1/26Define Economics.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 choicesScarcityOur inability to satisfy all our wants is calledCan’t possibly get enough of everything in the worldChoicesMake choices because we face scarcityThe choices we make depend on the incentives we faceIncentivea reward that encourages an action or a penalty that discourages an action.EconomicsMaking choicesHow our choices combine together to run our worldHow do we make choices? Why do we make them? How do they shape our economy?Two types of economics.Microeconomicsthe study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governmentshow the government interveneschoices individuals and businesses makeMacroeconomicsthe study of the performance of the national and global economiesTwo big economic questions.How do choices end up determining what, how, and for whom goods and services get produced?Goods and services are the objects that people value and produce to satisfy human wants.What?what we produce changes over timeHow?Goods and services are produced by using productive resources called factors of productionLand“gifts of nature” that we use to produce goods ans servicesLaborWork time and work effort that people devote to producing goods and servicesCapitalproductive capital. Capital that can produce goods or services. Not cash, stocks, or bondstools, instruments, machines, buildings, that are used to produce goods and serviceshuman capital – quality of labor depends on this – knowledge and skill that people obtainEntrepreneurshiporganize production processFor Whom?Who gets the goods and services depends on the incomes people earnLand earns rentLabor earns wagesCapital earns interestEntrepreneurship earns profitWhen do choices made in the pursuit of self-interest also promote the social interest?Do we produce the right things in the right quantities?Do we use our factors of production in the best way?Do the goods and services go to those who benefit most from them?You make choices that are in your self-interest – choices that you think are best for youChoices that are best for society as a whole are said to be in the social interestTopics that generate discussion and that illustrate tension between self-interest and social interestGlobalizationThe information-age economy (newspapers, libraries, etc. not benefited)Global warmingNatural resource depletionEconomic instabilityChoices and TradeoffsScarcity and choice are importantA choice is a tradeoffGiving up one thing to get something elseEx. Sleep or coming to classIncentive – do better in class if you comeWhat - 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 produceHow – Tradeoffs arise when businesses choose among alternative production technologiesFor Whom – Tradeoffs arise when choices change the distribution of buying power across individualsGovernment redistribution of income from the rich to the poor creates the big tradeoff – the tradeoff between equality and efficiencyThe choices we make in the face of tradeoffs determine the pace at which our economic condition improvesOpportunity costThinking about a choice as a tradeoff emphasizes cost as an opportunity forgoneThe highest-valued alternative that we give up to get something is the opportunity cost of the activity chosenCost that you actually incur when doing your tradeoffEx. Cost of being in this classroom – sleeping, getting a job, taking another classMaking choices at the marginEvaluate the consequences of making incremental changes in the use of their resourcesMarginal benefitBenefit from pursuing an incremental increase in an activityMarginal costOpportunity cost of pursuing an incremental increase in an activityIncentivesOur choices respond to incentivesIf marginal benefit exceeds marginal cost, people have an incentive to do more of that activityIf marginal cost exceeds marginal benefit, people have an incentive to do less of that activityThe key to reconciling self-interest and the social interestEx. Government gave incentives with cars so people would buy themA social scienceEconomists distinguish between two types of statementsWhat is – positive statementsWhat ought to be – normative statementsPositive statement can be tested by checking it against factsNormative statement cannot be testedEconomic modelDescription of some aspect of the economic world that includes only those features that are needed for the purpose at handTested by comparing its predictions with the factsEconomists also useNatural experimentsStatistical investigationsEconomic experimentsCeteris paribus“other things being equal”economists use this to isolate the factor of interesteconomists only change one variable in a time to see what happens to the whole thingEconomics is a way of approaching problems in all aspects of our livesThree broad areasPersonal economic policyBusiness economic policyGovernment economic policy1/28Why does food cost more today than it did a few years ago?Use part of corn crop to produce ethanolDrought in parts of world has decreased global grain productionUse economic model (PPF) to learn why ethanol production and drought have increased cost of producing foodReallocated resourcesFarming into other manufacturing businessLess supply of foodUse Production possibilities frontier to study…how we can expand our production possibilitieshow we gain by trading with otherswhy the social institutions have evolvedProduction Possibilities FrontierBoundary between those combinations of goods and services that can be produced and those that cannotTo illustrate PPFfocus on two goods at a timehold quantities of all other goods and services constantlook at a model economy where everything remains the same (ceteris paribus) except the two goods we’re consideringhow much maximum of two goods can we produce at the same time?Ignore everything else besides the two particular goodsEvery choice along the PPF involves a tradeoffThe outward bow of the PPF means that as the quantity produced of each good increases, so does its opportunity costProduction EfficiencyAchieved if we cannot produce more of one
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