Economics Third Edition, Global Edition Chapter 1 The Principles and Practice of Economics Copyright © 2022 Pearson Education Ltd. Learning Objectives 1 The Scope of Economics 2 Three Principles of Economics − The First Principle of Economics: Optimization − The Second Principle of Economics: Equilibrium − The Third Principle of Economics: Empiricism 3 Is Economics Good for You? Copyright © 2022 Pearson Education Ltd. Key Ideas 1. Economics is the study of people’s choices. 2. The first principle of economics is that people try to optimize: they try to choose the best available option. 3. The second principle of economics is that economic systems tend to be in equilibrium, a situation in which nobody would benefit by changing his or her own behavior. 4. The third principle of economics is empiricism—analysis that uses data. Economists use data to test theories and to determine what is causing things to happen in the real world. Copyright © 2022 Pearson Education Ltd. The Principles and Practice of Economics Evidenced-Based Economics Example: Is Facebook free? Copyright © 2022 Pearson Education Ltd. The Principles and Practice of Economics What do you give up when you use Facebook, Instagram or TikTok? Copyright © 2022 Pearson Education Ltd. The Principles and Practice of Economics What area of your life is NOT covered by economics? Copyright © 2022 Pearson Education Ltd. The Scope of Economics Economists study human behavior. Choice—not money—is the unifying feature of all the things that economists study An economic agent is any group or individual that makes choices, such as consumers, firms, parents, politicians, etc. Copyright © 2022 Pearson Education Ltd. The Scope of Economics Exhibit 1.1 Examples of Economic Agents Copyright © 2022 Pearson Education Ltd. The Scope of Economics What does it mean if something is “scarce”? Copyright © 2022 Pearson Education Ltd. The Scope of Economics Scarce resources are things that people want, where the quantity that people want often exceeds the quantity that is available. Scarcity is the situation of having unlimited wants in a world of limited resources. Copyright © 2022 Pearson Education Ltd. The Scope of Economics The Definition of Economics Economics studies • how agents make choices among scarce resources, and • how those choices affect society. Copyright © 2022 Pearson Education Ltd. The Scope of Economics Imagine a bowl of chocolate candies… You are instructed to take as many as you want Copyright © 2022 Pearson Education Ltd. The Scope of Economics How many pieces should each person have taken? Copyright © 2022 Pearson Education Ltd. The Scope of Economics Positive Economics Describes what people actually do. Positive economics: • uses objective analysis in the study of economics, • looks into what has happened and what is currently happening in a given economy, and • is based on facts and supported by data. Normative economics Recommends what people, including society, ought to do (value judgements). Copyright © 2022 Pearson Education Ltd. The Scope of Economics Normative Analysis and Public Policy Normative analysis also generates advice to society in general. Copyright © 2022 Pearson Education Ltd. The Scope of Economics Microeconomics The study of how individuals, firms, and governments make choices Macroeconomics The study of the whole economy Copyright © 2022 Pearson Education Ltd. Three Principles of Economics 1. Optimization – making the best choice possible with given information 2. Equilibrium – when everyone is optimizing; no one would be better off with a different choice 3. Empiricism – using data to figure out answers to interesting questions Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints Optimization – making the best choice possible with given information People don’t always succeed in optimizing—we are not calculating machines—but people generally try to optimize. Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints What is the optimal level of crime? Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints All optimization problems involve trade-offs. Trade-offs arise when some benefits must be given up in order to gain others. In other words, “When there is scarcity, then having more of one good thing means necessarily having less of another.” Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints A budget constraint is the set of things that a person can choose to do (or buy) without breaking her budget. Economists use budget constraints to describe trade-offs. Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints You want to buy a $20 book. You want to buy a $1,000 If you drive 3 miles, you can computer. If you drive 3 buy it for $10. miles, you can buy it for $990. Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints What does it cost you to What does it cost you to not drive to buy the book? $10! not drive to buy the computer? Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints Evaluating trade-offs can be difficult, because so many options are under consideration. Opportunity cost is the best alternative use of a resource. Economists sometimes try to put a monetary value on opportunity cost. Copyright © 2022 Pearson Education Ltd. The First Principle of Economics: Optimization Trade-offs and Budget Constraints Costs Benefits Copyright © 2022 Pearson Education Ltd. The Principles and Practice of Economics Evidenced-Based Economics Example: Is Facebook free? Copyright © 2022 Pearson Education Ltd. The Principles and Practice of Economics Evidenced-Based Economics Example: Is Facebook free? U.S. adults are estimated to spend 56 minutes per day on social media platforms in 2019 Given an opportunity cost of time of $13/hour, this amounts to $4,745 per year per U.S. adult: (1 hour/day) x (365 days/yr) x ($13/hour) = $4,745 per yr Copyright © 2022 Pearson Education Ltd. The Principles and Practice of Economics Exhibit 1.3 What Could You Buy with $4,745? Copyright © 2022 Pearson Education Ltd. The Second Principle of Economics: Equilibrium Equilibrium A situation in which no one benefits by changing his/her behavior Copyright © 2022 Pearson Education Ltd. The Second Principle of Economics: Equilibrium What Does Equilibrium Really Mean? Copyright © 2022 Pearson Education Ltd. The Second Principle of Economics: Equilibrium The Free Rider Problem Exists when an individual or group is able to enjoy the benefits of a situation without incurring the costs Copyright © 2022 Pearson Education Ltd. The Second Principle of Economics: Equilibrium Which one is experiencing equilibrium? Copyright © 2022 Pearson Education Ltd. The Second Principle of Economics: Equilibrium Is there an incentive for him to change his behavior? Copyright © 2022 Pearson Education Ltd. The Second Principle of Economics: Equilibrium Is this an equilibrium? NO! The group is NOT in equilibrium! Copyright © 2022 Pearson Education Ltd. The Second Principle of Economics: Equilibrium How do we deal with this Free Rider? 1. Group needs to decide what is fair. 2. Some sort of pressure needs to be put on the free rider to get him to conform. Markets have no mechanism for deciding what is fair. Copyright © 2022 Pearson Education Ltd. The Third Principle of Economics: Empiricism Economists test their ideas with data. We refer to such evidence-based analysis as empiricism. Economists use data to determine whether our theories about human behavior—like optimization and equilibrium—match up with actual human behavior. Copyright © 2022 Pearson Education Ltd. The Third Principle of Economics: Empiricism Crowded beaches and hot temperatures go together. So if we want to make it cooler, keep people from going to the beach! Copyright © 2022 Pearson Education Ltd. Is Economics Good for You? What are the costs and benefits of this course? Copyright © 2022 Pearson Education Ltd. Is Economics Good for You? Costs • Tuition • Other courses • Sleep? • Stress? Benefits • Graduation • Knowledge • Higher earnings potential? • Learning to think like an Economist! Copyright © 2022 Pearson Education Ltd. Evidence-Based Economics Problem Estimate the opportunity cost of going to see a movie in a movie theater. Express this opportunity cost in dollars. Copyright © 2022 Pearson Education Ltd.
