Yavneh Academy Economics

1. Yavneh AcademyEconomics Lesson One Introduction to Economics Definitions, assumptions and implications

2. What is Economics? Lesson One Economics is the study or Choice and Exchange Economics is the study of the allocation of scarce means to alternative uses (Lionel Robbins) Economics is not the study of wealth – but it is concerned about the nature and meaning of wealth, value, price, income, etc.

3. A Brief History Lesson One • Adam Smith – An Inquiry into the Causes and Consequences of the Wealth of Nations – 1776 (Also David Hume). • The French – J.B. Say, Turgot, Bastiat, … • David Ricardo – Principles of Political Economy • J. S. Mill, … The British Classical Economists. • The Marginalist Revolution – 1871 – Carl Menger, Leon Walras, W. S. Jevons – the birth of Neo-Classical Economics • Continental Economics – including Austrian Economics and Swedish Economics. • The development of Neo-Classical economics:1936 • Alfred Marshall – 1870’s – 1920’s • High theory in England – 1930’s • 1936 – John Maynard Keynes – the birth of Macroeconomics • 1950 – present the rise of American economics

4. Schools of Economic Thoughtwhere do I fit in? Pre-Classical The Classical Economists Adam Smith (1776); David Hume David Ricardo; James Mill John Stuart Mill Karl Marx Neoclassical The Revolution (1871) Menger, Walras and Jevons Modern Neoclassical Economics Alfred Marshall (c.1890-1912) In America Paul Samuelson; Kenneth Arrow Paul Krugman; Gregory Mankiw 1936: John Maynard Keynes -introduction of Macroeconomics The Chicago School Milton Friedman; George Stigler; Gary Becker The Austrian SchoolCarl Menger (1871) Mises (1912- 1973) Hayek (1928 – 1992) Modern Austrians Kirzner, Lachmann Garrison, Lewin Boettke, Horwitz, Leeson, Coyne, …

5. What does choice mean? • Above all choice means scarcity! • We all have to choose among unlimited options constrained by limited means. • What are the options/uses/ends? • read a book, buy a car, make love, make war, visit a sick person, have fun at a party, buy new clothes, …. the sky is the limit – • my wish list is infinite. • What are the means? • time, money and stuff (labor, capital, land, knowledge, …) • my instrument list is limited Lesson One

6. Is it too complicated? • Choice is a complex thing. • We are all different • We exist in time, therefore we face uncertainty • We don’t even know how we do it • That is not the point • We don’t want to predict actual choices • We want to understand typical choices and use this understanding to analyze social situations. Lesson One

7. People Try to Maximize Happiness (Utility) • This does not imply selfish behavior. Behavior is self interested. • If giving to others is what makes you happy, that is what maximizes your utility. • Rationality in this case implies that you wish to maximize your giving to others, not to just have the money wasted. • To whom does this apply? • Everyone! In all aspects of life! • Those who buy for themselves – consumers • Those who sell to them – producers, firms • Those who work • Those who don’t Lesson One

8. Firms (those who decide) Try to Maximize Profits; and Families • Private for-profit firms: • Are supposed to work for their shareholders • Who usually are interested in stock price appreciation - which is connected to profits (earnings). • But, many organizations are not for-profit firms: • Clubs, government, charities • Even if they don’t maximize profits, they still should be interested in “efficiency”. • What about families? Lesson One

9. Some Basic Definitions • Goods • Things people want • Economic goods • goods that are scarce. • Must goods have a positive price? • Are positively priced items economic goods? • Free goods have a zero price – they are not scarce • Scarcity  Value • Opportunity Cost • What you give up when you engage in any activity. • Measured as the value of your next best activity (the activity you would have engaged in if you didn’t choose the first activity). • Example: opportunity cost of going to college. Lesson One