AGEC 217 1st Edition Lecture 2Outline of Last Lecture I. Definition of EconomicsII. How Scarcity Relates to EconomicsA. Definition of ScarcityIII. Examples of Current ScarcityA. TimeB. MoneyIV. Pioneer of Economics: Adam Smith A. Definition of Division of LaborB. Definition of SpecializationC. Definition of Economies of ScaleOutline of Current Lecture I. Economic DecisionsII. The Fields of EconomicsA. MicroeconomicsB. MacroeconomicsIII. Economic TheoriesA. Basic ModelsB. Example of the Circular Flow DiagramIV. Economic MarketsA. Market EconomyB. Traditional EconomyC. Command EconomyCurrent LectureEvery decision is an economic decision. One example of issues that involve making such decisions is global warming. Global warming involves decision making about the scarcity of fossil fuels, responsibilities of firms for pollution, or added costs. Global poverty is another example, where decisions need to be made about allocations of resources. War and many current political issues also fall into this category. There are some caveats to saying that every decision is an economic decision. 1. Economics is a set of tools to understand trade-off.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2. Economics does not tell us what to do.3. Economics is at the heart of every debate.Economics encompasses many fields and branches. There is environmental, labor, economic growth and recession, inflation, and unemployment issues. Microeconomics studies individuals and small firms. Microeconomics usually encompasses the environmentaland labor fields. Individuals make decisions in certain ways as well. They tend to weigh out the positives and negatives, look at the long-term effects, what the cost will be, quality, and time of making such a decision. In other words, microeconomics focuses on:1. Preferences, which include needs and wants.2. Budgets, which looks at “is it doable?”For firms and companies, the focus is on profit. A higher demand leads to a higher profit if thereis inventory to supply the demand. Firms and companies also, in this modern time, have to look at the cost of technology.Macroeconomics looks at economics from a world-view. It encompasses the economic growth and recession, inflation, and unemployment fields of economics. Macroeconomics also includes government policies. Government policies can be monetary, dealing with interest rates,or fiscal, dealing with taxes and government spending. One thing that economists do is develop theories or new ideas about the functioning of the economy. They then will build a model to represent the theory. The model can be mathematical, a graph, a diagram, data, or statistics. The basic model is a circular flow diagram, as shown below. It narrows ideas down into two groups: households and firms, as well as two markets: good/services and labor.Goods/Services Price Wages LaborThere are three main types of economies. The market economy focuses on supply and demand, as well as competition. The planning is decentralized in this type of economy. The traditional economy focuses more on the individual and household level. People in this type of economy don’t have a specific trade or specialization. This leads to very little growth. Examples of the traditional economy are ancient civilizations from thousands of years ago. The third type is the command economy. This type involves a social hierarchy. The planning is done by one leader. Examples of this type of economy include North Korea and Ancient Egypt. In modern times, most world economies are a mixture or hybrid of the three