the economic way of thinkingdominicamorosa.weebly.com/.../2/13224889/the_econo… · ·...
TRANSCRIPT
What is Economics?
• Terminology and jargon
• Common sense
• Way of looking at the world
• Way of explaining human behavior
1. Due to scarcity, people have to make
choices; or there’s not enough for
everyone to have everything they want
2. Choices involve tradeoffs
and costs
Opportunity costs: The cost of anything is
the next best alternative
3. People make decisions by
comparing expected costs and
expected benefits
• Should I study one more hour or play
games on my IPAD?
4. People make decisions by
thinking at the margin.
Decisions are made by dividing them up
into incremental choices and weighing the
expected costs and expected benefits of
each increment. Few choices are all or
nothing.
6. Voluntary trade makes
people better off and creates
wealth
People can produce more in less time
by specializing and concentrating on
what they do best. Their excess
production can be traded to others to
obtain valuable goods or services. By
voluntarily giving up things that we
value less for things we value more,
both parties to a trade are made better
off.
7. Competitive markets are a
good way to organize economic
activity and increase individual
freedom, the quality of life, and
trust
9. Governments can sometimes improve market outcomes.
Markets don’t solve all problems. Externalities, defining and enforcing property rights, free-rider problems, and social goals such as equity bring the government into the economy. The key question to ask is “do the expected benefits of government actions outweigh their expected costs?”
10. The standard of living of a nation and its citizens is based on their ability to produce goods and services.
The more we can produce from a given
amount of resources, the higher will be our
living standards. The story of economic
growth and our rising standard of living is the
story of productivity growth, which is based on
improvements in education and technology.
US Real GDP Per Capita Growth in Long Run
Note: Log scale so a straight line means same rate of growth.
Average annual growth rate over past 190 years is 1.8%/year..
Commodity
Work Hours
Need to Earn
in 1895
Work
Hours
Need to
Earn in
1997
Productivity
Multiple
(How Much
Cheaper
Today?)
Horatio Alger books (6 vols.) 21 0.6 35.0
One-speed bicycle 260 7.2 36.1
Cushioned office chair 24 2.0 12.0
100-piece stoneware dinner set 44 3.6 12.2
Hair brush 16 2.0 8.0
Cane rocking chair 8 1.6 5.0
Solid gold locket 28 6.0 4.7
Encyclopedia Britannica 140 33.8 4.1
Steinway piano 2400 1107.6 2.2
Sterling silver teaspoon 26 34.0 0.8
Fun, and Interesting, Books About Economics
(all with no graphs!)
• Charles Wheelan, Naked Economics: Undressing the Dismal Science
• Tim Harford: The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor—and Why You can Never Buy a Decent Used Car
• Steven Landsburg, The Armchair Economist: Economics and Everyday Life
• P.J. O’Rourke, Eat the Rich: A Treatise on Economics
• James Surowiecki, The Wisdom of Crowds: Why the Many are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations
• Russell Roberts, The Choice: A Fable of Free Trade and Protectionism
• Russell Roberts, The Price of Everything: A Parable of Possibility and Prosperity
• James Gwartney, Richard Stroup, and Dwight Lee, Common Sense Economics: What Everyone Should Know About Wealth and Prosperity