Bah - MacroPrinciples 01 Economics. the World Around You

8/13/2019 Bah - MacroPrinciples 01 Economics. the World Around You

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Economics: The World Around YouEconomics: The World Around You

ECN 211ECN 211

Fall, 2007Fall, 2007

ELEL--HADJ BAHHADJ BAH

Chapter 1:

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Why Study Economics?Why Study Economics?

To seek answers to questions like:

Why do economies go through cycl es,

expanding and creating jobs at times, dipping

into recessions at others?

Why do some people find th emselves

unemployed while others are able to find jobs?

Why do people in some jobs get paid so much

more than people in other jobs?

Why do some bu sinesses succeed and others

fail?

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Why Study Economics?Why Study Economics? (Continued)(Continued)

More questions:Why do some people have to live on welfare?

Why are some nations richer than others?

Why is health care so expensive?

What determines the prices of thi ngs?

What is the value of an education?

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What is Economics?What is Economics?

Economics is a social science.Economists study how individuals, individually

and collectively, make decisions about: Working and hiring

Buying consumer goods and services (consumption)

Producing goods and services for sale

Building factori es, equipment, and tools

Building and buying houses

Setting prices and reacting to them

Coordinating activities in the economy

Import goods rather than make them themselves


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Definition of EconomicsDefinition of Economics

A social science that studies the allocation of scarce resourcesused to produce goods and services that satisfy consumers'unlimited wants and needs. Key points in the study ofeconomics:

Social Science: Economics uses the scientific method toexplain and study our society.

Allocation: Economics studies allocation decisions aboutdistributing resources, goods and services.

Scarce Resources: The economy's resources are limitedrelative to their use.

Production: We transform available resources into goodsand services. That's production.

Consumption: The goods and services produced are used to

satisfy wants and needs. That's consumption.6

Human Nature and RealityHuman Nature and Reality

People have unlimited wants.

People have limited time, income,wealththey have limited resourceswith which to acquire the things thatthey want.

As a result, they must make choices.

Choices involve pursu ing somethings while forgoing others.

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ScarcityScarcity

A good is called scarce if there is not

enough of it f reely available (i.e., at

zero price) to satisfy human wants.

Scarcity means that not enough isavailable for free.

Examples:

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Goods andGoods andBadsBads

An economic good is any good

(physical product) or service

(nonphysical product) that is scarce.

A free good is a good for which thereis no scarcity.

An economic bad is any good for

which we would pay to have less.


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Goods to Produce GoodsGoods to Produce Goods

Resources are the elements needed toproduce other goods.

Resources are also called factors ofproduction orInputs

They are:Land (includes natural resources)

Labor (physical and intellectual services ofpeople)

Capital (plant, machinery, equipment used inproduction)

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Resources in ProductionResources in Production

Producers

of GoodsResource

Suppliers

land

labor

capital

rent

wages

interest

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Scarcity and ChoiceScarcity and Choice

Scarcity necessitates making choices.

Economics is the study of how people choose toEconomics is the study of how people choose touse their resources in attempts to satisfy theiruse their resources in attempts to satisfy theirunlimited wants.unlimited wants.

Which goods do we create? (Which goods dowe allocate our scarce resources to theproduction of?)

How do we produce them at the lowest cost(efficiency)?

How do we decide who gets the goods oncethey are produced? (distribution)

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RationalityRationality

One principle of economics is that w e believe thateconomic decision-makers (agents) exhibitrational self-interest.

This means that people: use all available time and information,

weigh the costs and benefits of all available alternatives,

and choose the alternative that they believe will brin gthem the most benefit at the low est cost. This is thealternative that they believe will bring them th e mostsatisfaction.

This does not mean that people are innately

selfish. Self-interest i s not greed.


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Limits to RationalityLimits to Rationality

Depends uponInformation available (and/or its cost)

Abi li ty t o process the inf orm ation

Your perception of what constitutes your bestinterests

This leads to the theory of boundedrationality.

In practice, this means that peoplecompare costs and benefits to make adecision.

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ImplicationsImplications

Being self-interested, people will weighthe costs and benefits of variousalternatives, choosing that alternative thatmakes them best off.This behavior is called economic decision

making .

Costs and benefits are sometimes referredto as negative and positive incentives.Hence, according to the economicreasoning, incentives matter.

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Positive vs. Normative EconomicsPositive vs. Normative Economics

Positive EconomicsFocuses on what is .

Anal yzes actual, measurable outc omes.

Does not impose value judgments, personfeelings or convictions.

Positive economics is economics as a science.

Normative EconomicsFocuses on what someone thinks ought to

be or should be .

Makes ethical judgmentsvalue judgments.

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Test Question:Test Question: Identify the followingIdentify the followingstatementsstatements

Tariffs should be imposed on importedcars to increase domestic employment.

Unemployment in U.S. falls when peoplebuy domestically produced cars.

Congress should protect t he U.S.automobile industry from foreigncompetition.

The automobile industry benefit whentariffs are imposed on imported cars.


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Common Analytical MistakesCommon Analytical Mistakes

(Logical Fallacies)(Logical Fallacies)

Fallacy of Composit ion The mistaken assumption that what is true of a part is

also true of the whole.

Associ ation is no t Causation The mistaken assumption that because two events

occur tog ether, one must cause the other. Also given ascorrelation is not causation.

Violation of Ceteris Paribus Ceteris Paribus: Latin for all else equal.

This occurs w hen one attempts to analyze the effect ofone thing while holding everything else constant, whenin fact other things have changed.

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Micro vs. MacroMicro vs. Macro

Microeconomics

Studies the economy at the level of indi vidual

consumers, workers, firms, goods, and

markets

Macroeconomics

Studies the economy at the aggregate level, at

the level of the economy as a whole.

Examines total consumer behavior, total

employment, total production, total sales, etc.

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Test Question:Test Question: Identify the mistake inIdentify the mistake inthe following statementsthe following statements

Since a household cannot afford to keep

adding debt indefinitely, a country cannot

afford to do so either.

Every time the suns wear their purp le

uniform, they beat the Lakers.

Every time you l eave your home at 7:09

a.m, you get to work on time; therefore

everyone should leave their home at 7:09

a.m

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Bah - MacroPrinciples 01 Economics. the World Around You