Download Lecture 2

Principles of Economics
EC 201
California State Polytechnic University, Pomona
Dr. Bresnock
Fall, 2002
Lecture 2
Note: This is the first set of abbreviated class notes to accompany our class. Please
remember to check the “Class Materials”, “Lecture Notes” listing for notes for each class
prior to each upcoming lecture. It will be your responsibility to download and print a
copy of the notes and bring them to class. Remember, the postings will be partial lecture
notes. You must attend lecture to fill in additional tables, graphs, derivations of
theoretical points, and applications. You will notice spaces throughout the posted notes
that are place savers for material that we will add during class lecture. I will not be
posting complete notes for the lectures, just the abbreviated notes. The intention is to
economize on class lecture time so that we can devote more class time to the more
difficult concepts.
What is Economics? Here are several definitions.
It is a social science concerned with the efficient use of limited, or scarce, resources to
achieve maximum satisfaction of human material wants. (McConnell/Brue, p. 3)
It is the study of how people and society end up choosing, with or without the use of
money, to employ scarce productive resources that could have alternative uses, to
produce various commodities and distribute them for consumption, now or in the future
among various persons and groups in society. (Samuelson)
An analysis of choice making. (Bresnock)
Fundamental Economic Problem
Unlimited Wants
Demands
vs
>
Limited Resources
Supplies
Scarcities
Consumer Decision – maximizing satisfaction given their limited income, or budget.
Producer Decision – maximizing profit given their limited resources.
Government Decision – maximizing net benefits to society given limited budgets.
Private Sector = Consumers + Producers
+ Public Sector = All Levels of Government
Mixed Market Economy , i.e. U.S.
EC 201
Fall, 2002
Lecture 2
A. Bresnock
Types of Economies
Pure Market
(Capitalism)
Pure Command
(Communism)
U.S., Canada
Cuba, China
Pure Market – private property rights and decentralized decision making coordinated
through markets. Pure Command – state ownership and control of economic resources
and central planning.
Resources – also known as factors of production, inputs, productive inputs.
I. Human Resources
A. Labor – many types. See “occupational triangle” below. Notice that there are
more plentiful workers in the unskilled category. Consequently the wage for those
workers will be quite low. At the top of the triangle there are far fewer workers in the
“G”(short for genius or someone with unique talents), and such persons receive rather
high salaries. “M & P” represents managers and other professional persons.
G
M&P
Skilled
Semi-Skilled
Unskilled
Note also that the Human Capital of the workers increases greatly as the workers move
higher on the occupational triangle. Human capital is a measure of the workers
education, training and skills.
B. Entrepreneur – creative genius, the person or persons who put together all of the
factors of production and produce a marketable product.
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EC 201
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Lecture 2
A. Bresnock
II. Non-Human Resources
A. Capital – tools, equipment, aka “investment goods”. Not stocks and bonds.
B. Land -- “Natural Capital”. Environmental and natural resource endowment.
Consumer Goods and Services
1. Durable Goods – i.e. TVs, cars, washing machines, relatively stable expenditure
pattern over last 70 years.
2. Non-Durable Goods – i.e. food, clothing, decrease in expenditure pattern over last
70 years.
3. Services – i.e. dental work, manicures, car repairs, increase in expenditure pattern
over last 70 years.
Public Goods and Services
1. Pure Public – i.e. national defense, lighthouses, only produced by government
2. Quasi-Public -- i.e. education, housing, medical care, produced in part by government
and in part by the private sector
Key Microeconomic Questions
1. What to Produce? How are finite resources allocated to satisfy infinite societal
wants?
A. Traditional wants – custom, institution, arrangement, societal
B. Political/command wants – democracy, socialist, monarch rule
C. Economic wants – determined by the market system
2. How to Produce? Efficiency goal.
A. Productive, or Technical Efficiency – achievement of maximum output with full
usage of all inputs. Focuses on physical efficiency.
B. Allocative Efficiency – production of the combination of goods and services that
people prefer given their income. Focuses on market analysis.
3. How to Distribute? Equity, or fairness, goal. But who determines what is fair. Some
possible equity goals…
A. Pure Egalitarian – one person, one vote.
B. Need – Marxian formula – “from each according to his ability, to each according
to his need”
C. Deed -- “get what you work for”
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EC 201
Fall, 2002
Lecture 2
A. Bresnock
Micro vs Macroeconomics
Microeconomics analyses the behavior of specific economic units, i.e. how does an
individual consumer decide how to spend his/her income, how does a business firm
determine what to produce.
Macroeconomics analyzes the behavior of an entire economic system, i.e. aggregate
economic analysis, study of U.S. economy as a whole
Key Macroeconomic Issues
A. Stable Prices – low inflation
B. Full Employment – low unemployment
C. Sustainable Economic Growth – that is consistent with low inflation and low
unemployment
Is Economics an Art or a Science?
Art – creative ability to explain human behavior via economic models.
Science – follows the scientific method to develop economic models. The steps in the
scientific method are:
1) Collection and classification of data – descriptive economics
2) State formal relationships based on data – principles and generalizations formed
3) Form hypothesis based on data – use of abstractions, i.e. “ceteris paribus” (all other
things remaining the same) assumptions used
4) Test of hypothesis – determine statistical acceptance or rejection of hypothesis
5) If accepted, hypothesis may be used for prediction, policy development. If rejected,
the hypothesis is reformed, retested.
Deductive
theory
facts
vs
Inductive
facts
Reasoning
theory
Dangers of Model Building – hyperabstractions to be avoided include:
A. Fallacy of False Cause (or post-hoc fallacy) – “after this, therefore because of
this”, i.e. the Economics Dept. hires new faculty and enrollment increases – could
have been caused by many other factors than the new hire
B. Fallacy of Composition – what is true for the part is true for the whole, i.e. an
increase in price in one industry may increase profits in that industry. This may
Not be so if prices in general rise across industries and lead to widespread
inflation.
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EC 201
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Lecture 2
A. Bresnock
C. Fallacy of Division – what is true for the whole is true for the part, i.e. low
inflation may be good for the nation but could lead to unemployment in some
areas.
D. Dodging Values – hard to place #s on some things, often avoided as a result, i.e.
clean air, scenic views, quiet
E. Disciplinary Myopia – neglect of consideration for non-economic factors, i.e.
cultural and societal values not included in analysis
F. Bias – preconceptions that interfere with factual knowledge, i.e. oil companies
make excessive profits, less government regulation is always preferred
G. Loaded Terminology – choice of words to express a slant rather than a fact, i.e.
“obscene” profits, “excessive wages”, corporate “greed”
Positive
vs
Factual
What is,
Was, or will be
Empirical analysis
Correlation
Normative
Analysis
Subjective
What should
or ought to be
Intrusion of value judgment
vs
Causation
2 events behave
in a systematic
+ dependable way
Dependent and
independent
variables involved
But one does not
necessarily influence
the other
Independent
variables effect
the dependent variable
X does not in cause Y
Y does not cause X
But X and Y may move
together
X causes Y
Y causes X
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