Introduction to Economics
D.W. Hedrick
Instructional Method
• Primarily Lecture format with discussion,
simulations, and video presentations
• Constructive discussion is welcomed
• Grading is based on Aplia Homeworks
(20%), five of seven quizzes (20%), three
midterms (20% each), and an optional
comprehensive final (replaces lowest
midterm) – NO MAKEUPS GIVEN
Instructional Method
• Suggestions for the study of economics
– Read the book before coming to class
– Recopy lectures and reread the book within
several hours of class
– Identify what you don’t understand
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Ask questions in class
Use the Aplia and the study guide (optional)
Go to tutors in supplemental instruction (if offered)
Visit the professor during office hours
Definition of Economics
• Mankiw’s definition
– How Society manages its scarce resources
• Hedrick’s definition
– How society chooses to allocate its scarce resources
among competing demands to best satisfy human wants
• Alternative definitions
– Economics is the study of choice.
– Economics is what economist do.
– Wikipedia's perspective
Scarcity and the Fundamental
Questions of Economics
• Scarcity : Unlimited wants versus limited
resources
• Choices and tradeoffs
• Opportunity Costs
• All societies must answer the WHFM questions
– What is to be produced?
– How is to be produced?
– For whom will it be produced?
Economics as a Science
• The Scientific Method
– Observation →Hypothesis →Testing
– Observation: identifying and measuring important variables –
orderly loss of information
– Hypothesis: educated guesses about cause and effect with the
variables
• Theories
• Models: realism or usefulness
– Testing: theories can’t be proven and are supported by repeated
failed attempts to disprove them.
• Microeconomics vs. Macroeconomics
• The Assumption of Rational Behavior
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Max TNB = TB – TC
Boxes Example
MB=MC rule
People respond to incentives
Limits to the use of rational behavior (e.g. axe murders)
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Microeconomics versus macroeconomics
Normative vs. positive approaches
A brief history of economic thinking
The language of economics
Mankiw’sTen Principles of
Economic Thinking
Categories of Basic Principles of
Economics
• How people make decisions?
• How people interact?
• How does the economy work overall?
How People Make Decisions
• Principle #1 - People face tradeoffs
– Time allocation – an example of tradeoffs
– Production Possibilities Frontier
– Efficiency versus equity
How People Make Decisions
• Principle #2 - The cost of something is what
you have to give up to get it
– Opportunity costs come from Von Weiser, a
German economist late 1800s
– Opportunity costs are independent of monetary
units
– TINSTAAFL
– The real costs of going to college
How People Make Decisions
• Principle #3 - Rational people think at the
margin
– Rational or irrational decision-making
– Marginal benefits and costs versus total benefits
and costs
– Weighing marginal costs and benefits leads to
maximizing net benefits (total welfare)
How People Make Decisions
• Principle #4 –People respond to incentives
– Reactions to changes in marginal benefits and costs
– Increases (decreases) in marginal benefits mean more
(less) of an activity
– Increases (decreases) in marginal costs mean less
(more) of an activity
– Example of seat belts leading to increased speeds
– Example of SUV (with child car seat) in Issaquah
How People Interact
• Principle #5 - Trade can make everybody
better off
– Adam Smith author of the “An Inquiry into the
Causes and Consequences of the Wealth of
Nations” 1776
– Gains from the division of labor and
specialization
– Mercantilists perspectives
– Example of why Ellensburgians should trade
with others
How People Interact
• Principle #6 - Markets are usually a good
way of organizing economic activity
– Feudal times and haciendas in the new world
– The power of trade: cooperation versus conflict
– Markets: prices and quantities traded, typical
and abstract
How People Interact
• Principle #6 - Markets are usually a good
way of organizing economic activity
creativity and productivity and resource
allocation
– “Failure” of centrally planned economies
– “set it and forget it” becomes “compete or be
obsolete”
How People Interact
• Principle #7 Governments can sometimes
improve market outcomes
– Market signals can fail to allocate resources
efficiently or equitably
– Public goods, the exclusion principle, the freerider problem and non-rival consumption
– External costs and benefits
– Examples: vaccines, education, pollution
How People Interact
• Principle #7 Governments can sometimes
improve market outcomes
– Equitable or fair distribution of resources
– Efficiency and equity: the pie analogy
– Government Failure: is government
intervention always the proper solution?
How the Economy works as a
Whole
• Principle # 8 – A country’s standard of living
depends upon its ability to produce goods and
services
– Adam Smith’s “An Inquiry into the Nature and the
Consequences of the Wealth of Nations”
– Materialism – more toys mean more welfare
– wealth: a necessary or sufficient condition for
happiness (are rich people happier, children with lots of
toys)
How the Economy works as a
Whole
• Principle # 8 – A country’s standard of
living depends upon its ability to produce
goods and services
– leisure time and productivity
– the factors of production: land or natural
resources, labor, capital, entrepreneurship
– technology and productivity
– the Rule of 72 and growth rates
How the Economy works as a
Whole
• Principle #9 – The general level of prices
rises when the government prints and
distributes too much money
– Definition of money, and economic language
How the Economy works as a
Whole
• Principle #9 – The general level of prices
rises when the government prints and
distributes too much money
– Examples: “Not worth a continental” and
Argentina
– Establish of the Federal Reserve and the
introduction of sustained inflation in the US
How the Economy works as a
Whole
• Principle #10 – Society faces a short-run
tradeoff between inflation and
unemployment
– Short-run and the long-run
– Demand and supply shocks
– Short-run increases (decreases) in output above
(below) long-run potential output lead to
adjustments
How the Economy works as a
Whole
• Principle #10 – Society faces a short-run
tradeoff between inflation and
unemployment
– Counter-cyclical stabilization versus procyclical destabilization
– Political business cycles