Bell Ringer Bell ringer What is the difference
Bell Ringer • Bell ringer: • What is the difference between a need and a want? • Objective: Students will analyze scarcity and opportunity cost and understand the basic concepts of economics. Micro 2802 -Lecture 01 1
WHAT IS ECONOMICS? • Definition of Economics - -how people try to satisfy seemingly unlimited and competing wants through careful use of relatively scarce resources. • Why is it important to study Economics? Why is it important to understand how our economy works? Micro 2802 -Lecture 01 2
Definition of Economics • All economic questions arise because we want more than we can get. We want a peaceful and secure world. We want clean air, blue water. We want long and healthy lives. We want spacious and comfortable homes… … • However, what each of us can get is limited by time, by the incomes we earn, by the prices we must pay. Everyone ends up with some unsatisfied wants. Micro 2802 -Lecture 01 3
Definition of Economics • Our wants are insatiable (never ends)! Is this true in your life? Humans, by nature, would like to have more of those things they find desirable. Micro 2802 -Lecture 01 4
Not only do I want a cracker—we all want a cracker! ©The New Yorker Collection 1985 Micro 2802 -Lecture 01 5
Definition of Economics • A society is limited by its resources, these resources include the gifts of nature, human labor, and the tools and equipment. * Resources are the instruments provided by nature or by people that are used to create goods and service, such as land, labor, capital and entrepreneurial ability. Micro 2802 -Lecture 01 6
• Resource owners are paid in different ways: – Wages for labor – Interest for capital – Rent for the use of natural resources – Profit for entrepreneurship Micro 2802 -Lecture 01 7
Good and Service Quiz!! • A tangible item used to satisfy human wants is called ________. • An activity used to satisfy human wants is called a _________. Micro 2802 -Lecture 01 8
• We have limited resources. • We have unlimited wants. This leads to scarcity. • Scarcity exists when there are insufficient resources to satisfy people’s wants. Micro 2802 -Lecture 01 9
Definition of Economics • Rich and poor alike are faced with scarcity. • We have to make choices to choose among the available alternatives. Micro 2802 -Lecture 01 10
Definition of Economics is the science of choice — the science that explains the choices that individuals, businesses, governments, and entire societies make and how those choices change as they cope with scarcity. • Discussions: Micro 2802 -Lecture 01 11
What if we lived in a Garden of Eden where goods and services were abundant and are provided by the nature of free? What would be the role of the economist? Micro 2802 -Lecture 01 12
Activity • Internet definitions- Use the internet to define the following terms: • Scarcity, economics, need, want, factors of production, land, capital good, labor, entrepreneur, and gross domestic product • We will be using these frequently throughout the year so be familiar with their definition. Micro 2802 -Lecture 01 13
Bell Ringer • If limited resources and unlimited wants leads to scarcity, what are we going to have to do as consumers? Micro 2802 -Lecture 01 14
The Simple Circular-Flow Model for Households and Firms Micro 2802 -Lecture 01 15
• There are two branches of economics, microeconomics and macroeconomics. • Microeconomics focuses on the behavior of individual agents (such as consumers, firms), and how they come together in markets. Studies: • Prices and Quantities • Effects of government regulation and taxes Micro 2802 -Lecture 01 16
• Macroeconomics focuses on the aggregates, the study of the national economy and the global economy as a whole. Studies: • Average prices and total employment, income, and production • Effects of taxes, government spending, a budget deficits on total jobs and incomes • Effects of money and interest rates Micro 2802 -Lecture 01 17
Three Big Microeconomic Questions Micro 2802 -Lecture 01 18
What? This is the question? • What goods and services are produced ? (Do we produce houses or camping vehicles? ) • In U. S. , the five largest services sectors: real estate, retail trades, wholesale trades, health and education. We are a service economy. • Five largest categories of goods: construction, electronic equipment, food, industrial equipment and chemicals. Micro 2802 -Lecture 01 19
– Figure shows the trends in what the U. S. economy has produced over the past 60 years. – It shows the decline of agriculture, mining, construction, and manufacturing, and the expansion of services. From Parkin, Microeconomics Micro 2802 -Lecture 01 20
– Figure shows the major items produced in the U. S. economy today. – It emphasizes the dominant place of services in our economy. Micro 2802 -Lecture 01 21
Good VS. Service • Goods are tangible products that are useful, relatively scarce, and transferable to others. • Services-work that is performed for someone Micro 2802 -Lecture 01 22
How? How are goods and services produced? Do we use humans or machines to produce the goods we want? • There are four categories of factors of production: – land, “gift of nature” – labor, work time and work effort • human resources—quality of labor: education, training, experiences – Capital, tools, instruments, machines, buildings and other constructions – Entrepreneurship, who organizes land, labor and capital Micro 2802 -Lecture 01 23
Activity and handouts Micro 2802 -Lecture 01 24
Quiz! • Economics: Chapter 1 Quiz • ______ arises because society does not have enough resources to produce all the things people would like to have. • ______is the study of how people use limited resources to satisfy unlimited wants. • The ______ of going to a football game instead of working would include the money not earned at your job. • How are trade-offs and opportunity cost related? • Write a short paragraph explaining how scarcity affects you and your family on a daily basis. • Word bank: economics, scarcity, opportunity Micro 2802 -Lecture 01 25 cost
– Figure shows a measure of the growth of human capital in the United States over the last century—the percentage of the population that has completed different levels of education. – Think it further… what determines the quantities of resources? Micro 2802 -Lecture 01 26
Whom? • For whom are goods and services produced? It depends on the incomes that people earn. • Land earns rent. • Labor earns wages. • Capital earns interest. • Entrepreneurship earns profit. Micro 2802 -Lecture 01 27
