Chapter 1 1 26 Define Economics 01 26 2010 All economic questions arise because we want more than we can get the social science that studies the choices that individuals businesses governments and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices Scarcity Choices Incentive o Our inability to satisfy all our wants is called o Can t possibly get enough of everything in the world o Make choices because we face scarcity o The choices we make depend on the incentives we face o a reward that encourages an action or a penalty that discourages an action Economics o Making choices o How our choices combine together to run our world o How do we make choices Why do we make them How do they shape our economy Two types of economics Microeconomics o the study of choices that individuals and businesses make the way those choices interact in markets and the influence of governments o how the government intervenes o choices individuals and businesses make Macroeconomics o the study of the performance of the national and global economies Two big economic questions How do choices end up determining what how and for whom goods and services get produced o Goods and services are the objects that people value and produce to satisfy human wants o What o How what we produce changes over time Goods and services are produced by using productive resources called factors of production Land Labor Capital gifts of nature that we use to produce goods ans services Work time and work effort that people devote to producing goods and services productive capital Capital that can produce goods or services Not cash stocks or bonds tools instruments machines buildings that are used to produce goods and services human capital quality of labor depends on this knowledge and skill that people obtain Entrepreneurship organize production process o For Whom Who gets the goods and services depends on the incomes people earn Land earns rent Labor earns wages Capital earns interest Entrepreneurship earns profit When do choices made in the pursuit of self interest also promote the social interest o Do we produce the right things in the right quantities o Do we use our factors of production in the best way o Do the goods and services go to those who benefit most from o You make choices that are in your self interest choices that you o Choices that are best for society as a whole are said to be in the them think are best for you social interest o Topics that generate discussion and that illustrate tension between The information age economy newspapers libraries etc not self interest and social interest Globalization benefited Global warming Natural resource depletion Economic instability Choices and Tradeoffs Scarcity and choice are important A choice is a tradeoff o Giving up one thing to get something else o Ex Sleep or coming to class Incentive do better in class if you come What Tradeoffs arise when people choose how to spend their incomes when governments choose how to spend their tax revenues and when businesses choose what to produce How Tradeoffs arise when businesses choose among alternative For Whom Tradeoffs arise when choices change the distribution of production technologies buying power across individuals Government redistribution of income from the rich to the poor creates the big tradeoff the tradeoff between equality and efficiency The choices we make in the face of tradeoffs determine the pace at which our economic condition improves Opportunity cost o Thinking about a choice as a tradeoff emphasizes cost as an opportunity forgone o The highest valued alternative that we give up to get something is the opportunity cost of the activity chosen o Cost that you actually incur when doing your tradeoff o Ex Cost of being in this classroom sleeping getting a job taking another class Making choices at the margin use of their resources Marginal benefit Marginal cost o Evaluate the consequences of making incremental changes in the o Benefit from pursuing an incremental increase in an activity o Opportunity cost of pursuing an incremental increase in an activity Incentives Our choices respond to incentives If marginal benefit exceeds marginal cost people have an incentive to do If marginal cost exceeds marginal benefit people have an incentive to do more of that activity less of that activity The key to reconciling self interest and the social interest Ex Government gave incentives with cars so people would buy them A social science Economists distinguish between two types of statements o What is positive statements o What ought to be normative statements Positive statement can be tested by checking it against facts Normative statement cannot be tested Economic model Description of some aspect of the economic world that includes only those features that are needed for the purpose at hand Tested by comparing its predictions with the facts Economists also use o Natural experiments o Statistical investigations o Economic experiments Ceteris paribus o other things being equal o economists use this to isolate the factor of interest economists only change one variable in a time to see what happens to the whole thing Economics is a way of approaching problems in all aspects of our lives Three broad areas Personal economic policy Business economic policy Government economic policy Chapter 2 The Economic Problem 01 26 2010 1 28 Why does food cost more today than it did a few years ago Use part of corn crop to produce ethanol Drought in parts of world has decreased global grain production Use economic model PPF to learn why ethanol production and drought have increased cost of producing food Reallocated resources o Farming into other manufacturing business Less supply of food Use Production possibilities frontier to study how we can expand our production possibilities how we gain by trading with others why the social institutions have evolved Production Possibilities Frontier Boundary between those combinations of goods and services that can be produced and those that cannot To illustrate PPF o focus on two goods at a time o hold quantities of all other goods and services constant look at a model economy where everything remains the same ceteris paribus except the two goods we re considering how much maximum of two goods can we produce at the same time Ignore everything else besides the two particular goods Every choice along the PPF involves a tradeoff The outward bow of
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