Lecture Ch 1

8/10/2019 Lecture Ch 1

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WHAT IS

ECONOMICS?

1


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1

Course Assessment

2 assignments: 15%

Midterm Exam: 25% (19:00 -- 21:00 Oct. 17th,

2014)1 quiz: 20%

Final exam: 35%

Attendance: 5%


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Chapter One: What Is Economics?

After studying this chapter, you should be ableto:

Define economicsand distinguish between

microeconomics and macroeconomics

Explain the two big questions of economics

Explain the key ideas that define the economicway of thinking

Explain how economistsgo about their work as

social scientists and policy advisers


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What is Economics?

Scarcity(

)Our inability to satisfy all our wants

Resources are scarce

means that society has limited resourcesandtherefore cannot produce all the goods and

services people wish to have


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What is Economics?

Choice

Because we face scarcity, we must make choices

Choice, the act of selecting among alternatives, isthe logical consequence of scarcity

Scarcityforces us to choose among availablealternatives.

Incentive

An incentiveis a reward that encourages an actionor a penalty that discourages an action.

Economics is about the study of choicesand theirconsequences.


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What is Economics?

Economics

is the social science

studies the choicesthat individuals,

businesses, governments, and entiresocieties makeas they cope with scarcity

studies the incentivesthat influence and

reconcile those choices.


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What is Economics?

Economics divides in two main parts:

Microeconomics

Macroeconomics


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What is Economics?

Microeconomicsis the study of choicesthat individuals and businesses make, the

waythose choices interactin markets, and

the influenceof governments.

An example of a microeconomic question

is: Why are people buying more e-books and fewer

hard copy books?


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What is Economics?

Macroeconomicsis the study of theperformanceof the national and

global economies.An example of a macroeconomic

question is:

Why is the unemployment rate in theUnited States so high?


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Two Big Economic Questions

About production Goods and services

They are the objects that people valueand produce to satisfy human wants.


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Two Big Economic Questions

1. How do choices end up determiningwhat, how, andfor whomgoods and

services get produced?2. When do choices made in the pursuit

of self-interestalso promote the social

interest?


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Two Big Economic Questions:

Question 1

What are produced?

How to be produced?

For whom produced?


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What are produced?

U.S. production Agriculture (Primary

industry ): Less than

1% of total U.S.

production;

Manufactured goods

(secondary industry):

for 22%; Services(tertiary

industry): 77%.

China production

Agriculture: 11% of

total China production;

Manufactured goods:

47%;

Services: 43%.


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How to be produced?

Goods and services are produced by usingproductive resources that economists callfactors of production.

Factors of production are grouped into four

categories:

Land

Labor

Capital Entrepreneurship


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How to be produced?

Land: The gifts of nature that we use to

produce goods and services. Labor: The work time and work effort that

people devote to producing goods andservices.

Capital: The tools, instruments, machines,buildings, and other constructions thatbusinesses use to produce goods andservices (financial capital is not a factor of

production). Entrepreneurship: The human resource that

organizes land, labor, and capital.


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How to be produced?

The qualityoflabordepends onhuman capital,which is the

knowledge andskill that peopleobtain fromeducation, on-

the-job training,and workexperience.


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For Whom Produced?

Who gets the goods and services dependson the incomesthat people earn.

People earn their income by selling the

service of the factors of production theyown

Land earns rent.

Labor earns wages. Capital earns interest.

Entrepreneurship earns profit.


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For Whom Produced?

Which factor of production earns the most

income?

Labor!

In the U.S., in 2011, wages were 68%of total

income

The income from land, capital and

entrepreneurship was 32%


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Question 2

Does the Pursuit of Self-InterestUnintentionally

Promote the Social Interest?

Every day, people make economic choices that

result in What, How, and For Whomgoods and

services are produced.

These choices are made by people who are

pursuing their self-interest.

Are they promoting the social interest?


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Question 2

Does the Pursuit of Self-InterestUnintentionally Promote the Social Interest?

Self-Interest

You make choices that are in your self-interest choices that you think are best for you.

Social Interest

Choices that are best for society as a whole.

Social interest has two dimensions:

Efficiency

Equity


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Question 2

Efficiency and Social Interest

Resource use is efficientif it is notpossible tomake someone better off without makingsomeone else worse off.

Equityis fairness, but economists have avariety of views about what is fair.

