ECON 2313 Fall Semester 2008 Welcome Economics is

ECON 2313: Fall Semester, 2008 Welcome!

Economics is the study of how individuals and societies allocate scarce resources among competing alternative ends

Available resources are insufficient to satisfy wants. We cannot produce enough goods and services to satisfy everyone—we don’t have the resources!

What to produce? Because resources are scarce, growing more corn means growing less wheat, building more SUV’s means building fewer military vehicles, and building more prisons means we have to sacrifice something else— like new schools.

Congress made supplemental appropriations for the Iraq effort of $110 billion June 2003 and March 2004. We should ask the question: what could we have for $110 billion?

• 628 Boeing 7 E 7 Aircraft • Construct three (3) 700 mile bullet trains (includes the cost of inner-city land acquisition). • 4, 075 “high quality” educational facilities to accommodate 1, 000 students. • Write a $379 check to every U. S. citizen. • Fund 1, 000 universities the size of Arkansas State for one year.

The geneology of economics Economics Webster’s Ninth New Collegiate Dictionary. eco • nom • ic 1. archaic: of or relating to a household or its management. eco = oikos, meaning “house” or “household” nom = nemein, meaning “to manage” ic = ic, mean “of” or “relating to”

The production of goods and services is impossible without economic resources or factors of production

Land or natural resources

Labor or “human resources”

Capital or “manmade instruments of production”

Human Capital Human capital is the knowledge and skill people obtain from education, on-thejob training, and work experience.

Entrepreneurship is the willingness and ability to combine land, labor and capital into productive enterprises. • Entrepreneurs identify profitable business opportunities and mobilize and coordinate resources to take advantage. • Sam Walton, Michael Dell, Martha Stewart, and Bill Gates are examples of highly successful entrepreneurs.

Income received by owners of economic resources • Rent: Income paid for the use of land. • Wages (and salaries): income paid for the services of labor. • Interest: income paid for the use of capital. • Profit (or loss): Income earned by an entrepreneur for running a business.

Goods and Services • Good: see, feel, touch • Service: intangible • Scarce good/service – The amount people desire exceeds the amount available at a zero price • Choice – Give up some goods and services 15

Goods and Bads • Bads – We want none of them; not even at a zero price • Free goods and services • “There is no such thing as a free lunch” – Involve a cost to someone 16

Economic Decision Makers • Households – Consumers • Demand goods and services – Resource owners • Supply resources • Firms, Governments, Rest of the World – Demand resources – Produce goods and services 17

Markets • Bring together buyers and sellers • Determine price and quantity • Product markets – Goods and services • Resource markets – Resources 18

A Simple Circular-Flow Model • Flow of – Resources – Products – Income – Revenue • Among economic decision makers • Interaction – Households – Firms 19

The simple circular-flow model for households and firms Exhibit 1 Households - Supply resources to resource market; earn income - Demand goods and services from product market; spend income Firms - Demand resources to produce goods and services; payment for resources - Supply goods and services to product market; earn revenue 20

The Art and Science of Economics Economists assume that economic decision-makers are rational and engage in “maximizing” behavior

Choice Requires Time and Information • Time and information – scarce; valuable • Rational decision makers – Willing to pay for information • Improve choices – Acquire information: • Additional benefit expected exceeds the additional cost 22

Economic Analysis Is Marginal Analysis • Expected marginal benefit • Expected marginal cost • Marginal – Incremental, additional, extra • Rational decision maker: – Change the status quo if expected marginal benefit exceeds expected marginal cost 23

Microeconomics and Macroeconomics • Microeconomics – Individual economic choices – Markets coordinate the choices of economic decision makers – Individual pieces of the puzzle • Macroeconomics – Performance of the economy as a whole – Big picture 24

Positive and normative economics Economics deals with questions of “what is” and “what ought to be. ” The former set of questions belong to positive economics; the latter to normative economics

Positive economics attempts set forth scientific statements --that is, statements subject to verification or falsification For instance: • “ If they raise tuition again at ASU, enrollment will decline. ” • The recent rise in interest rates is likely to depress housing construction. • Total employment in the U. S. fell in the year 2002.

It’s unfair to ask a person to live on $6. 55 an hour.

I shouldn’t have the government telling me how much I should pay for fast food cooks or any other type of labor service.

Who is right? It is a normative issue.

The Scientific Method: Step by Step 1. Identify the Question and Define Relevant Variables 2. Specify Assumptions Modify Approach 3. Formulate a hypothesis 4. Test the hypothesis or Reject the hypothesis Use the hypothesis until a better one shows up 30

What is an Economic Model? An economic model is a simplified substitute for economic reality.

This map of Arkansas is a good example of a “model”

Ceteris Paribus “All other things being equal” or “All other factors held constant. ” Simplification in model building is achieved by the ceteris paribus assumption. It allows us to reason about the relationship between two variables without the intrusion of other variables.

Economic reasoning: Some pitfalls • Association-is-causation fallacy • Fallacy of composition • Ignoring secondary effects

Correlation versus Causation Correlation is the tendency for the values of two variable to move in a predictable and related way. For example, beer consumption tends to rise when unemployment rises—that is, these variables are correlated. Does it follow that beer consumption causes unemployment?

Association-is-causation fallacy: More examples • Researchers at the Aabo Akademi found that Finns who speak the language of their Nordic neighbors were up to 25 percent less likely to fall ill than those who do not. • My rooster died—the sun won’t come up tomorrow. • Crimes rates tend to be higher in cities with more police per capita.

Fallacy of composition To commit the fallacy of composition is to suppose that what is true in the individual case also holds true for the group. • Example: “The best way to leave a burning theater is to run for the exit. ”

Secondary effects The imposition of a luxury tax in 1990 (for items priced $100, 000 or more was blamed for destroying jobs in the yacht-building industry.