain how economic growth and international trade increase consumption possibilities. (Appendix) Understand graphs, curves, and slopes as they relate to economics.
You provide answers So, you know what to look for in a chapter. I have a road map on the syllabus for the chapters we will cover. A way to really learn economic ideas is to work through examples. Let’s jump right into an example. This is an example from what I will call personal economics. Say you have $10 to spend and you are looking a candy bars and pops. Say candy bars have a price of $1 per unit and pops have a price of $1.25 per unit. So, in your personal life you have some money and when you buy stuff you have to pay prices.
Consumption Possibilities Here let’s create a table that lists various combinations of pop and candy bars you can consume with your $10. Note if you buy no pop you can use the whole $10 on candy bars and thus if you take $10 and divide by $1 you see you can have 10/1 = 10 candy bars. If you buy 1 pop you have $10 minus $1.25 left to spend and thus can have (10 – 1.25)/1 = 8.75 candy bars. Don’t worry, for now say you can buy fractional amounts of goods (you can buy ½ gallon of gas, right?). Pops Candy bars 0 10 1 8.75 2 7.50 3 6.25 4 5 5 3.75 6 2.50 7 1.25 8 0
Here I took the data in the table and did a rough graph – it is close to being exact, but not perfect. In a graph Units of candy bars Note I took the first column and made it the “x” variable. The x intercept is the point where the amount of y = 0 and you look at the corresponding amount of x. Here we have the point (8, 0), where you remember you put the x value first. The y The y intercept here is (0, 10). In the current context the intercepts are the maximum amounts of either item one can intercept have when devoting all the money to the purchase of 1 type of item. Units of Pop The x intercept
The slope Let’s play a word association game. I will say something and you write something down. Parker……………………….. (did you write short and dumpy?) Slope…………………………………….. How many of you wrote rise over the run? You can put your hand down now. A fuller way to express this is that between any two points on a line take the change in the y variable and divide by the change in the x variable between those two points.
The slope, part 2 Let’s take the 2 intercept points (0, 10) and (8, 0). The y values here are 10 and 0 and so the change in y is (10 – 0) = 10. In the same order the x values are 0 and 8 and so the change is (0 – 8) = -8. The slope is (10 – 0)/(0 – 8) = 10/-8 = -1.25. Now the slope is an indication of the change in y for each unit change in x. This means if you want 1 more pop you have to give up 1.25 candy bars. I say give up 1.25 candy bars because when the slope is negative the two variables move in opposite directions.
What have we learned? Here the $10 is a personal resource that can be used in many ways. Most people have a limited amount of resources. Because of this there is a 1) A limited amount of items that can be purchased, and 2) A trdae-off in that as you want more of 1 item you have to give up some amount of the other item. In fact, the slope is an indication of how much y must be given up for each addityional unit of x. Let’s turn to some definitions of economics.
What is Economics? Some definitions of economics: The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity. Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. The study of how people make choices under conditions of scarcity and of the results of those choices for society.
Scarcity Note a key point of the definition of economics - limited resources and unlimited wants. Scarcity really is the condition that human wants always exceed what can be produced with the limited resources and time that we have available. Because of scarcity, choices must be made as to how to use our resources. Some folks who study economics like to say there is an “economic way of thinking.” In other words, there are certain aspects to looking at the world from an economic perspective.
Opportunity cost The opportunity cost of something is what you give up to get it. The consequence of limited resources and unlimited wants - scarcity - is that choices of how to use resources must be made. If we use resources to produce one thing we can not, obviously, use those very resources to produce something else. From the above statement we understand that there is a trade-off each time we do one thing. If we do one thing, what we give up the ability to do is called the opportunity cost of what we do. Really the opportunity cost of an activity is the value we would have received had we done the next best activity. All costs in economics are opportunity costs.
The Basic Economic Problem This first part of the economic way of viewing the world is a statement of what we say is a fact – there is scarcity (limited resources but unlimited wants). The second part of the economic way of thinking is the idea that people, when they act or do things, have a purpose or are on a mission. The third part of the economic way of thinking is really a method employed to make sense of information that is available. I will get back to these pieces of the economic way of thinking, but I want to digress and explain briefly what are considered the basic economic resources.
Basic Economic Resources Land, labor, capital and entrepreneurial ability are the 4 basic economic resources from a larger, societal point of view. This is different from the starting personal economic story. Land includes the soil, water, trees and other natural resources. Labor is that human effort that is not entrepreneurial. You could say labor is the working. Capital (or capital goods) includes all those man made tools and stuff we use to make other goods. Entrepreneurial ability is that human effort devoted to the combining of the other three resources in production of goods and services.
Rational In economics we make a major assumption about people. This assumption is that people ACT in their own self-interest or have a purpose. This is what we mean by rational. Another way to understand the idea that people are rational is to say that people have well defined goals and they try to fulfill their goals the best way they can. So, when I say people are on a mission I mean they are rational or act with a purpose. A big idea here is that people try to maximize their utility. Utility is the happiness or satisfaction people get from consuming goods and services.
Utility I get a lot of utility from listening to the group Green Day. In their song Warning there is a line that goes, “did you remember to pay the utility.” Please do not confuse their use of the word utility, where they mean paying a bill to a utility company such as the electric company, with our use. We mean happiness or satisfaction! You can get some satisfaction, yes you can. (By the way, lots of words used in an econ class are used elsewhere. Often the word used in the class has a special meaning different from the one used elsewhere.)