– Figure shows the distribution of income in the United States. – The richest 20 percent earn almost 50 percent of total income while the poorest 20 percent earn only 4 percent of total income. Micro 2802 -Lecture 01 28
Three Big Macroeconomic Questions • What determines the standard of living? • What determines the cost of living? • Why does our economy fluctuate? Micro 2802 -Lecture 01 29
The Economic Way of Thinking • There are several basic ideas of economics, it is called economic way of thinking. • This way of thinking needs practice, but it is powerful! Micro 2802 -Lecture 01 30
Important Ideas (1) • How much does it really cost? • Attempts to repeal the laws of supply and demand: the market strikes back • The surprising principle of comparative advantage • Trade is a win-win situation • The importance of thinking at the margin • Externalities: a shortcoming of the market cured by market methods Micro 2802 -Lecture 01 31
Important Ideas (2) • Why the costs of education and medical care keep growing • The trade-off between efficiency and equality • The short-run trade-off between inflation and unemployment • Inflation distorts measurements • Why was it important to reduce the budget deficit? • Productivity growth is (almost) everything in the long run Micro 2802 -Lecture 01 32
Opportunity costs (“There is no such thing as a free lunch”) • Economists believe that the costs of rational choice are not the number of dollars spent on such choices, but rather the opportunity costs. • The opportunity costs of a decision are the highest-valued alternative that we give up to get something else. Micro 2802 -Lecture 01 33
Example: What are the true costs of going to college or on to graduate school? • Tuition $18, 000 • Scholarship $ 3, 000 • Salary if working as an accountant $20, 000 • Accounting costs: 18, 000 -3, 000=$15, 000 • Opportunity costs (Economic costs): $20, 000 Micro 2802 -Lecture 01 34
A sad example • Who shall live and who shall die? • A good example comes from the development of new medical treatments. Every society—even the richest—faces a tradeoff between making new, promising medicines available quickly while assuring that they are also safe. That is why the Food and Drug Administration (FDA) is charged with assessing both the efficacy as well as the safety of each new drug before it is released to the market. Patients who are HIV- positive all require immediate access to the latest, promising medicines in order to have a chance for survival. But without thorough and time-consuming testing procedures, the safety of new drugs is not known. • So we must choose between two bad outcomes: 1) lives lost because people take promising drugs that turn out to have unforeseen deadly side-effects, or 2) lives lost because people are denied access to promising drugs until sufficient testing can be performed to check that they are both effective and safe. Regardless of which drug distribution policy we adopt, many people will die. Micro 2802 -Lecture 01 35
Marginal Analysis • Decision-making often requires the use of marginal analysis to isolate the benefits and costs of that particular decision. • For example, the fare from CHI to Los Angeles by Southwest airline usually is around $270, if you buy it 2 weeks advance, the price is $170, sometimes it even offers a price as low as $99. Can airlines make profits by offering low fare? Answer probably is yes. The reason is that most of costs will be paid despite the numbers of passengers. Micro 2802 -Lecture 01 36
• Marginal analysis points out that the only costs that are relevant to the decision of low fare the extra costs of carrying one passenger. These costs are called marginal costs. Any passenger who pays the airline more than its marginal costs will add to the company’s profits more or less. Micro 2802 -Lecture 01 37
Economics: A Social Science • Economics is the most scientific of the social sciences. • It is, however, much more social than the natural sciences. • Economists attempt to discover an explanation for how economic systems work. Micro 2802 -Lecture 01 38
• Positive statements are about what is. – Can be proven right or wrong. – Can be tested by comparing it to facts. Example: “Universal health care will cut the amount of work time lost to illness”. • Normative statements are about what ought to be. – Depend upon personal values and cannot be tested. Example: “Every American should have equal assess to health care”. Micro 2802 -Lecture 01 39
Objective • The task of economic science is to discover and catalog positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works. • The task can be broken step by step: Micro 2802 -Lecture 01 40
Micro 2802 -Lecture 01 41
Obstacles and Pitfalls in Economics Unscrambling Cause and Effect Ceteris Paribus A logical tool used by all scientists to identify cause and effect, its key point is to change one factor at a time holding all the other relevant factors constant. Micro 2802 -Lecture 01 42
Agreement and Disagreement? Among economists, agreement > disagreement Imperfect information disagreements Value judgments disagreements Micro 2802 -Lecture 01 43
Exercises • 1 The characteristic from which all economic problems arise is A. political decisions. B. providing a minimal standard of living for every person. C. scarcity. D. how to make a profit. Micro 2802 -Lecture 01 44
2. To economists, scarcity means that A. the number of people without jobs rises when economic times are bad. B. limited wants cannot be satisfied by the unlimited resources. C. a person looking for work is not able to find work. D. unlimited wants cannot be satisfied by the limited resources. Micro 2802 -Lecture 01 45
Which of the following is a microeconomic issue? • A. Why has economic growth been rapid in China? • B. What is the impact on the quantity of Pepsi purchased if consumers’ tastes change in favor of non-carbonated drinks? • C. Why has unemployment risen nationwide? • D. All of the above are microeconomic issues. Micro 2802 -Lecture 01 46
4. The question "Should we produce video tapes or DVD discs? " is an example of a ____ question. • A. for whom • B. why • C. how • D. what Micro 2802 -Lecture 01 47
• Jamie has enough money to buy either a Mountain Dew, a Pepsi, or a bag of chips. He chooses to buy the Mountain Dew. The opportunity cost of the Mountain Dew is • A. the Mountain Dew. • B. zero because he enjoys the Mountain Dew. • C. the Pepsi or the bag of chips, whichever was his second choice. • D. the Pepsi and the bag of chips Micro 2802 -Lecture 01 48
End of Lecture 1 Micro 2802 -Lecture 01 49
- Slides: 49