ECON 308 Classnotes Spring 2010 Week 01 02 January 25 27 2010 1 Def Economics is a science that analyzes how individuals behave in a world of Scarcity 2 Science means that the study is objective analyzing and predicting how people behave without making any value judgments Positive vs Normative 3 Construction of economic theory A Abstraction The process of building a theory is to simplify our thinking giving us an understanding of the most likely outcome with the least amount of detailed information B Definitions Clearly defining the terms that are used to avoid any uncertainty or confusion Economics uses marginal analysis the study of small changes associated with one additional unit ex Def Marginal value the additional value of consuming one more unit Marginal revenue the addition to revenue from selling one more unit marginal cost the additional cost of producing one more unit C Assumptions The assumptions of the theory or model are the key observations of reality that appear to be most helpful in predicting behavior ex Who plays basketball well Assumption Focus on tall people first D Implications The implications of the theory follow directly and logically from the assumptions Together the assumptions If and implications Then form the If Then form of the theory or hypothesis ex If the sun rises in the east and sets in the west then a Washington DC will be light before Los Angeles b an eastern window will be light before a western window etc etc E Testing and Adoption of Theories We test theories by observing reality We adopt theories based on how well they predict The Science of Economics Definitions Assumptions and Implications Economics is a science that analyzes how individuals behave in a world of scarcity To begin to build our analysis we start with definitions 1 A Good is anything which an individual wants to have more of at zero price A Notice it is anything you want so it includes all those material things like cars and clothes and travel but also all those non material things you want like friendship physical abilities knowledge good health a cure for cancer world peace just to name a few B which an individual wants for something to be a good you must want it Since we don t all want all of the same things some things may be a good to me and not to you I enjoy sushi so for me sushi is a good If you think that s called bait it may not be a good from your perspective C to have more of Here we are interested in the number of units in a given time period If I offer you free Krispy Kr me donuts and you only take two then these two are goods but the third is not a good Note you don t want it so its not a good from your decision perspective D at zero price Notice we are talking about just your wants not how many you might be willing to buy The term good includes all those things you want so we measure it at zero price 2 A Resource is anything that can be used to produce goods We normally think of three categories of resources A Land including all its attributes like mineral content location view weather etc B Labor the skills of people in producing both material and non material goods C Capital the buildings and equipment used in production 3 Assumption Humankind has insatiable wants We are seekers Since goods include all those non material wants we are never fully satisfied 4 Assumption Our resources are limited Both as an individual and a world society we do not have enough resources to produce all the goods people want 5 Scarcity A good is scarce if the amount wanted at zero price is greater than the amount available at zero price 6 Implications of Scarcity If Scarcity exists and it does seem to follow from our two assumptions then we can think about the implications for our lives A Choice Since we have limited resources we have to make choices Which of all the goods I want will I use my scarce resources to produce Each day we each make those decisions My time is limited Will I a practice tennis to improve my physical abilities or b spend time helping a friend increasing my friendship c work to earn dollars to buy more sushi e study my economics to acquire knowledge etc Nations must make choices too How much to collect from its citizens for government spending what to spend tax revenue on Defense more roads more assistance to other nations more medical research more prisons more police more parks etc B Cost Since resources are limited producing more of one good means less of other goods can be produced Every choice involves a cost In economics we define all costs in a particular way Economic costs are opportunity costs The economic cost of any choice is the personal value of the next highest valued alternative given up or forsaken All the things I might do with my time do not have equal value to me All the goods I might buy do not bring me equal satisfaction In measuring cost we focus on the next best alternative as the cost of my choice Ex If I spend 8 and two hours watching a movie the economic cost is the value of what I would have bought with 8 plus the value of what I would have done during the two hours By going to the movie I gave up that highest alternative value Question What is your cost of attending class my attendance often drops off when students consider this concept C Competition When the concept of scarcity is extended from an individual to society we can see that scarcity implies competition Two people are in competition if the resources which could be used to produce the goods Mr A wants could alternatively be used to produce the goods that Ms B wants If resources are scarce using them to produce the goods I want means they cannot be used to produce the goods you want If I get the porterhouse steak you don t If the land is used for your bike path it cannot be used for my tennis court Society must choose a way to allocate resources and determine which goods to produce and who will get them The method of allocation is the method of competition Society cannot eliminate competition only choose the form it will take 7 Forms of Competition Since humankind has faced scarcity from the beginning it is useful to think of the alternative ways in which we have competed and do compete today A Violence or Threat of Violence The most primitive and primary form of competition is the use of violence Among cave people and still today in the animal kingdom goods are allocated by violence Even in our society some individuals resort to violence to get the goods they want