Marginal Analysis The third part of the economic way of thinking is a method we call marginal analysis. I will use an example to give you the feel for marginal analysis. In our personal example from before you had $10 to spend on candy bars and pop. Many of us face the same prices – like $1.25 per pop and $1 per candy bar. So, even if we have different resource limits (money to spend) we still have the same trade-off – one more pop means we give up 1.25 candy bars.
Marginal analysis How many pops should a person have? Rule of thumb: Change your behavior (like how many pops to have) when the marginal benefits are at least as great (or better) than the marginal costs. With a pop you get fizziness and liquid. These make you happy. With a candy bar you get chewiness and nougat and the like. These make you happy. Take another pop if the extra (marginal) utility of the pop is at least as great as as the marginal utility lose from having less candy. Different people will have different valuations and thus end up a different amounts of pop.
Marginal Analysis Note here for a person the marginal benefit curve for pop is downward sloping and the marginal cost is upward sloping. Qright is the right amount of pop for the person. Qlo is too low because on additional units the benefits are greater than the costs (less candy). Quahi is way too high because while the additional units of pop have positive benefit the costs in terms of candy given up is even higher (that is what the height of the curve means!). Conclusion: the right amount is where MB=MC. MB, MC MC MB QloQrightQuahi Quantity of pop
Introduction to Principles of Microeconomics What has been going on in the gasoline market lately? Is the BCS in college football a monopoly? These two questions, while seemingly simple questions, have complex answers. The attempt here in this course is to get you to view questions like these from an economic perspective. Economics is not the only way to view the world, but it is the point of this class. We are in this together. I will try to do my part. I hope you will do the same. Please ask questions. Let’s do it!
Economics is a science - really! In economics, like other scientific fields, models are used to predict and explain activity or actions. A model is judged to be useful by how well it predicts and explains these actions. The better the predictions and explanations, the better the model. There are two main branches of economics as a science: microeconomics and macroeconomics.
Economic Models Have you every used a map of a city so that you could drive around to places you wanted to get to? Was the map part of a circular globe? Maps I have used were flat, but they were fairly decent. As a model of the world the map being flat wasn’t true, but it was useful. Economic models may have assumptions built into them that are not exactly true, like maps of the world assuming the world is flat, but they help us make sense of the world.
Microeconomic topics Economics has two main branches of study: micro and macro There is a organization called the Council on Economic Education and folks there have an idea of what you should learn in a college level econ class like the one you are in (a micro class). The major content areas in microeconomics are A. The Basic Economic Problem i) scarcity ii) opportunity cost iii) choice B. Markets and Price Determination i) determinants of supply and demand ii) utility iii) elasticity iv) price ceilings and price floors C. Theories of the Firm i) revenues ii) costs iii) marginal analysis iv) market structures (more on next slide)
Microeconomic topics D. Factor Markets i) wages ii) rents iii) interest iv) profits v) income distribution E. The microeconomic role of government in a Market Economy i) public goods ii) maintaining competition iii) externalities iv) taxation v) income redistribution vi) public choice F. International Economics i) comparative advantage ii) trade barriers iii) exchange rates So, this slide and the last slide provides a nice blueprint for the topics we will want to cover this term. We may not go in the same order as the information here. Maybe you can write on these sheets what chapters cover which topics.
Macroeconomic topics Some macro topics (ECO 202 is a macro course) 1) How the national economy works - we are concerned about things like inflation, unemployment, international trade and economic growth. 2) We will ask what role the government plays in the economy and explore what impact that role has on the economic system. 3) We will want to understand how changes in variables such as the interest rate affect our lives in the roles we play in households, firms, and governments.
Positive and normative economics What is the difference in the following two statements? 1) Raising the minimum wage will not change the unemployment rate at all. 2) I think we should raise the minimum wage. To me both of these statements sound like my opinion. BUT, the first may, or may not, be right. It is a statement that can be put to the test. If economics were like chemistry you could conduct an experiment to see if the statement is true. (In fact, statistical tools help economics be like chemistry.)
Positive and normative economics Statements like 1) above that can be put to the test are POSITIVE economic statements. Much of the work in science is formulating and testing positive statements. Statement 2) above is a statement about what someone thinks SHOULD BE. We call it a normative economic statement. Most folks have normative views about the economy, even when their positive understanding is weak. It’s okay to have opinions, right? I hope you learn enough about the positive aspects so you can decide for yourself whose opinions you will want to value and whose opinions you can ignore (Dudball!)
A pet peeve about weather people When I watch the local news I want the weather person to stick to the positive aspects of meterology. I can live with a statement like, “tomorrow it will be 27 degrees with winds blowing 10 to 15 miles out of the northwest.” I do not like the normative views the weather person shares with me. They usually say stuff like, “better have your heavy coat tomorrow.” My point is I can make up my own mind once they tell me what the conditions will be. I do not need a recommendation about what I should do!
Ceteris Paribus Ceteris Paribus (sounds like say tear iss pay ribus) is a flashy way of saying all else the same or other things equal. The point is that when we use models and make positive statements they are in a certain context. The statements apply in that context. If the context is different the statements might not still apply. We have an idea that we will explore more later that goes something like the following: The lower the price of x the greater quantity of x a person will desire, ceteris paribus. The main point is we want to focus only on how the price influences the desire, although the desire is influenced by many things (like how much you like the good, how much income you have, how much other related goods cost, for example).