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CHAPTER 1 THE ECONOMY IS US! Nature of Economics! Why is the economy us? What kind of economy do we have? Why do some economies work better than others? Definition of Economics? Do all countries regardless of type of economy deal with scarcity? Scarcity of what? Even the U.S. has a problem with this? The scarcity of resources causes most things to have a cost. Definition of Economics The study of how people, both individually and in groups, deal with the problem of scarcity. Why is economics considered a social science? Scarcity forces human beings to make choices Why has there always been an economic problem? man’s wants are virtually unlimited scarcity of resources *Have to prioritize Remember**** Society has virtually unlimited wants BUT limited resources This means prioritization! When did you last have to prioritize? Companies? Are you seeing them prioritize? Where What about government? What is your choice? Why? Scarcity forces individuals and groups to do what? All economies evolve around a basic conflict.. Want more than we can have. What is the difference between Micro and Macroeconomics? Micro vs Macro Economists do not formulate economic objectives Economist’s job is to design policies that best achieve economic goals. (who establishes those goals?) Name one in existence today….. Microeconomics = study of individual behavior in the economy by parts that comprise the larger economy… businesses, individuals, govt agencies.) (CocaCola output/hour) Macroeconomics = study of the aggregate economic behavior of economy as a whole (inflation/unemployment) Choices- Trade-offs (giving up one thing to get another) Example: Barrel of crude oil? What is thing given up called? Examples of Opportunity Cost Reality of Trade-offs Just a few of the products getting a start from a barrel of oil: Aspirin Candles CD players Clothing Compact discs Computers Credit cards Deodorant Diapers Dinnerware DVDs Eyeglass frames furniture not to mention gasoline hair dryers carpets lipstick paints luggage fertilizer perfumes oils of all kinds photographs piano keys roller blades shampoo soft contact lenses toothpaste vitamin capsules Economics is a Social Science What does that mean? Economics is NOT Pure!! Hypothesis are formed (what if? This should? Models are Created (trial and error) Assumptions are made Trial and error (revisited) Rational Self-Interest Individuals act as if motivated – self interest Idea first brought forth- Adam Smith- Wealth of Nations. Father of Market Economics. Did you arise this a.m. and say>>>> I want to make terrible decisions all day that are NOT in my self-interest??? Assumption then is that you will make decisions in your best self-interest based on incentive. BUT… bottom line is we don’t always do that! Rational Self-interest What is your incentive to brush your teeth? Why did you begin that habit? Did you continue to do it later? Do you think about it now? So rationally you have deduced that it is in your best interest to brush daily- preserving your self-interest. RATIONAL BEHAVIOR/ CONSUMERS/GOVERNMENT If • • • • • • • • analyzing is so important to economics, what are the pit falls in formulation of decisions? How were those decisions derived? Emotion Biases Illiteracy Political Some person you hear speak Text from some book Periodicals Peers Some people just can’t make a decision. ARE WE RATIONAL IN OUR DECISION-MAKING? Rational Decisions involve all aspects of society! Governments – (guns v butter) Individuals – (buy or rent house) Businesses – (expand or lay off) Non-profits – (providing for greater good) Economic Wants These wants vary from culture to culture. One culture’s ideas may not be the goals of another cultures’. Ones we satisfy in the economic system. Ones that money will buy. Do incentives work? Give me some examples. What about negative incentives? Any ideas? Is Self-interest always a concept of greed? Can charitable acts be in one’s self-interest? Economic wants vs non-economic wants Economics Wants a concept underlying for all mankind. things we feel we need to have so we can live the style of life we want to enjoy. What are some non-economic wants? Friendship Health Self Esteem Love Are non-economic wants important???? Two things that allow economies to progress This is an Adam Smith concept: Division of labor Specialization of labor 4 Types of economic wants 1. Basic or subsistence difference between developed and underdeveloped countries is whether basic wants are taken care of.) (U.S. poor are not as poor as other poor- relative to poor in U.S. difference from absolute poverty like in Haiti , Afghanistan, or Iraq. U.S. citizens have a higher plan of basic wants which includes “social” wants. These wants come out of our culture. Such as… airconditioning, television, education, internet connections, going to dinner ….vast majority of our wants are culturally determined. 2. Individual or Collective Wants Individual = things we want as individuals pizza vs hamburgers Ford truck vs Chevy truck most of our wants are individual, but some are Collective such as: clean water good schools good roads garbage collection 3. Public Wants Market does not take care of public wants- these are decided usually by the federal government… defense – homeland security. We all enjoy the benefits at the same time. Consumptive We want to be able to consume (buy things) 4. Basic or ultimate aim of any economic system is consuming goods and services. Consumption is how we satisfy our wants. But can’t completely satisfy all of our wants because___??????_ ???? Economics depends on models Models are used to predict behavior. Models are simplified replica of real world Empirical Evidence and data- material gathered by observation or experience. Usually a working hypothesis that is testable. Enter Ceteris Paribus Economists models do not relate to how people think, but how they behave. Economic models have to be tested on real world. Marginalize in Economics Keeping decisions within perspective involves marginal analysis. Marginal Benefits vs Marginal Costs – is the benefit greater than the cost or vice-versa. Obviously, either can elicit changes in status quo. You have an opportunity to go to Rose Bowl game! You know it will cost you $1,000. Do you want to go to the RB Parade while you are there? That is going to cost another $300… On margin? Is it worth it? Scarcity is the key ingredient here also. SO…..Are You Rational? What is rational? Are you pursuing opportunities to increase your utility? Are you allocating your time, energy and money to maximize your well-being? Do you weigh your decisions looking at costs vs benefits? If you do you are rational. If you do not… you may be random or haphazard with your decisions. So… if you are rational, are you selfish? We all make decisions for a reason Answer: No………….Not necessarily… Rational in the sense we have discussed means that you are looking after your self interest… Your self-interest decisions will change through your years…. Maybe it is in your best interest to work for yourself after working 15 years for IBM… Do you just whimsically decide or do you have a plan… cost of doing so vs benefit. Terms to Know Positive economics = deals with facts “what is” Normative economics = involves someone’s judgment “what ought to be” Fallacy of Composition = it is not correct.. (the validity of a particular generalization for an individual or part does not necessarily ensure its accuracy for the group or the whole) I stand up… everyone stands up… Post Hoc Fallacy = Be careful concluding that because event A precedes event B that A is the cause of B. Wear purple shirt to ballgame…win.. Need to wear purple shirt again to win. Rooster crows before dawn… rooster responsible for sunrise. Rational Behavior = based on rational self-interest. People make different choices because their circumstances and available information differs. Marginalism = extra or less (one more unit, one less unit) What is Standard of Living? How can you calculate it? How well off people are! How well off are you? Divide total production by population… If production is high and population is low…. “get more stuff.” 3rd world countries… high population/low production What are the three questions every economy asks? What to produce? How to produce? For whom to produce? Why do econ texts always include these questions??????? Key is how the society or country answers these questions. Traditional economic forms are not part of the 3 basic, but what does traditional entail? 3 Basic Economic Systems of the World Capitalism Socialism Communism Any Questions?