lecture 2: ecn 111 the basics scarcity choice and opportunity cost defining economics policy and...

Lecture 2: ECN 111 The Basics

Scarcity Choice and opportunity cost Defining Economics Policy and Economic Science Market Institutions

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From Last Time

Course Home Page www.public.asu.edu/~ifdlh/ Econ 111 Macro Happens (MW) Econ 111 Macro Plus (MWF)

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Assignment for the Weekend.

Reading chapters 1 and 2 - begin 3 Experiment with EIA Work on EIA chapters 2and 3 Those in Section xxxxx, names listed

in class, who meet MWF, we will see you in BAxxx at 10:40am on Friday.

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Scarcity

When wants exceed the resources available to satisfy them, there is scarcity.

People have unlimited wants. Resources to satisfy those wants are

limited.

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Scarcity and Poverty

Scarcity is not poverty. The poor and the rich alike face

scarcity. Faced with scarcity, people must

make choices.

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Big Ideas of Economics

The questions give you a sense of what economics is about.

The Big Ideas of Economics describe how economists think about these questions and seek answers to them.

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IDEA 1 A choice is a tradeoff — we give up

something to get something else — and the highest valued alternative we give up is the opportunity cost of the activity chosen.

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IDEA 2 We make choices in small steps, or at

the margin, and choices are influenced by incentives.

• Marginal Benefit vs. Marginal Cost

• Incentives are inducements to take particular actions

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IDEA 3 Voluntary exchange makes both buyers

and sellers better off, and markets are an efficient way to organize exchange.

• Buyers receive goods or services

• Sellers receive money.

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IDEA 3 (cont.) Markets are efficient because they

ensure that resources will be used where they are valued most highly.

Alternative to Market Economy• Command Economy

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IDEA 4 The market does not always work

efficiently and sometimes, government action is necessary to overcome market failure and lead to a more efficient use of resources.

Market failure is a state in which the market does not use resources efficiently.

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IDEA 5 For the economy as a whole,

expenditure equals income equals the value of production.

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IDEA 6 Living standards improve when

production per person increases.• This increase in output per person will enable more

people to own goods and services.

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IDEA 7 Prices rise when the quantity of money

increases faster than production.• Inflation results from “too much money chasing too

few goods”.

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IDEA 8 Unemployment can result from market

failure but some unemployment is productive.

• Unemployment rates vary

• Some unemployment results from employees searching for a suitable job and employers searching for suitable workers.

– This unemployment improves productivity.

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What Economists Do

Economic questions can be divided into two big groups: microeconomics and macroeconomics.

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Microeconomics

Microeconomics is the study of the decisions of people and businesses and the interaction of those decisions in markets.

Goal: to explain the prices and quantities of individual goods and services.

these topics are covered in ECN112

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Macroeconomics

Macroeconomics is the study of the national economy and the global economy and the way that economic aggregates grow and fluctuate.

Goal: to explain average prices and total employment, income, and production.

these topics are covered in ECN111

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Positive Versus Normative Statements

A positive statement can be tested by checking it against facts. e.g. When prices rise the quantity of a good demanded will fall.

A normative statement depends on values and cannot be scientifically tested. e.g. We should redistribute income from the rich to the poor.

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The Task ofEconomic Science

Economic science discovers and catalogs positive statements that are consistent with what we observe.

Normative issues are typically tackled in political and social debate.

Our discussion will be primarily about positive issues. But the role of normative issues will also be addressed.

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Unscrambling Causeand Effect

The nature of economic data makes it difficult to identify what is a cause and what is an effect.

The logical tool all scientists use is ceteris paribus, a Latin term that means “other things being equal.”

By changing one factor at a time, we can investigate its effects clearly.

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Post Hoc Fallacy

Post hoc ergo propter hoc is a Latin phrase meaning “after this, therefore because of this.”

Just because two events happen together does not mean one caused the other.

e.g. are Presidents(or Governors) responsible for Economic performance. What do you think?

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Markets

A market is any arrangement that enables buyers and sellers to get information and to do business with each other.

Goods markets are markets for goods and services.

Factor markets are markets for factors of production.

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Factors of Production

Factors of production are the economy’s productive resources, including: Labor, what is the return Land, what is the return Capital, what is the return Entrepreneurial ability, what is the

return? Who can name an entrepreneur?

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Coordinating Decisions

Conflicting choices by households, firms, and governments are resolved by markets.

This is depicted in the following picture of the economy

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Alternative Coordinating Mechanisms

A command mechanism is a method of determining what, how, when, and where goods and services are produced and who consumes them, using a hierarchical organization structure in which people carry out the instructions given to them.

Is this better than a market economy? What do you think?

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Market Economies

An economy that uses a market coordinating mechanism is called a market economy.

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Remember Your Assignment for the

Weekend. Reading chapters 1 and 2 - begin 3 Experiment with EIA Work on EIA chapters 2 Those in Section xxxxx, names listed

in class, who meet MWF, we will see you in BAxxx at 10:40am on Friday.

MACRO HAPPENS

ECON 111HOFFMAN

lecture 2: ecn 111 the basics scarcity choice and opportunity cost defining economics policy and...

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