Fair Shares and Social Interest

The idea that the social interest requires fairshares is a deeply held one.

But what isfair?


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Question 2

Four topics that generate discussion and

that illustrate tension betweenself-interest

and social interest are:

Globalization

The information-age monopolies

Climate change

Economic instability


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Question 2

Globalization Globalizationmeans the expansion of

international trade, borrowing and lending,and investment.

Globalization is in the self-interest ofconsumerswho buy low-cost importedgoods and services.

Globalization is also in the self-interest of themultinational firms that produce in low-costregions and sell in high-price regions.

Is globalization in the social interest?


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Question 2

The Information-Age Monopolies The technological change of the past forty years has

been called the Information Revolution.

The information revolution has clearly served your self-

interest: It has provided your cell-phone, laptop, loads

of handy applications, and the Internet.

It has also served the self-interest of Bill Gates of

Microsoft and Gordon Moore of Intel, both of whom

have seen their wealth soar.

But did the information revolution serve the social

interest?


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Question 2

Every day, when you make self-interested choices touse electricity and gasoline, you contribute to carbonemissions.

You leave your carbon footprint.

You can lessen your carbon footprint bywalking, riding abike, taking a cold shower, or planting a tree.

But can each one of us be relied upon to make decisionsthat affect the Earths carbon-dioxide concentration in

the social interest?

Can governments change the incentives we face sothat our self-interested choices are also in the socialinterest?


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Question 2

Economic Instability

Between 1993 and 2007, the U.S. and global economies

expandedstrongly. Incomesin the United States

increased by 30 percent and incomesin China tripled. But in August 2007, a period of financial stress began

that soon gripped the entire global financial system.

The choices of banks to borrow and lend and the

choices of people and businesses to lend to and borrowfrom banks are made in self-interest.

Does this lending and borrowing serve the social

interest?


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The Economic Way of Thinking

Six key ideas define the economic way of

thinking: A choice is a tradeoff.

People make rational choicesby comparing

benefits and costs. Benefitis what you gainfrom something.

Cost is what you must give up to get something.

Most choices are how-much choices made atthe margin.

Choices respond to incentives.


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A Choice Is a Tradeoff

Theeconomic way of thinkingplaces scarcityand its implication, choice, at center stage.

You can think about every choice as a tradeoff:

an exchangegiving up one thing to getsomething else.

On Saturday night, will you study or have fun?

You cant study and have fun at the same time,so you must make a choice.

Whatever you choose, you could have chosensomething else. Your choice is a tradeoff.


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People face tradeoffs.

There is no such thing as a free lunch!


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To get one thing, we usually have to give upanother thing


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To get one thing, we usually have to give upanother thing

Guns v. butter

Food v. clothing

Efficiency v. equity

Making decisions requires trading offone goal against another


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People face tradeoffs

Efficiencymeans society getsthe mostthat it can

from its scarceresources.

Equitymeans the benefitsof those resources aredistributedfairly among the members of society.

Efficiency v.Equity


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After graduate from UM, you will face the trade-off betweengoing to work and taking a further

study


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The basic ideas of scarcityand choice, along

with the trade-offswe must face as decision

makers, are the basic ingredients of

economic analysis


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Questions

Which of the following involves a trade-off?

A. buying a new car

B. going to college

C. watching a football game on Saturday afternoon

D. taking a snap in class

E. all of the above


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Making a Rational Choice A rational choiceis one that compares costs

and benefitsand achieves the greatest benefit

over cost for the person making the choice. The idea of rational choice provides an answer

to the first question: What goods and services

will be produced and in what quantities?

The answer is: Those that people rationally

choose to buy!


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Howdo people choose rationally?

The answers turn on benefits and costs.

Benefit: What you Gain

The benefit of something is the gain or

pleasure that it brings and is determined by

preferences

Preferences are what a person likes and

dislikes and the intensity of those feelings.


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Questions

Which of the following involves a trade-off?

A. buying a new car

B. going to college

C. watching a football game on Saturday afternoon

D. taking a snap in class

E. all of the above


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The cost of something is what you give

up to get it.

Decisions require comparing costsand

benefits

)of alternatives.

Whether to go to college or to work?

Whether to go to class or sleep in?


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Opportunity Cost

The use of scarce resourcesto produce a good isalways costly.

Someone must give upsomething if we are tohave more of a scarce good.

The highest valued alternativethat must besacrificed is the opportunity costof the choice.


