In this book, we use economics to also answer these questions: • How are the prices of goods and services determined? • How does pollution affect the economy, and how should government policy deal with these effects? • Why do firms engage in international trade, and how do government policies affect international trade? • Why does government control the prices of some goods and services, and what are the effects of those controls?
Economics The study of how scarce, or limited resources are used to satisfy unlimited material wants and needs; the study of decision making in a world of scarcity.
Unlimited wants Limited resources to satisfy wants Choose between alternatives
Land (various degrees of fertility) Food (bread, milk, meat, eggs, vegetables, coffee, etc.) Natural (rivers, trees, minerals, Resources oceans, etc.) Clothing (shirts, pants, blouses, shoes, socks, coats, sweaters, etc.) Machines and other human-made physical resources Household (tables, chairs, rugs, beds, goods dressers, television sets, etc.) Space exploration Non-human animal resources Education Technology (physical and scientific “recipes” of history) National defense Recreation Human (the knowledge, skill, resources and talent of individuals) Leisure time Entertainment Clean air Pleasant (trees, lakes, rivers, environment open spaces, etc.) Pleasant working conditions Scarcity and Choice Scarce Goods Limited Resources
Prices Competition for scarce goods Causes prices to change accordingly
Basic Assumptions As we study how people make choices and interact in markets, we will return to these important ideas:
Basic Assumptions 1. People are rational. • Consumers and firms use all available information as they act to achieve their goals, weighing the benefits and costs of each action, and choosing an action only if the benefits outweigh the costs—even if it is not always the “best” decision.. Consumers make rational decisions, based on costs
guideposts 2. Incentives matter As personal benefits (costs) from choosing an option increase, other things constant, a person will be more (less) likely to choose that option.
MakingtheConnection Does Health Insurance Give People an Incentive to Become Obese? Obesity is an increasing problem in the United States. By reducing some of the costs of obesity, health insurance may give people an economic incentive to gain weight.
Basic Assumptions 3. Economic reasoning focuses on the impact of marginalchanges. Decisions will be based on marginal costs -the cost of buying or making one more unit and marginal benefits(utility). - The increase in satisfaction from buying or making one more unit
Tradeoffs Choices involve tradeoffs and consequences. - give up to get It involves a value judgment. - decide the relative importance of alternatives
Opportunity Cost What must be given up to get one more unit of another good or service Involves evaluating the costs and benefits of choices. There is no such thing as a free lunch.
Trade-offs force society to make choices when answering the following three fundamental questions: 1. What goods and services will be produced?. Each choice made comes with an opportunity cost, measured by the value of the best alternative given up. 2. How will the goods and services be produced?Firms often face a trade-off between using more workers or using more machines. 3. Who will receive the goods and services produced?There are disagreements over whether there should be more or less redistribution of income.
How Decisions are Made Using an Economic System Method of organizing the relationship between businesses, households and the government to make the production decisions 4 Types
1. Agrarian or Traditional A. What? What the family business has been producing (for generations) B. How? Using the same method that have been used (for generations) No incentive for change C. For Whom? Determined by place in society.
2. Market Economies A. What? - Goods and services that are profitable - Goods and services consumers want. B. How? Efficiently- least cost combination of resources C. For Whom? Those who can pay.
2. Market Economies C. For Whom? Those who can pay.
3. Planned Economies A. What? • Goods needed to meet economic planning targets B. How? Aimed at achieving targets Switch resources around to meet targets C. For Whom? Government decides who gets goods Bonuses for important workers
4. Mixed Economies • Combine aspects of market and planned economies • Includes almost all economies
4. Mixed Economies Coordinating Mechanism Market System Planning Nazi Germany Private Public US Resource Ownership China Cuba
Which Market Type?? 1. Businesses are free to produce what ever they want and are always looking for cost-cutting techniques of production. Mixed? Market? Traditional? Planned? Market Market Market
Which Market Type?? 2. A catering business goes bankrupt, but its employees receive unemployment compensation while they look for other jobs. Mixed Mixed Market? Mixed Traditional? Planned? Mixed?
Which Market Type?? 3. Union and management representatives submit a deadlocked labor contract negotiation to the government for mediation. Mixed Mixed Mixed? Traditional? Mixed Market? Planned?
