Pump Primer n Using your textbook define insatiability

Pump Primer n Using your textbook, define insatiability and scarcity.

Unit 1: What Is Economics? Chapter 1 Part II What is Economics?

Lecture Objectives: Contrast the concepts of intrinsic value and subjective value. n Describe the opportunity benefits and costs of a purchase. n Differentiate between microeconomics and macroeconomics. n Differentiate between positive economics and normative economics. n

Economic Way of Thinking n What is the ‘economic way of thinking’? All social events come from the actions and interactions of individuals who are choosing in response to expected additional benefits and costs to themselves n Question: Does this assumption mean people are selfish, materialistic, and shortsighted?

Economic Way of Thinking n n Focus is on actions, interactions, and consequences Actions emphasize ‘economizing’ n allocate resources in a way that allows the agent to derive whatever he/she wants n results from scarcity n involves trade-offs

Economic Way of Thinking Economic theory assumes that : People make choices under scarcity based on Expected Benefits and Expected Cost

Cooperation through mutual adjustment n Economizing actions create alternatives available to others n Social coordination is a process of continuing mutual adjustment Examples: n why don’t drivers on a freeway drive in one lane? n What about lines at the checkout counter

Cooperation through mutual adjustment n The net advantage determines people’s actions costs versus benefits n example: higher gas prices reduce travel n money persuades!

Rules of the game n Economic systems and social interaction are directed and coordinated by the rules participants know and follow n Disputed – inconsistent – unclear rules cause the ‘game’ to break down Chapter one Copyright 2010 Pearson 9

How Do We Produce? Resources to fulfill these wants are limited and fall into four categories: 1. 2. 3. 4. land labor capital entrepreneurship. (Carper, 3)

Resources = limited supply (scarcity) Land/Natural Resources n n Paper (trees), electricity (rivers, coal, natural gas, wind, solar) “The payment for Land is RENT” Labor n n “Human resources The payment for Labor is WAGES" Capital (a product of Investment) n n Your computer, desk, “tools, machines, factories” “The payment for Capital is INTEREST” Entrepreneurship n n “The special ability of risk-takers to combine land, labor and capital in new ways in order to make profit The payment for Entrepreneurship is PROFIT!” (Mayer)

Intrinsic Versus Subjective Value Economic Value n “the value of a good or service in dollars. ” (Carper, 5)

Economic Riddle “Diamond-Water Paradox” “What has more economic value: a handful of diamonds or a singe glass of water? ” (Carper, 5)

Intrinsic Value Believed to be the “obvious solution” to the riddle. n “Holds that a thing is valuable because the amount of labor and natural resources that went into its production. ” n n Diamonds were something of value, whereas, water had no value because it is “free. ” (Carper, 5)

Karl Menger “Put the riddle to rest. ” n “The value of an object is not determined by anything having to do with the good, but rather by the subject, the person buying the good or service. ” n “Subjective Value” n (Carper, 5)

Subjective Value n “Worth of everything is determined by its usefulness to the buyer. ” n Usefulness = “utility” (Carper, 5)

Subjective Value n Utility - “varies from person to person” n No goods or service is intrinsically valuable. n The value of everything is determined each time a buyer considers a purchase. (Carper, 5)

Utils of Satisfaction! n Shoes = Opportunity Benefit or Satisfaction = 9 utils (YOO till) n Steak Dinner = Opportunity Cost or Regret = 10 utils Purchased shoes over dinner: 9 – 10 = 1 negative util Purchased dinner over shoes: 10 – 9 = 1 positive util (Carper, 6)

Every decision has … Ø Ø Ø opportunity benefits opportunity costs hidden costs

“The wise consumer should always ask themselves…” n “What is the hidden cost of making this decision? ” n “Every decision brings with it some form of regret – the regret varies according to the subjective value on the opportunity costs. ” (Carper, 8)

As believers how should our decisions be weighed? n n n Our “subjective value of life’s choices should be examined in light of the principles of God’s Word” “Making godly choices brings a satisfaction with the knowledge that the believer has made the right decision, which minimizes his regrets. ” When a person is saved, both the Holy Spirit and Scripture work together to alter what the believer perceives to be the opportunity costs of many choices. n When we allow the Holy Spirit to renew our mind – it enables us to make wise decisions. (Carper, 8)

Economic Scope and Purpose Microeconomics Versus Macroeconomics: “Economists study their subject on two levels: ” § § Microeconomics Macroeconomics

Microeconomics examines the individual components of the economy. “What causes a person to save money? ” n “How does one business firm set its prices? ” n “How will the closing of a factory affect the individual community? ” n (Bade 3)

Macroeconomics examines the economy as a whole (aggregates). n Concerned with large-scale economic choices and issues. n Study of national and global economies. (Carper, 8)

Macroeconomics n “What causes bank interest rates to rise and fall? ” n “What causes large-scale national unemployment? ” “Why do the Japanese sell more goods to the United States than the United States sells to Japan? ” n (Carper, 8)

Positive Economics Versus Normative Economics

Positive Economics Versus Normative Economics n In economics, there are two types of statements. Positive statement – describes what is n Normative statement – describes what ought to be n

However… “Positive economics is the approach to economic study involving the observation of economic choices and prediction of economic events. ” n “Normative Economics is the approach to economic study involving value judgments about existing and proposed economic policies. ” n (Carper, 8)

“The government makes normative economic choices, such as…” “When it passed the Social Security Act “ n “Requires people to save for retirement without choice, or when it passes regulations forbidding the purchase of certain foreign imports. ” n Regardless of whether citizens desire to purchase these foreign goods. (Carper, 8)

When the government increases the benefits to education – those funds have to come from somewhere. It takes from Peter to pay Paul. q These funds could come from the Clean Air or Water Projects – or taxed to business (which then have to raise their prices to cover the expense). (Carper, 8)

Works Cited Blade, Robin, and Michael Parkin. Foundations of Economics: Instructor’s Manual. 2 nd ed. Boston: Pearson Education, Inc. , 2004. Carper, Alan. Economics for Christian Schools. Greenville: Bob Jones University Press, 1998. "The New King James Version. " Logos Bible Software. CD_ROM. ed. 2004.