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Opportunity Cost

Individuals choose purposefully;therefore they will economize.

Economizing:

gaining a specific benefit at the least

possiblecost.


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Opportunity Cost

Th C t f S thi I Wh t Y


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The Cost of Something Is What YouGive Up to Get It.

Yao Mingchose to skipcollege andgo to NBAwhere he hasearned

millions ofdollars.

Benefits

Costs


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Opportunity Cost: Economic Development and

Environment

Opportunity Cost


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Opportunity Cost

Suppose you find $20. If you choose to use the $20 to go

to the football game, your opportunity cost of going to

the game is:A. nothing, because you found the money

B. $20 (because you could have used the $20 to buy other things)

C $20 (because you could have used the $20 to buy other things) plusthe value of your time spend at the game

D. $20 (because you could have used the $20 to buy other things)

plus the value of your time spend at the game, plus the cost of the

dinner you purchased at the game

E. none of the above


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Choosing at the Margin

You can allocate the next hour betweenstudying

and instant messaging your friends.

The choice is not all or nothing, but you must

decide how many minutes to allocate to each

activity.

To make this decision, you comparethe benefitof a little bit more study time with its costyou

make your choice at the margin.

h i f hi ki


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To make a choice at themargin, you evaluate

the consequences of making incrementalchangesin the use of your time.

The benefit from pursuing an incrementalincrease in an activity is its marginal benefit.

The opportunity cost of pursuing anincremental increase in an activity is itsmarginal cost.

If the marginal benefit from an incrementalincrease in an activity exceedsits marginalcost, your rational choice is to do more of thatactivity.


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Rational people think at the margin

Economics normally assume that people are

rational ()

Rational peopleare self-interestandchoosethe more favorable alternative


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Marginal changesaresmall, incremental

adjustments to an existing plan of action.

People make decisions by comparing costs

and benefitsat the margin


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Rational people take an action if and only if

marginal benefit (

) of the action

exceedsthe marginal cost ()

Economic reasoning focuses onthe impact of

marginalchanges.

Decisions will be based on marginal costsandmarginal benefits


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Choices Respond to Incentives A changein marginal cost or a changein

marginal benefit changes the incentivesthat we face and leads us to change our

choice. The central idea of economics is that we

can predict how choices will change by

looking at changes in incentives. Incentives are also the key to reconciling

self-interest and the social interest.


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Two Roles of Economists

When economists are trying to explain the

world, they are scientists.

When they are trying to change the world,

they arepolicymakers.


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Positiveversus NormativeAnalysis

Positive statements() are statements that

describe the world as it is.

Called descriptiveanalysis(

)

Normative statements() are statements about

howthe world should be.

Calledprescriptive analysis( )


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Positiveversus NormativeAnalysis

Positive economicsconcerns the forces that affect

economic activity, and predictsthe consequences of

alternative actions

It is the focusof most modern economic reasoning.

Normative economicsanswers the question: What ought

to be?

Most economists shy away from normativequestions.


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?

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Positive orNormative Statements?

An increase in the minimum wage willcause a

decrease in employment among the least-skilled.

Positive


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?

?

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Positiveor NormativeStatements?

Higherfederal budget deficits will cause

interest rates to increase.

Positive


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?

??

Positiveor Normative Statements?

State governments should be allowed to collect

from tobacco companies the costs of treatingsmoking-related illnesses among the poor.

Normative

Economics:


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Economics:

A Social Science and Policy Tool

Economist as Social Scientist Economists two types of statement:

Positive statements

Normative statements Apositivestatement can be tested by checking it

against facts.

A normativestatement expresses an opinion andcannot be tested.

Economics:


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Economics:


Unscrambling Cause and Effect

The task of economic science is

to discover positive statements that are

consistent with what we observe in the worldand that enable us to understand how theeconomic world works.

Economists create and test economic models.

An economic model

is a descriptionof some aspect of the economicworld that includes only those features that are

needed for the purpose at hand.


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Economics:


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Economist as Policy Adviser

Economics is a toolkit for advisinggovernmentsand businesses and for making personaldecisions.

All the policy questions on which economistsprovide advice involve a blend of the positive andthe normative.

Economics cant help with the normative partthe goal.

But for a given goal, economics provides amethod of evaluating alternative solutionscomparing marginal benefits and marginal costs.

Lecture Ch 1

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