Pump Primer

Using your textbook, define insatiability and scarcity.

Unit 1: What Is Economics?

Chapter 1Part II

What is Economics?

Lecture Objectives:

Contrast the concepts of intrinsic value and subjective value.

Describe the opportunity benefits and costs of a purchase.

Differentiate between microeconomics and macroeconomics.

Differentiate between positive economics and normative economics.

Economic Way of Thinking

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

Question: Does this assumption mean people are selfish, materialistic, and shortsighted?

Economic Way of Thinking

Focus is on actions, interactions, and consequences

Actions emphasize ‘economizing’ allocate resources in a way that allows the

agent to derive whatever he/she wants results from scarcity involves trade-offs

Economic Way of Thinking

ExpectedBenefits

andExpected

Cost

Economic theory assumes that :

People makechoices

under scarcitybased on

Cooperation through mutual adjustment

Economizing actions create alternatives available to others

Social coordination is a process of continuing mutual adjustment

Examples: why don’t drivers on a freeway drive in one lane?

What about lines at the checkout counter

Cooperation through mutual adjustment

The net advantage determines people’s actions

costs versus benefits example: higher gas prices reduce travel

money persuades!

Rules of the game

Economic systems and social interaction are directed and coordinated by the rules participants know and follow

Disputed – inconsistent – unclear rules cause the ‘game’ to break down

Chapter one Copyright 2010 Pearson

Education, Inc. Publishing as Prentice Hall

9

Resources to fulfill these wants are limited and fall into four categories:

1. land2. labor 3. capital 4. entrepreneurship.

(Carper, 3)

How Do We Produce?

Resources = limited supply (scarcity)Land/Natural Resources

Paper (trees), electricity (rivers, coal, natural gas, wind, solar)

“The payment for Land is RENT”Labor

“Human resources The payment for Labor is WAGES"

Capital (a product of Investment) Your computer, desk, “tools, machines, factories” “The payment for Capital is INTEREST”

Entrepreneurship “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 “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.

“Holds that a thing is valuable because the amount of labor and natural resources that went into its production.” Diamonds were something of value,

whereas, water had no value because it is “free.”

(Carper, 5)

Karl Menger

“Put the riddle to rest.” “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.”

“Subjective Value”

(Carper, 5)

Subjective Value

“Worth of everything is determined by its usefulness to the buyer.”

Usefulness = “utility”

(Carper, 5)

Utility - “varies from person to person”

No goods or service is intrinsically valuable.

The value of everything is determined each time a buyer considers a purchase.

(Carper, 5)

Subjective Value

Shoes = Opportunity Benefit or Satisfaction = 9 utils (YOO till)

Steak Dinner = Opportunity Cost or Regret = 10 utils

Purchased shoes over dinner: 9 – 10 = 1 negative utilPurchased dinner over shoes: 10 – 9 = 1 positive util

(Carper, 6)

Utils of Satisfaction!

Every decision has …

opportunity benefits opportunity

costs hidden costs

“The wise consumer should always ask themselves…”

“What is the hidden cost of making this decision?” “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? 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. 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?”

“How does one business firm set its prices?”

“How will the closing of a factory affect the individual community?”

(Bade 3)

Concerned with large-scale economic choices and issues.

Study of national and global economies.

(Carper, 8)

Macroeconomicsexamines the economy as a whole (aggregates).

“What causes bank interest rates to rise and fall?”

(Carper, 8)

“What causes large-scale national unemployment?”

“Why do the Japanese sell more goods to the United States than the United States sells to Japan?”

Macroeconomics

Positive Economics Versus

Normative Economics

Positive Economics Versus Normative

Economics

In economics, there are two types of statements. Positive statement – describes what is Normative statement – describes what

ought to be

“Positive economics is the approach to economic study involving the observation of economic choices and prediction of economic events.”

“Normative Economics is the approach to economic study involving value judgments about existing and proposed economic policies.”

(Carper, 8)

However…

“The government makes normative economic choices, such as…”

“When it passed the Social Security Act “ “Requires people to save for retirement

without choice, or when it passes regulations forbidding the purchase of certain foreign imports.”

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.

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. 2nd 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.