Which Market Type?? 4. Workers who have lost their jobs and incomes cut back their spending because there is no alternative source of emergency financial support once their savings runs out. Market Mixed? Market Market? Traditional? Planned? Market
Which Market Type?? 5. Consumers are unable to obtain fuel injectors and windshield wiper motors for their cars because they are not being produced, yet accordions, which are plentiful and not in demand, continue to be produced. Planned Planned Planned Traditional? Planned? Market? Mixed?
Productive Efficiency Goods and services are produced at the lowest cost. It also means doing the job they were trained or designed to do
Equity (the distribution of economic benefits) Should every person receives as much as every other person? or Should people receive based on their relative need for the goods and services? or Should people be rewarded for their contribution to the production?
modeling 1. Make Assumptions a. Principle - relationship b. Theory – string of principles c. Law –theory proven to hold true most times
Hypothesis a. Inductive Use facts to develop a model Take a survey and study the results b. Deductive See if the facts support a hypothesis Start with a theory and see if facts support it
facts 2. Use data to test hypothesis “Need facts to support theories and theories to make sense of facts.”
Predicting Behavior Positive Economic Statements - relationships that can be tested - The class is half full - Unemployment is 6% - if incomes rise people spend money
Normative Economic Statements - statements about “what should be” or make a value judgment - It is too hot - Unemployment should be around 4% - we should raise the minimum wage.
Pitfalls • Ceteris Paribus – other things being equal - only consider price changes
Pitfalls 2. Cause and Effect – one event may not be the cause of another - sunrise and the rooster
Pitfalls 3. Fallacy of Composition – what is good for some may not be good for others - increased wages -time of this class
Economic graphs • Graphs of one Variable - market shares - bar graphs, pie charts Figure 1A.1 Bar Graphs and Pie Charts
Economic graphs 2. Graphs of two Variables - price, quantity - demand curve
Economic graphs • Direct, or positive, relationship - Graph slopes up from left to right • Inverse, or negative, relationship - Graph slopes down from left to right 3. Slope Rise Run
Formulas 3. Percent change new - old old 4. Area of a triangle 1\ 2 base x height
1. When an economist states that a good is scarce, he means that: a. Production cannot expand the availability of the good. b. It is rare. c. Desire for the good exceeds the amount that is freely available from nature. d. People would want to purchase more of the good at any price. 2. The highest valued alternative that must be given up in order to choose an action is called its a. opportunity cost. b. utility c. scarcity d. ceteris paribus
1) By definition, economics is the study of A) how to make money in the stock market. B) how to make money in a market economy. C) the choices people make to attain their goals, given their scarce resources. D) supply and demand. 2) Economists assume that individuals A) behave in unpredictable ways. B) will never take actions to help others. C) prefer to live in a society that values fairness above all else. D) are rational and respond to incentives. 3) Marginal analysis involves undertaking an activity A) until its marginal costs start declining. B) only when its marginal benefits are positive. C) until its marginal benefits equal marginal costs. D) only if its marginal costs are greater than its marginal benefits.
4) The highest valued alternative that must be given up to engage in an activity is the definition of A) economic equity. B) marginal benefit. C) opportunity cost. D) marginal cost. 5) How are the fundamental economic questions answered in a market economy? A) The government alone decides the answers. B) Individuals, firms, and the government interact in markets to decide the answers to these questions. C) Households and firms interact in markets to decide the answers to these questions. D) Large corporations alone decide the answers. 6) ________ is a situation in which a good or service is produced at the lowest possible cost. A) Allocative efficiency B) Productive efficiency C) Equity D) Optimal marginalism
7) Which of the following questions or statements regarding medical school is normative? A) How do changes in expected future incomes affect the decisions of medical students about which specialty to choose? B) Medical students who enter specialized fields make a larger contribution to society than do student who enter primary care. C) What role does tuition play in a student's decision about whether to attend medical school? D) Have tuition increases had a large effect or a small effect on the number of applications to medical school? 8) In economics, the accumulated skills and training that workers have is known as A) human capital. B) entrepreneurship. C) physical capital. D) innovation. 9) The machines workers have to work with are considered A) human capital. B) physical capital. C) entrepreneurship. D) financial capital. 10) The relationship between consumer spending and disposable personal income is A) an inverse relationship. B) a direct relationship. C) a negative relationship. D) independent.