Economics for Leaders Lesson 1 Scarcity Economic Growth

Economics for Leaders Lesson 1: Scarcity & Economic Growth Economics for Leaders

HYPOTHESIS FOR THE WEEK: Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade. Economics for Leaders

Economic Reasoning Propositions #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 these choices based on their perceptions of the expected costs and benefits of the alternatives. #2: Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up. #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 change, behavior changes in predictable ways. #4: Institutions are the “rules of the game” that influence choices. Laws, customs, moral principles, superstitions, and cultural values influence people’s choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system. #5: Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation 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 Economics for Leaders

Economic Reasoning Principle #5: Understanding based on knowledge and evidence imparts value to opinions. ERP-5: Understanding based on knowledge and evidence imparts toofopinions. Opinions matter value and are equal value at the ballot box. But on matters of rational deliberation 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. Economics for Leaders

The Lamp Economics for Leaders

Why Can’t You Have It All? SCARCITY: the FACT that resources are limited and human wants and needs are unlimited Not enough to go around! Economics for Leaders

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 these choices based on their perceptions of the expected costs and benefits of the alternatives. Economics for Leaders

SCARCITY ISN’T OPTIONAL Fact: Resources ARE limited § Land (57, 506, 000 sq mi. & not even all habitable!) § Labor (6, 7 bil. souls x 24 hrs a day) § Capital (less than ∞, trust me) § Entrepreneurship (not everybody is Bill Gates) Fact: Human desires are boundless Economics for Leaders

Are YOU Never Satisfied ? – It’s not just you out there Economics for Leaders

Scarcity Choice Economics is: a study of choice Economics for Leaders

Key Economic Proposition Scarcity necessitates choice – people must choose Economics for Leaders

Scarcity Economics for Leaders Choice

Key Economic Proposition Scarcity necessitates choice – people choose & – choices determine social outcomes Economics for Leaders

Wealth and Poverty And the outcomes are noticeably different … Economics for Leaders

Economics for Leaders

Understanding Wealth & Poverty Economics for Leaders

Quiz … Who is this person? What was the title of the book he wrote in 1776? – An Inquiry into the Nature and Causes of the Wealth of Nations Economics for Leaders Adam Smith

During This Week, We Will Conduct … An Inquiry into the Nature and Causes of The Wealth of Nations Economics for Leaders

POVERTY IN THE WORLD… GDP per capita (ppp) • Rwanda Economics for Leaders $1282 http: //www. flatrock. org. nz/topics/odds_and_oddities/ultimate_in_unfair. htm

The Rest of the Story. . . GDP per capita (ppp 2012 US Dollars) • Malawi $ 893 • Rwanda $ 1282 • Uzbekistan $ 3287 • Indonesia $ 4636 • Ecuador $ 8669 • World average$12, 200 • Mexico • United States Economics for Leaders $ 16, 588 $ 48, 112

The Elusive Quest for Growth I do not see how one can look at figures like these without seeing them as possibilities… Is there some action a government … could take that would lead the … economy to grow … ? If so, what exactly? Economics for Leaders

The consequences for human welfare …are simply staggering: Once one starts to think about them, it is hard to think about anything else. –Robert Lucas, University of Chicago » Nobel Laureate, 1995 » July, 1988 Economics for Leaders

Why are some countries rich and others poor? Low, Middle and High Income Economic reasoning tools can help us answer this and other questions about world poverty Economics for Leaders

How Will Tom Hanks Survive? He must produce! What? What he wants – Food – Shelter Economics for Leaders

Dealing with Scarcity We must produce things that we want – that is, – goods and services that we value Economics for Leaders

Economic Growth If we can increase what we produce person Then our standard of living rises over time – even in the face of scarcity We refer to this as “economic growth” – Often measured by GDP = gross domestic product • GDP = sum value of all produced in economy in a year Economics for Leaders

Population Growth and Important World Events Economics for Leaders ~1750

Economics for Leaders

Sources of Economic Growth Perspiration Inspiration Longer work day Higher labor force participation rate Economics for Leaders Improve worker …

“Productivity” Our nation’s standard of living depends on it! Economics for Leaders

Importance of Productivity A engineer who, while visiting China, came across a large crew of men building a dam with picks and shovels. When the engineer pointed out to the supervisor that the job could be completed in a few days, rather than many months, if the men were given motorized earthmoving equipment, the supervisor replied: . . . such equipment would destroy many jobs. Economics for Leaders

The Real Source of Wealth? Oh, the engineer responded, – “I thought you were interested in building a dam. – If it’s more jobs you want, why don’t you have your men use spoons instead of shovels. ” Moral: – Purpose of economic activity • produce as much VALUE as possible with scarce resources. Economics for Leaders

Economic Growth improves the lives of the poor by making the pie bigger Bigger “slices” mean higher standards of living Economics for Leaders

The Secret to Economic Growth: Productivity The output produced from a given set of resources in a given period of time. Increasing productivity means that greater output is produced from a given set of resources in a given period of time. Hans Rosling and the Magic Washing Machine http: //www. youtube. com/watch? v=BZo. Kfap 4 g 4 w Economics for Leaders

Farming Productivity Then and Now… http: //www. livinghistoryfarm. org/farminginthe 50 s/machines_plowing. html Economics for Leaders

Key to Productivity: Institutions the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction. Economics for Leaders Institutions in your life:

What are the “rules of the game” (the accepted and expected forms of social interaction) in: Dating ? Economics for Leaders

Institutions Matter: Property rights The rule of law Open markets Entrepreneurship and innovation Economics for Leaders

Institutions Shape Incentives The reward or penalties that influence people’s choices and behavior. Economics for Leaders

THE “BIG IDEAS” FROM LESSON 1: 1. Scarcity forces us to choose among alternatives 2. Economic growth gives us more to choose from and raises standards of living by: – – – reducing infant mortality, Increasing life expectancy, reducing hunger, improving environmental quality, and reducing the incidence of debilitating diseases. Economics for Leaders

THE “BIG IDEAS” FROM LESSON 1: 3. Some institutions and institutional arrangements encourage economic growth and some do not. 4. The institutions that foster growth and economic development include: Open markets Property rights and the rule of law Entrepreneurship and innovation Economics for Leaders