TOPIC ONE INTRO I WHAT IS ECONOMICS ALL ABOUT 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 Keynes The General Theory of Employment Interest and Money 1936 Why are you here 1 OVERVIEW QUESTIONS OF THE DAY What does it cost when you make a decision What does is cost for you to go to school Should the government have bailed out the auto industry Where do prices come from How does the free market system work Why do we have them Why can t everything just be free Why do they keep going up every year How much does the United States produce per year What exactly does it mean to be in a recession Who or what is the Fed and what do they do What do all these questions issues have in common 2 Today s economic lesson is brought to you by the word Scarcity Scarcity The condition in which wants are forever greater than the available Scarcity The condition in which there is not enough of 3 1 SOCIETY S 2 PART PROBLEM Economists see an irreconcilable problem with the world 1 Human One of the most fundamental economic assumptions More is always better Is this true 2 Unfortunately our ability Another fundamental economic assumption The resources used to make 4 Society s 2 part problem cont Resources factors of production inputs the inputs used to make the goods services that individuals and society desires Raw Materials land Labor Physical Capital human made goods used to make other goods equipment machinery etc Human Capital experience Entrepreneurship ability to organize the other inputs to take the risks Technology the method of turning inputs into output 5 SCARCITY Scarcity is Time is scarce Only so many hours in the day what should you do with them Income Revenues are scarce Only so many dollars in your paycheck how should you spend it Government revenue is scarce Only so many tax dollars collected what should the govt do with it Resources are scarce and as a result there is not enough to satisfy everything that people want We have a limited pile of resources to work with which means we can only do so much what should we do with them 6 2 Our Fundamental Problem Resources Raw Materials lumber iron copper crude oil etc Labor time effort energy Human Capital experience education Physical Capital man made goods Hopper some economic system Goods shoes jeans food etc Govt Provided roads education defense etc Services 7 medical care car maintenance haircuts etc Goods versus Services Goods Tangible products usually with some physical dimensions U S Economy Goods 20 Services Intangible products that cannot be weighed or measured usually require some degree of interaction with a customer usually perishable or time dependent Services 80 8 3 Questions for Society What 1 How many How many acres of corn to plant How many of wheat How many SUV s How many tanks How many Prii How 2 What is the best most efficient combination of inputs to make the good service How do we 3 How do we divide up the goods service we made Who gets the Bentley who gets the Ford and who gets the bus 9 3 ECONOMICS AS A SOCIAL SCIENCE Normative vs Positive Language Normative Concerned with Centered around The government The government should Positive Concerned with Centered around factual testable and objective beliefs If the government increased the minimum wage by 10 When the government prints too much money it causes inflation a rise in the general price of goods services The Fed should leave interest rates alone in their next meeting Our reliance on fossil fuels is causing global climate change The government should encourage subsidize alternative means of energy use away from fossil fuels 11 MICROECONOMICS vs MACROECONOMICS Microeconomics the study of choices facing Macroeconomics the study of how the aggregate of individual decisions households firms and government affect an entire economy city state national or even global 12 4 Microeconomics 3 Main Economic Agents 1 Households 2 Firms Industries Households 3 Government Government Firms Industries Microeconomics studies their behavior and choices individually 13 Macroeconomics Level of Production How can we measure an entire country s total level of production How is this level of production related to income To unemployment Standard of Living What affects a country s standard of living the average level of Cost of Living What is the cost of living and how is it measured Government Policies How can Federal Reserve or Government policies affect you 14 How will a drought in the Midwest affect the market price and output of corn How will the Fed s increase of short term interest rates affect the country s savings rate How will uncertainty in the Middle East affect the price of crude oil and gasoline 15 5 The Methodology of Economics 1 Identify an issue problem or question 2 Simplify using assumptions 3 Develop a working model theory 4 Collect data and test the model 16 ASSUMPTIONS THEORIES AND MODELS Assumptions serve to Complexity is by far the biggest problem economists face Therefore critical first step involves simplifying so that we focus on only those aspects critical to the particular problem Often a subjective process Common economic assumptions people consumers behave to maximize their happiness utility businesses firms behave to maximize their profits consumers firms make well informed rational decisions 17 The Methodology of Economics Theories generalized causal relationships between variables Often based on observation educated guesses or experience Attempt to Explain past phenomenon Predict future occurrences Pitfall Don t confuse correlation with causation One of the biggest mistakes 18 6 The Methodology of Economics Models quantitative representation of the issue being examined Models can represent consumers businesses the government etc Supply and Demand is the most important economic model Theory says that consumers buy more coffee when price falls Model says that consumers buy 8 more coffee when price falls by 5 Last Step Collect data run it through your model analyze results You either reject the theory or fail to reject it You can never outright prove your theory only fail to reject it 19 ECONOMICS What is it all about The social science that studies production distribution and consumption of goods and services Wikipedia The study of how society chooses to allocate its scarce resources to the production of