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WHAT IS ECONOMICS?

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Economics is…..

the social science that studies the production, distribution, and consumption of goods and services

An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area

an economy delivers the goods

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The Economy of the United States:

US has a market economy production and consumption are the

result of decentralized decisions by many firms and individuals

opposite is a command economy – where there is a centralized authority making decisions about production and consumption (Soviet Union)

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Adam Smith, The Wealth of Nations

individuals, in pursuing their own interests, ended up serving the interests of society as a whole

invisible hand – refers to the way a market economy manages to harness the power of self-interest for the good of society

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Microeconomics:

Microeconomics individuals pursuing their own interests often

do promote the interests of society as a whole Problems though --- Market Failure is when

the individual pursuit of self-interest leads to bad results for society as a whole

Fluctuations series of ups and downs which are a feature

of modern economies the economy just does not always run

smoothly recessions – economic downturns

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Macroeconomics:

concerned with the overall ups and downs of the economy

economic growth is the “growing” ability of the economy to produce goods and services

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THE ECONOMIC PERSPECTIVE

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The Economic Perspective: Economic perspective is the

economic way of thinking

There are four economic principles that underlie the economics of a individual choice

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1. Resources are scarce

A resource is anything that can be used to produce something else

Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers)

Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it ex. natural resources, limited quantity of

human resources, even clean air and water

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2. The real cost of something is what you must give up to get it opportunity cost – what you

must give up in order to get it

every choice you make means forgoing some other alternative

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3. “How much?” is a decision at the margin

usually the question Is not “whether” but “how much”

this is a question whose answer hinges on the costs and benefits of dong a bit more or bit less

decision usually involves a trade-off – a comparison of the costs and benefits

marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis

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4. People usually exploit opportunities to make themselves better off it is a good bet that people will

exploit opportunities to make themselves better off

incentives – anything that offers rewards to people who change their behavior

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THE ECONOMIC WAY OF THINKING

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1. Everything has a cost

“there is no such thing as a free lunch”

Everything action costs someone time, effort or lost opportunities to do something else

Opportunity costs

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2. People choose for good reasons

Everyone faces choices and everyone should chose the alternative that gives them the most advantageous combination of costs and benefits

Normative economics –economic analysis that makes predictions about the way the economy should work

Positive economics – economic analysis that describes the way the economy actually works

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3. Incentives matter

Economics is all about incentives Supply and demand analysis if

about incentives Theory of the firm and factor

markets are about incentives Government decision making is

about incentives When incentives change, people’s

behavior changes in predictable ways

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4. People create economic systems to influence choices and incentives Cooperation among people is governed

by written and unwritten rules that are the core of an economic system

As rules change, incentives and behavior change

The success of market systems and the failures of communism are rooted in incentives

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5. People gain from voluntary trade

Economics is about trade People trade when they believe

the trade makes them better off, if there are no benefits, they won’t trade

People, not countries, trade Market system is about trade Economics is about trade

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6. Economic thinking is marginal thinking

Marginal choices involves the effects of additions and subtractions from current conditions

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7. The value of a good or service is affected by people’s choices

Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers

Price of a good or service is set by supply and demand

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8. Economic actions create secondary effects

Good economics involves analyzing secondary effects

Example: Rent controls make apartments more

affordable to some consumers Controls make it less profitable to

build and maintain apartments Secondary effect is a shortage of

apartments and houses for rent

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9. The test of a theory is its ability to predict correctly

If the theory correctly predicts the consequences of actions it is a good theory

Nothing is “good in theory but bad in practice”

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WHAT IS ECONOMICS?

24

Economics is…..

the social science that studies the production, distribution, and consumption of goods and services

An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area

25

The Economy of the United States:

US has a market economy production and consumption are the

result of decentralized decisions by many firms and individuals

individual consumers make what they think will be most profitable

each consumer buys what he or she chooses

opposite is a command economy

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Adam Smith, The Wealth of Nations

individuals, in pursuing their own interests, ended up serving the interests of society as a whole

invisible hand –

27

Microeconomics:

Microeconomics individuals pursuing their own interests

often do promote the interests of society as a whole

Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole

Fluctuations series of ups and downs which are a feature

of modern economies the economy just does not always run

smoothly

28

Macroeconomics:

concerned with the overall ups and downs of the economy

economic growth is the “growing” ability of the economy to produce goods and services

29

THE ECONOMIC PERSPECTIVE

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The Economic Perspective:

Economic perspective is the economic way of thinking

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1. Resources are scarce

A resource is anything that can be used to produce something else

Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers)

Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it

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2. The real cost of something is what you must give up to get it

opportunity cost –

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3. “How much?” is a decision at the margin

usually the question is not “whether” but “how much”

decision usually involves a trade-off – a comparison of the costs and benefits

marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis

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4. People usually exploit opportunities to make themselves better off

incentives – anything that offers rewards to people who change their behavior

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THE ECONOMIC WAY OF THINKING

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1. Everything has a cost

“there is no such thing as a free lunch”

Everything action costs someone time, effort or lost opportunities to do something else

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2. People choose for good reasons

Normative economics –economic analysis that makes predictions about the way the economy should work

Positive economics – economic analysis that describes the way the economy actually works

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3. Incentives matter

Economics is all about incentives

When incentives change, people’s behavior changes in predictable ways

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4. People create economic systems to influence choices and incentives

Cooperation among people is governed by written and unwritten rules that are the core of an economic system

As rules change, incentives and behavior change

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5. People gain from voluntary trade

Economics is about trade

People, not countries, trade

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6. Economic thinking is marginal thinking

Marginal choices involves the effects of additions and subtractions from current conditions

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7. The value of a good or service is affected by people’s choices

Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers

Price of a good or service is set by supply and demand

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8. Economic actions create secondary effects

Good economics involves analyzing secondary effects

Example:

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9. The test of a theory is its ability to predict correctly

If the theory correctly predicts the consequences of actions it is a good theory

Nothing is “good in theory but bad in practice”