What is economics?
The study of human behavior…..
How is that different from
Psychology or Sociology?
How is that different from
Psychology or Sociology?
Economics…the study of human
behavior and the choices that we
make.
Sociology…the study of human
behavior when there are no choices to
make….
What is economics?
The study of human behavior…..
….in the presence of constraints.
What constrains us?
Constraints:
• Society’s norms
• Money
• Parents….
• Time
Why do we have constraints?
• Scarcity — not enough of a good, freely in nature,
as we would like.
Where do constraints come from?
 Needs
 Desires-Unlimited
 Resources--LIMITED
Resources:
• Anything used to produce other goods and
services….
– Human—knowledge, experience, talent
– Physical—tools, machinery, factories
– Natural—iron ore, oceans, rivers, land
Class Work: 1.1
• Are scarcity and poverty the same thing?
Explain using the terms objective or
subjective OR positive or normative, your
choice.
Scarcity v. Poverty
• Positive v. Normative Economics
– Positive—fact, can be tested
– Normative—opinion, value judgment
• Objective v. Subjective Economics
– Objective—fact, can be tested
– Subjective—opinion, value judgment
Scarcity necessitates:
• Rationing—allocating a scarce resource
among those who want it
– Types of rationing:
• First come, first served--inefficient
• Subjective (prettiest, tallest, shortest) --
•
arbitrary
PRICE!!! -- efficient, non-arbitrary!!
• Competition —
• By price—promotes income generation
• Makes us better off…better, cheaper, faster
Thus: Scarcity ≠ Poverty
• Scarcity—objective definition
• Poverty—subjective definition; arbitrary
income amount
• Is life better today than 100 years ago?
John Stossel: Report -- is life getting
worse?
So, are we better off or worse off
now than 50 to 100 years ago?
By all OBJECTIVE standards, we
are better off.
So, are we better off or worse off?
If you were born in:
1900-1920 1995-1998
Life Expectancy (in years)
Infant mortality (deaths per 1000 live births)
Per Capita GDP (1998 dollars)
High School Completion (% of
47
100
$4,800
22
77
7
$31,500
88
Computer Speed
0.02
700
adults)
(computations / sec)
(1976)
Unemployment Rate
?
?
Inflation
?
?
(2000+ today)
Conclusion:
• We are SO fortunate….
– This country and this time of our lives
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
1. There is ALWAYS a tradeoff:
– We call that tradeoff our Opportunity Cost
• the highest valued option given up when you
choose one thing over another
– Spouse
– Lunch
– Coming to class
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
2. Individuals choose purposefully,
therefore economically…
• If you have 3 choices, which do you
choose? How to you prioritize them?
•Highest utility, lowest cost
•Most BANG for our Buck!
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
3. Incentives matter: do I want you to
come to class? How do you know?
Parking in handicapped spaces…how do
you know?
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
4. Economic thinking is marginal thinking
People make decisions at the margin.
“My poor mother….she had to choose
between eating and buying her prescription
drugs last month!!” Lloyd Benson, running
for VP of US
Fundamental lack of understanding of the
difference between total costs and benefits
vs. marginal costs and benefits.
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
5. Information is a costly good.
Rational Ignorance — remaining ignorant
about something where the cost of
obtaining the knowledge is greater than
the benefit of learning it.
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
• Remember the secondary effects—
– AFDC payments that increased the divorce
rate
– Rent controls that destroy the inner city
– Increases in the money supply that give
people more income but eventually result in
higher inflation
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
• The value of a good or service is subjective
– What is something worth? Whatever
someone is willing to pay for it.
– You may value green space more than a
paved parking lot or you may value the
parking lot more.
– Economics tries not to make value judgments
but instead looks at the measurable effects of,
say, paving a parking lot.
The Economic Way of Thinking
(8 Guideposts to Economic Thinking)
• The test of a theory is its ability to predict.
Is economics a science? Can you form
hypotheses, test them and draw
conclusions? Yes, then economic thinking
is scientific thinking.
Pitfalls to avoid in economic
thinking
• Violating the ceteris paribus condition
-- ceteris paribus — all else equal, other
things constant
-- if you forget this, it can lead to
erroneous conclusions.
-- You know that income is growing in the US but
you notice that people are buying fewer radios.
How can that be? MP3 players
-- If 2 things are changing at once, predicting is
much more difficult.
Pitfalls to avoid in economic
thinking
• Just because something seems like a good
idea doesn’t mean it is (good intentions do
not guarantee good outcomes).
-- rent controls
-- FAA regs to require all children to wear
safety belts (requiring their own seat)
Pitfalls to avoid in economic
thinking
• Association is not causation –
--every time it rains I see folks with
umbrellas. Conclusion: umbrellas cause
rain.
Pitfalls to avoid in economic
thinking
• The Fallacy of Composition – just because
something is good for one, does not make
it good for all
– One farmer has a bumper crop and his
income rises. ALL farmers have a bumper
crop….
– I leave work early to beat the rush.
EVERYONE leaves work early…..
Class Work: 1.2
Give me another example of
violating the “association is
not causation” pitfall.