Economics 201- Chapter One: What Is Economics?“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.” John Maynard KeynesBefore we begin, think about the following questions and how you would personally answer them:What does it “cost” when you make a decision?Why is the United States so rich?Where do prices come from?Why are here right now?How much does the United States produce each year?Would you take something given to you and not earned?Society’s 2-Part ProblemEconomists see an irreconcilable problem with the world:1. Human wants are unlimited.This is one of the most fundamental economic assumptions.Humans always want more: More clothes, higher wages, cleaner environment, better education, free football tickets, etc.2. Our ability to produce is very limited.This is another fundamental economic assumption.The resources used to make the goods and services that satisfy our wants are scarce.Scarcity: What Is It?Below are two definitions of scarcity taken from two separate texts:1. Scarcity: The condition in which wants are forever greater than the available supply.2. Scarcity: The condition in which there is not enough of something available to satisfy every individual want if the good were free.From these two definitions we can form our own basic definition of scarcity:We do not have enough to give to everyone if giving for free.Society’s 2-Part Problem (Continued)Resources (factors of production, inputs): the inputs used to make the goods/services that individuals and society desires.Raw Materials (land): coal, timber, iron, water, etc.Labor: time of workersPhysical Capital: human-made goods used to make other goods (equipment, machinery, etc.)Human Capital: experience, training, educationEntrepreneurship: ability to organize the other inputs, to take the risksTechnology: the method of turning inputs into outputsAll of these resources are scarce and this is the problem.ScarcityScarcity is the fundamental economic problem. Your time is scarce: Only so many hours in a day – what will you do with them? Your income is scarce: Only so many dollars – how should you spend them? Government revenue is scarce: Only so many tax dollars – what should the government do with them?We have a limited amount of resources to work with, which means we can only do so much – what should we do with them?Scarcity has nothing to do with being rich or poor; but it does make us make decisions.Our Fundamental Problem! The chart below shows the fundamental problem of scarcity. The items on top are scarce and the things on bottom consumers want, which is known as unlimited demand.3 Questions for SocietyWhat goods and services should we make? (How many?)How should we make them? (Most efficient combination of inputs)How do we allocate the goods and services? (Who gets what?)The answers to these questions have to be specific and not estimated.Remember that the main goal here is efficiency.Economics as a Social ScienceNormative vs. Positive LanguageHopper(some economic system)HouseholdsGovernmentFirms/IndustriesNormativeConcerned with how the world should beCentered around moral, ethical, subjective beliefsCommonly uses the word “should”, and varies person to personPositiveConcerned with how the world actually isCentered around factual, testable, objective beliefsCommonly uses real statistics, but doesn’t have to be correctNormative varies person to person. Positive is how the world is but doesn’t allows have to be correct.Microeconomics vs. MacroeconomicsMicroeconomics: The study of choices facing individuals, businesses, and governments and theirinteractionsHow individuals make decisionsMacroeconomics: The study of how the aggregate of individual decisions (households, firms, and government) affect an entire economy (city, state, national, or even global)How these decisions affect the economyMicroeconomics3 main “Economic Agents”1. Households 2. Firms/Industries3. GovernmentCan focus on each group separately Studies behavior and individual choicesand interactions between groupsMacroeconomicsLevel of productionHow can we measure an entire country’s total level of production?How is this level of production related to income? To unemployment?Standard of livingWhat affects a country’s standard of living: the average level of consumption of goods/services enjoyed by the population?Cost of livingWhat is the “cost of living” and how is it measured? (Always increasing)Government policiesHow can Federal Reserve or Government policies affect you?Macroeconomics focuses on the entirety.Examples include: inflation and unemploymentAssumptions, Theories, and ModelsAssumptions: serve to simplify the worldComplexity if by far the biggest problem economists face.Therefore, the critical first step involves simplifying so that we can focus on only those aspects critical to the particular problem.Often, this is a subjective process which can lead to disagreements between economists.Theories: generalized casual relationships between variablesOften based on simple observations.Theories attempt to explain past occurrences and phenomenon, as well as predict future occurrences.Uses dependent and independent variables.Models: quantitative representations of the problem being analyzedGive us quantitative predictions, which means this is where our numbers come from.Economics: What is it??For the test, know a basic definition of economics.The study of how society chooses to allocate its scarce resources to the production of goods andservices in order to satisfy unlimited wants.Bottom LineThings are scarce, so we need to do the best with what we have.Allocating resources to their highest valued use.Stretching our limited resources as far and as fairly as possible.What do Economists “do”?Economics is clearly a broad topic that can be applied to an incredibly wide range of subjects.Economists tend to specialize in particular subgroups of these subjects.Where do economists work?1. Academia: teach students the tools to think economically about decision-making2. Private Sector: industries such as finance, insurance, as consultants to businesses3. Public Sector: federal, state and local governments analyzing/weighing