\ a way of thinking about the relationship between wants & needs and how to obtain them
TRANSCRIPT
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A way of thinking about the relationship between wants & needs and how to obtain them.
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So What is Economics?
• Economics is how people decide to use their limited resources for their unlimited wants– Basically – getting the most with what you have
• It is NOT just about money– Economics deals with things of any VALUE, not
just monetary value– Everyone has different values and different wants
• It is NOT full of mathematical equations– It is more conceptual than mathematical
• There is some math involved but it is not the focus
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The Start of Economics
• The notion of Economics was started by Adam Smith
– Wrote The Wealth of Nations in 1776– Explained that countries/companies/communities
and people were better off when they compete with one another
• Not competition by war, but by production/selling of goods
– Said people needed more than food, shelter, clothing
• The more of these “things” they have – the richer they are
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The Start of Economics• Adam Smith and the Free Market
– That people, acting in their own self-interest, would work hard and produce what consumers want as if directed by an invisible hand.
• Smith argued for trade– Saying it opened new markets where surplus goods could be sold and
allowed for cheaper goods to be imported.
– Believed that competition among businesses would keep prices in check.
• Smith believed there was a limited but important role for government to do things such as;– Enforce contracts, grant patents and copyrights, and provide public
works such as roads.
• Smith observed that specialization and division of labor in a pin factory allowed workers to produce many times more pins than if each worker had been working alone.
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The Start of Economics
(Cont.)• Led to studies of how to control/run an
economy
•What is an economy of a country?– A national economy deals with how a country or
government uses or utilizes its limited resources to get the most out of production and consumption of these goods.
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What Economics Does• Economics works to explain why things are the
way they are– For example, why charge 1.99 instead of 2.00?
• Explains how and why people use their resources– For greatest profit, meet most demand, etc.
• Resources are important because they are scarce– Scarcity – People have unlimited wants, but all
resources are essentially available in limited amounts.• Explains how and why people make the life decisions that
they make.
• Jobs, houses, moving, more or less children, etc.
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Examples of Limited Resources in the U.S.
• What are some of the limited resources we have here in the United States?– Limited resource – any product or service that we do
not have an unlimited amount of…
• Why do we continue to use such a large amount of these resources?
• What are we doing to address these limitations?
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Comprehending Economics boils
down to….• People make choices
• People’s choices involve cost
• People respond to incentives in predictable ways
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Two distinct views of Economics as a field of study
and practice
• Macroeconomics = economic issues of a nation.
• Microeconomics = economic issues of the individual, household or business.
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Different Types of Economic Analysis
• Positive Economics – uses analysis to explain how things are (cause & effect) – focuses on facts and data.
• Normative Economics – uses data and analysis to find the greatest value in each decision made – uses value judgements and opinion (how things should be).
• In the end, economics HELPS MAKE DECISIONS
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Positive Economics
Normative Economics
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3 Main Tools of Economist• Scientific Method
– Using hypotheses and research to make decisions
• Graphs– Use data of variables to show visual evidence– The curve: shows the representation b/w variables
• Does not actually have to be curved
• Economic Models– Uses simplified models to try to predict outcomes– Also called “rational-behavior model”– Also requires the belief that all things are equal in the models
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Scenarios to Figure Out• Which area of economics would be used for each
scenario – hint: more than one can be used
• Should a tax return be used to fix up the house or to buy a new TV?
• What could Broad Run do to reduce the sports fee required to play sports?
• What are the costs to increase our workforce by 5 workers next year?
• Should we impose an embargo on all Communist countries to force them to become free-market?
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7 Principles to Economic Thinking
• Economic thinking – using economic view to make decisions– Purchases, job choices, education, taxes, banking,
fiscal and monetary policy etc…• Principle 1: Scarcity and Tradeoffs • Principle 2: Costs and Benefits• Principle 3: Marginal Thinking• Principle 4: Incentive Thinking• Principle 5: Beneficial Trading• Principle 6: Markets Coordinating Trade• Principle 7: Future Consequences Thinking
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Principle 1: Scarcity and Tradeoffs• Explains that there will never be enough of ANY
resource to meet everyone’s wants– Lack of an unlimited supply creates scarcity
• When a choice must be made for one resource over another, that choice has created a tradeoff– Tradeoff – what is given up for another resource
• This is known as the “no-free-lunch-principle”– Known for this because even when lunch is free, someone had
to pay for the goods to make it
• This principle is prevalent in everyday life, think of different examples…
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Principle 2: Costs vs. Benefits
• Scarcity forces decisions, so people are forced to weigh the costs and the benefits of each decision– Costs – what must go in to get the
product/outcome– Benefit – what is gained from the decision
• Leads to “cost-benefit analysis” - CBA– Looking at what is spent versus what is earned
from a potential decision
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Principle 3: Marginal Thinking
• Margin – the outer edge of our decision– Refers to a little more or less of whatever we desire
• Example: What is your favorite food?– Eat it on Monday – 100% happiness– Tuesday – still very happy, Wednesday – still good, but…– Thursday – good, but getting sick of it– Friday – you are ready for something new
• Tells you that 2-3 days is where your happiness starts to fade, which is your margin.
• Marginal Cost – what you give up for 1 more– Is one more dinner of your favorite food worth not
eating something else for dinner that you also enjoy?
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Principle 4: Incentives
• Incentive – something that promotes choosing one decision over another– Examples: coupons, sales, rebates, etc…
• Two types of incentives – Positive Incentive – encourages people to choose by
rewarding them with something by their own choice.
– Negative Incentive – encourages people to do things by charging some kind of penalty, fine or tax, if not done.
• What are examples of positive and negative incentives that you can think of?
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Principle 5: Benefits of Trade
• People cannot and do not live self-sufficiently– They don’t grow their own food– They don’t build their own homes
• Trade benefits everyone and allows specialization– Allows people to gain better products and gain
resources such as time
• We trade for almost everything from food to clothing to homes and other products
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Principle 6: Market Coordinates Trade
• Market – any arrangement that brings together buyers and sellers to do business– Markets can be a single place or an undefined location, such as
the internet or cyberspace
– Examples: grocery store, flea market, lunch table, Ebay, Craig’s list
• Markets that work without government interference usually work best – “The invisible hand”– Allows buyers to find sellers -- both benefit
• At times, Government is forced to interfere to protect buyers and sellers.
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Principle 7: Future Consequences
• People usually make decisions while only looking at the short-term effects– Tossing out old tests before the midterm
• Same questions end up on the test
• You forget the answers and get a lower grade
• Economists try to make decisions by looking at all possible consequences – very difficult– Creating the combustible engine -> running out of oil
• Also must beware the “law of unintended consequences”– All decisions come with consequences that could not be predicted
• Redskins pay top QB (McNabb) to come to VA and finish career
• He has worst season of his career, they waste money and have no QB
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Exit Ticket
• On a notecard, please write your name
• In your own words (2-3 sentences), describe a situation where you had to make a decision based on costs and benefits. What did you decide and why?
• Turn in notecard before leaving class.