What is Economics

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What is Economics
College Notes Supplement
Mathias
Economics: The study of choices made
by people faced with scarcity

A situation in which
resources are limited and
can be used in different
ways so we must
sacrifice one thing for
another.

How many of you had
breakfast?


WHY?
WHY NOT?

WHAT DID YOU GIVE
UP to have or have not?
Breakfast Analogy for Scarcity

We all have the same
amount of time ( a scarce
resource) but we choose
to allocate it differently.


OPPORTUNITY COSTS:
What we give up.
OPPORTUNITY
BENEFITS: What we get in
our decision.
Scarcity

A situation in which
resources are limited
and can be used in
different ways – so we
must sacrifice one
thing for another.
Positive v. Normative Analysis

Positive answers
questions of fact.
“What is?”

Normative answers
“what ought to be.”
EXAMPLE: WHICH IS IT?

Mr. Alumni Bigbucks
has donated 50million dollars to UNL.
It can be used to build
a new football
practice facility OR a
state of the art library
/ technology center.
What would make the positive a
normative analysis?

What do they think
should be built and
why?
TRIP DOWN MEMORY LANE: The
Father of Economics – ADAM SMITH



1723 – 1790
Scottish professor
First to propose
CAPITALISM


The foundation of our
economy
Wrote WEALTH OF
NATIONS in 1776.

The “bible” of our
economy.
Adam Smith’s “radical” ideas.

Let the people decide
for themselves the
three basic economic
questions:



What to produce?
How to produce?
For whom to produce?
What was the INCENTIVES for
people to decide the 3 questions?

PROFIT!


It gives incentive to
others to work.
Psychic Income

The “personal
satisfaction” in
working.
Adam Smith’s “radical” ideas

Government should
stay out of people’s
way.




Not tax too much.
Let people enjoy their
money how they want.
Don’t regulate
business.
LAISSEZ-FAIRE
Adam Smith didn’t mean NO
government!

Provide
INFRASTRUCTURE:






Police and Fire
protection
Public Education
Transportation (roads)
Communications
(mail)
Military
Civil Court System
Adam Smith’s INVISIBLE HAND

Working in one’s own
SELF-INTEREST is
also other people’s
SELF-INTEREST.

Self interest is NOT
selfishness.
The Invisible Hand

Individuals, business
firms and governments
come up with similar
answers to:



What goods and services
do we produce?
How do we produce these
goods and services?
Who consumes the goods
and services that are
produced?
Economic Way of Thinking


ASSUMPTION 1:
People act in their
individual selfinterest.
ASSUMPTION 2:
People make
informed decisions.

Act in what we think is
a rational manner.
Economic Way of Thinking

The CETERIS
PARIBUS is that
when we consider
changes in one
variable we hold all
other variables
constant.
Economic Way of Thinking

THINKING ON MARGIN:

Small, incremental
changes to determine if it is
desirable to change the
level of economic activity.

Adding on one more
worker on the assembly
line.


Do we get more
product?
Eating the fourth piece of
pizza when you aren’t
hungry!
Productions Possibilities Curve

A curve that shows
the possible
combinations of good
and services
available to an
economy GIVEN that
all productive
resources are fully
employed and
EFFICIENTLY used.
PPCs can show what is given up
as well
PPCs can SHIFT if there is a
change to:
Natural Resources





Labor (physical / mental
effort)
Physical Capital
(machines, building,
roads, etc)
Human Capital –
knowledge and skills.
Entrepreneurship – effort
to coordinate production
and sales.

ALSO comes up with the
idea of what to produce
and how to produce!
Test Your Knowledge!

Economics is best defined as the study of:




Financial decision-making
How consumers make purchasing decisions
Choices made by people faced with scarcity
Inflation, unemployment, and economic
growth
Economics
Financial
How
is best defined as the study of:
decision-making
consumers make purchasing decisions
Choices
made by people faced with
scarcity
Inflation,
unemployment, and economic growth
Test Your Knowledge

Because resources are limited:




Only the very wealthy can get everything they
want.
Firms will be forced out of business.
The availability of goods will be limited but the
availability of services will not.
People must make choices
Because
Only
resources are limited:
the very wealthy can get everything they
want.
Firms
will be forced out of business.
The
availability of goods will be limited but the
availability of services will not.
People
must make choices
Check Your Knowledge!

