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Economics
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Economics
The study of choices
What do you want?
I want… We want…
I want… We want…
What do you want?
…more than I can get… …more than we can get…
GDPFull employment
Low inflation
Census Bureau reports poverty at highest rate since 1994
I Wan
t It A
ll
Scarcity – our wants for goods and services are virtually unlimited, but the productive resources we use to create them are not.
Different priorities about importance of various goods and services (value judgments):
What contributes most to the public good ?Is it more important to be efficient or fair?Wants vs. needs (personal choice)
Productive Resources: • natural• human (labor)• capital goods (goods used to produce other goods and services)
MacroeconomicsIssues affecting the whole economy: unemployment, inflation, GDP,…
Microeconomics• Individual choices • Individual markets (demand and supply)
This is why economics exists.
Complications
How Do You Know When
Scarcity Forces You to
CHOOSE
Something Is Scarce?
SCARCITY CHOICE
Economics is the study of how we can make the best choices for using our
scarce resources.
Therefore, choices confront us all the time: What combinations of goods and services to produce How to combine resources to produce (which production methods to use) and How to distribute what is produced (how to decide who gets what)
best choices?Economic efficiency
producing the combination and amounts of goods and services that the society wants
using the lowest cost production methods to produce the largest possible amount of output
fijit
Technical efficiency
Allocative efficiency
1. People choose.2. All choices have costs.
3. People respond to incentives in predictable ways.
5. Voluntary trade creates wealth.
4. Economic systems influence individual choices and incentives.
6. The consequences of choices lie in the future.
1. People choose.
Based on goals:
Consumers choose what combinations of goods and services to buy and how to behave in order to maximize individual well being given income.
Workers choose what kind and how much labor to supply to businesses in order to maximize income given preferences for work and leisure time.
(because of scarcity)
Businesses choose what and how much to produce and sell in order to maximize profit (revenue minus cost).
Governments choose what combinations of goods and services (as determined by local, state, and federal government budgets) will maximize society’s well being (as measured by Gross Domestic Product [GDP], number of jobs, purchasing power, happiness, …?)
Anyone – choose to behave in a way that will increase the world’s well being?
People choose - continued
2. All choices have costs.
Cost = sacrifice (may or may not be measured in $)
Opportunity cost: the next best alternative you sacrifice when you make a choice
“What should I do today? Play soccer or ride my scooter?”
“I will buy the sweater. My opportunity cost is the books.”
What is your opportunity cost for coming to school today?
Marginal rule for decision making: choose the alternative for which
the additional benefit is more than the additional cost
(ideally, the one that provides the most additional benefits with the least additional cost )
3. People respond to incentives in predictable ways.
Do people respond in predictably rational and/or predictably irrational ways?Do people respond in predictably rational and/or predictably irrational ways?
People change their behavior in response to positive or negative incentives: actions, awards, or rewards that determine the choices people make
People change their behavior in response to positive or negative incentives: actions, awards, or rewards that determine the choices people make
It depends…
Did people respond to the rising price of gas by buying less? Yes
Did people respond to the rising price of gas by buying less? Yes
How do people respond in the ultimatum game?
How do people respond in the ultimatum game?
Was your decision to participate in this learning community affected by the thought of getting into a better college?
Homo economicus: logical, consistent choices
…but
Do you leave a tip for a server in a restaurant you will never go to again?
• When responders reject positive offers, they are signaling that their preferences include more than just a monetary objective.
Many experiments have shown that –
• When proposers make a high offer it is either:-- a taste for fairness -- a fear of rejection -- both
The Ultimatum Game Experimental Results
• Most proposers will be fair even if their offers can not be rejected.
• Most responders will sacrifice money to punish a proposer who behaves unfairly to someone else.
The ultimatum game does not reveal rational “homo economicus,” but it does reveal behavior that Adam Smith would have predicted (yes, the same Adam Smith whose invisible hand guides the free market system!).
4. Economic systems influence individual choices and incentives.
The type of economic system a country has is determined by:
• Who owns the productive resources (natural, human, capital goods)? • How it chooses what, how, and who gets what?
We want a system that will help us reach our goals as individuals and as a country.
Are these questions answered by: • The interaction of buyers and sellers in markets (demand and supply)? • Government? • A combination?
Range of the World’s Economic Systems
Mixed Capitalism(Based on a free market system, with some government intervention)
Almost all of the countries in the world have “mixed economies.”Pure socialism is rare.
Command economy
Research• On the computer look up the following information on The CIA world fact
book ( Google it )• Type information out on a google doc and share it (10 point assignment)1. What is the GDP per Capita, unemployment rate, government type,
corporate tax rates of:a) USAb) Cubac) Singapored) Hong Konge) Zimbabwe
2. What other important economic factors can you find? 3. Why are the countries ranked where they are? 4. Does it all have to do with Government? 5. Is one type of government a better type of government for their
economies?
1. People choose.2. All choices have costs.
3. People respond to incentives in predictable ways.
5. Voluntary trade creates wealth.
4. Economic systems influence individual choices and incentives.
6. The consequences of choices lie in the future.
5. Voluntary trade creates wealth.
People (countries) specialize in producing what they can produce relatively cheaper than other people (countries) and then trade for other goods and services, allowing all to consume more than they otherwise could.
People (countries) trade when they each believe there is something to gain.
Specialization results in less self-sufficiency and increasing interdependence of people, markets, and countries.
But remember
6. The consequences of choices lie in the future.
We can only influence the future; we cannot change the past (sunk cost).
Unintended consequencesUnexpected benefits: aspirinUnexpected costs: Prohibition
You pay $10 to see a movie. You soon regret your choice. This is without a doubt the worst movie you have ever seen. What do you do?
a. Stay and watch the whole movie because you don’t want to waste your $10.
b. Leave immediately.
