Economics for Leaders Lesson 1 Economic Growth Scarcity

Economics for Leaders Lesson 1: Economic Growth & Scarcity

Let’s Learn Some ECON Take some notes, but don’t try to write down everything I say I will tell you when you should take notes Lectures will be fast-paced with lots of information and interaction Pay attention and get involved As the week ends, it will all come together You can have all of these slides at the end of the week

Shining Student Moments I will always be on the lookout for shining student moments and will award small prizes in recognition of these moments If you want to win (and learn) then you need to be alert, engaged and participate in a meaningful way Let’s have some FUN! Online post-test at the end of the week (80%)*

Joke of the Day At the end of the day, always remember…

Joke of the Day You can tune a piano, but…

Joke of the Day You can’t TUNA FISH!

Joke of the Day

Economics for Leaders Lesson 1: Economic Growth & Scarcity

Hypotheses for the Week Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade. Developing an economic way of thinking empowers people to understand explain the world in which we live.

Low, Middle, & High Income Nations Why are some countries rich and others poor?

Low, Middle, & High Income Nations Why should we care?

Why Should We Care?

Economic Reasoning Principle #5: Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and are of equal value at the ballot box. But the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it.

Eating Candy

The Rules of the Game Institutions & Norms Rules of the game shape how decisions are made Decisions determine outcomes People respond to incentives in predictable ways Institutions and incentives set the table for choices/outcomes What are some institutions or norms in our society?

Scarcity Something is scarce if society cannot have all it wants at no cost By cost we mean OPPORTUNITY COST Some things are more scarce than others Relative scarcity is determined by what must be given up

Eating Candy

Choices & Opportunity Cost Because the world is characterized by scarcity, individuals and societies are forced to make choices Scarce resources must be allocated among many competing uses Wood that is used for tables and chairs cannot be used for crutches Crutches are not made of wood anymore

Choices & Opportunity Cost Trees harvested for lumber cannot be forest (ecosystems, CO 2) Land kept as forest cannot be used for agriculture Land left as greenspace cannot be used to build a road, school, hospital or mall Land left as greenspace cannot be used to build houses (for rich/ poor) How many choices do you make on a typical day?

Eating Candy

Choices & Opportunity Cost Opportunity cost is not always about money What did you give up to be here? Time is important, time is money or leisure Opportunity cost is the value of the next best alternative that is given up when a choice is made by an individual or society

Choices & Opportunity Cost Because we are forced to make choices (scarcity), we are faced with tradeoffs and opportunity costs The cost of any choice is what is given up Choosing is REFUSING!

Choosing Between Alternatives

Eating Candy

Do You Want to Trade?

Do You Want to Trade?

Do You Want to Trade?

Economic Reasoning Principle #1: People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices: not all of our desires can be satisfied. People make choices based on their perceptions of the expected costs and benefits of the alternatives.

Eating Candy

Economic Reasoning Principle # 2: Choices impose costs. People receive benefits as they make decisions, but they also incur costs. The cost of a choice is the value of the next best alternative foregone, measurable in time, money or some alternative value. What did you give up to be here?

choices → TRADE-OFFS → forgone alternatives OPPORTUNITY COST! choosing is REFUSING! the cost of something is what you give up OPPORTUNITY COST!

Eating Candy

Economic Reasoning Principle # 3: People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives are altered, behavior changes in predictable ways. People do what makes them better off Marginal Benefit > Marginal Cost (MB > MC)

Choosing Between Alternatives

Eating Candy

Do You Want to Trade?

Do You Want to Trade?

Eating Candy

Do You Want to Trade?

Eating Candy

A Fact Regarding Benefits The benefit (value) of the next one will eventually be lower Diminishing marginal benefit (value) Value is based on benefit received Rolos Washing machine, automobile, house

Wheat or Oranges?

Wheat or Oranges?

Wheat or Oranges?

Which is more realistic? Production Possibilities Frontier (PPF): Graphical representation of the possible goods/services an economy can produce at a given time with the available resources and technology

A Fact Regarding Costs The cost of the next one will eventually be higher Rising marginal cost Cost is based on what is given up Wheat vs. Oranges, work, vacations, China and India rapid economic growth

Choose Between Alternatives Do it if…… MB > MC

Big Ideas choices → TRADE-OFFS → forgone alternatives OPPORTUNITY COST! choosing is REFUSING! the cost of something is what you give up OPPORTUNITY COST!

Big Ideas People do things that make them better off Diminishing marginal value (benefit) Rising marginal cost (opportunity cost) The rules of the game (institutions/incentives) shape how decisions are made Decisions determine outcomes Different people have different preferences so people’s assessment of benefits/costs differ as a result

People’s Choices are always RATIONAL Rational choice = choosing the alternative that has the greatest excess of benefits over costs If ALL choices are rational, then the challenge is to understand individual decision-maker’s perceptions of costs and benefits

Choosing Between Alternatives

Quote From Thomas Sowell "What is YOUR solution? “ "There are no solutions, " I said. "There are only trade-offs and OPPORTUNITY COSTS. “ Opportunity Cost is the value of the next best alternative forgone (second best) There is no such thing as a free lunch

Policy Conundrum There are no solutions. There are only trade-offs and OPPORTUNITY COSTS