Resources are all the following EXCEPT:




Unlimited and in abundance.
The things we use to produce goods and
services.
Limited in quantity and can be used in
different ways.
Scarce and therefore requiring choices to be
made.

Resources are all the following EXCEPT:
 Unlimited and in abundance.



The things we use to produce goods and
services.
Limited in quantity and can be used in
different ways.
Scarce and therefore requiring choices to be
made.
Check Your Knowledge!

An arrangement that allows buyers and
sellers to exchange things is called:




Contract
Market
Money
efficient

An arrangement that allows buyers and
sellers to exchange things is called:

Contract

Market

Money
efficient

Check Your Knowledge!

In which of the following markets is time
exchanged for money?




Consumer market
Political market
Labor market
None of the above.

In which of the following markets is time
exchanged for money?

Consumer market
Political market

Labor market

None of the above.

Check Your Knowledge!

Markets perform all the following functions
EXCEPT:




Determining the prices of goods and services.
Helping firms decide what to produce
Helping firms decide how to produce
All the above are functions that markets
perform.

Markets perform all the following functions
EXCEPT:




Determining the prices of goods and services.
Helping firms decide what to produce
Helping firms decide how to produce
All the above are functions that
markets perform.
An Adam Smith Question

Adam Smith used the metaphor of the
invisible hand to explain how:




Markets mismatch buyers and sellers.
The butcher and the baker are benevolent
People acting in their own self-interest
promote the interest of society as a whole.
The production possibilities frontier illustrates
efficient outcomes.

Adam Smith used the metaphor of the invisible
hand to explain how:


Markets mismatch buyers and sellers.
The butcher and the baker are benevolent

People acting in their own self-interest
promote the interest of society as a whole.

The production possibilities frontier illustrates efficient
outcomes.
Check Your Knowledge!

Deciding if a company will produce cars by
manual labor or robotics answers the
economic question of:




Who consumes the products produced?
What will be produced?
Where will the products produced by
consumed?
How will we produce it?

Deciding if a company will produce cars by
manual labor or robotics answers the
economic question of:




Who consumes the products produced?
What will be produced?
Where will the products produced by
consumed?
How will we produce it?
Positive v. Normative Economics

Positive Economics:




Is the focus of most modern economic
reasoning.
Concerns the forces that affect economic
activity
Predicts the consequences of alternative
actions
All of the above is correct.
Positive v. Normative Economics

Positive Economics:




Is the focus of most modern economic
reasoning.
Concerns the forces that affect economic
activity
Predicts the consequences of alternative
actions
All of the above is correct.
Positive v. Normative Economics

Which of the following is a question answered
with normative economic reasoning?




If the college offers free parking for students, will
more students drive to campus?
If the college provided more financial aid assistance,
would more students benefit?
If the college increases tuition, would class size
decline?
Should the college cut tuition to stimulate
enrollments?
Positive v. Normative Economics

Which of the following is a question answered
with normative economic reasoning?




If the college offers free parking for students, will
more students drive to campus?
If the college provided more financial aid assistance,
would more students benefit?
If the college increases tuition, would class size
decline?
Should the college cut tuition to
stimulate enrollments?
Question:

To think at the margin means to consider:




How nothing remains constant over time.
How a small change in one variable affects
another variable.
How people behave in their own self-interest.
How people will decide what to purchase.
Answer!

To think at the margin means to consider:

How nothing remains constant over time.

How a small change in one variable
affects another variable.

How people behave in their own self-interest.
How people will decide what to purchase.

LAST!

A student has a D grade average in her
accounting course and a B grade average
in Economics. She decides to study an
extra hour for her accounting exam.
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