Getting Started CHAPTER1EYE ONS

Benefit Macroeconomics Rational ChoiceCeteris Paribus Margin ScarcityCorrelation Marginal Benefit Self-interestEconomics Marginal Cost Social interestGoods & Services Microeconomics Sunk costIncentive Opportunity Cost

CHAPTER 1: CONCEPTS

Economics DefinedEconomics is 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 our choices,

Two big economic questions:• How choices determine

what, how, and for whom goods and services get produced?

• When do choices made in self-interest also promote social interest?

What, How, and For Whom?

Goods and services are the objects (goods) and actions (services) that people value and produce to satisfy human wants.

What goods and services get produced and in what quantities?

How are goods and services produced?

For Whom are the various goods and services produced?

Economic Questions

When Is the Pursuit of Self-Interest in the Social Interest?

Can this be done?

Let’s look at 8 topics…

Globalization and International Outsourcing

The New Economy Disappearing Rainforests Water Shortages Global Warming Natural Disasters Unemployment Social Security Time Bomb

Core Economic Concepts

Rational choice Cost Benefit Margin Incentives

Compare Cost and Benefit before deciding

The Best thing you MUST give up What you are WILLING to give

up / Gain received Comparing ALL relevant

alternatives Reward/Penalty that

encourages/discourages action

Core Economic Concepts

1. Rational choice

2. Cost

1. Sunk Cost

3. Benefit

4. Margin

1. Marginal Cost

2. Marginal Benefit

5. Incentives

1. Compare Cost and Benefit before deciding

1. Take the action for which MB>=MC

2. The Best thing you MUST give up

1. Irreversible Cost – NOT in Opportunity Cost

3. What you are WILLING to give up / Gain received

4. Comparing ALL relevant alternatives

1. Cost of 1 unit increase

2. Benefit/Gain from 1 unit increase

5. Reward/Penalty that encourages/discourages action

MACRO VS MICRO VIEWS OF THE WORLD

MACRO Study of aggregate/total

effects on national/global economy of the choices that individuals, businesses, and governments make.

MICRO Study of choices that

individuals and businesses make and the way these choices interact and are influenced by governments

SCARCITY‘Resulting condition of insufficient resources’

HUMAN WANTSRESOURCES NEEDED

Must choose among available alternativesChoices depend on incentives we face

Everyone faces scarcity

Faced with Scarcity we must make CHOICES

ALL economic problems arise because:

>Available resources are insufficient to satisfy wants.

THE ECONOMIC WAY OF THINKING‘A SOCIAL SCIENCE’

POSITIVE STATEMENTS WHAT IS

NORMATIVE STATEMENTS WHAT OUGHT TO BE

test positive statements about how the economic world works

and weed out those that are wrong

TASK of ECONOMIC SCIENCE:

ECONOMISTS DISTINGUISH BETWEEN:

Ceteris paribus “other things being equal.”

How do Economists unscramble Cause and Effect?

By Changing ONE factor at a time

And Holding ALL other factors constant

Thus you can investigate the effects of the factor at hand.Correlation

“tendency for values to move in a predictable and related way.”

Postive Correlation – Move in same direction Negative Correlation – Move in opposite directions

Adam Smith and the Birth of Economics as a Modern Social Science

• Adam Smith made economics a social science.

• Born in 1723 in Scotland, Smith’s masterpiece was An Inquiry into the Nature and Causes of The Wealth of Nations, published in 1776.

• Why, Adam Smith asked, are some nations wealthy while others are poor?

• His answer: the division of labor and free markets.

Adam Smith and the Birth of Economics as a Modern Social Science

• Using hand tools, one person might make 20 pins a day.

• By breaking the process into a number of individually small operations in which people specialize—by the division of labor—ten people could make a staggering 48,000 pins a day.

• But a firm must sell 15 million pins a year to stay in business!

• So free markets are needed too.