CHAPTER 1 THE ECONOMY IS US

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CHAPTER 1THE ECONOMY IS US!

• Why is the economy us?
• What kind of economy do we have
• Is it superior to other economies?

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Definition of Economics?

• ?

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• Do all countries regardless of type of economy
  deal with scarcity?
• Scarcity of what?
• Even the U.S. has a problem with this?

The scarcity of resources causes most things to
have a cost.  
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Definition of Economics

• The study of how people, both individually and in
  groups, deal with the problem of scarcity.
• Why is economics considered a social science?
• Scarcity forces human beings to make choices
• Why has there always been an economic problem?
• mans wants are virtually unlimited
• scarcity of resources
• Have to prioritize

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Remember

• Society has virtually unlimited wants BUT
  limited resources
• This means prioritization!
• When did you last have to prioritize?
• Companies? Are you seeing them prioritize? Where
• What about government?

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What is your choice? Why?
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Scarcity forces individuals and groups to do what?

• All economies evolve around a basic conflict..
  Want more than we can have.

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• Choices- Trade-offs (giving up one thing to get
  another)
• Example Barrel of crude oil?
• What is thing given up called?

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Reality of Trade-offs

• Just a few of the products getting a start from a
  barrel of oil
• Aspirin furniture not to mention
  gasoline
• Candles hair dryers carpets
• CD players lipstick paints
• Clothing luggage fertilizer
• Compact discs perfumes oils of all kinds
• Computers photographs
• Credit cards piano keys
• Deodorant roller blades
• Diapers shampoo
• Dinnerware soft contact lenses
• DVDs toothpaste
• Eyeglass frames vitamin capsules

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Economics is a Social Science

• What does that mean?

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Rational Self-Interest

• Individuals act as if motivated self interest
• Idea first brought forth- Adam Smith- Wealth of
  Nations. Father of Market Economics.
• Did you arise this a.m. and saygtgtgtgt I want to
  make terrible decisions all day that are NOT in
  my self-interest???

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RATIONAL BEHAVIOR/ CONSUMERS/GOVERNMENT

• If analyzing is so important to economics, what
  are the pit falls in formulation of decisions?
• How were those decisions derived?
• Emotion
• Biases
• Illiteracy
• Political
• What was the influencing factor?
• Some person you hear speak
• Text from some book
• Periodicals
• Peers

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• ARE WE RATIONAL IN OUR DECISION-MAKING?

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Rational Decisions involve all aspects of
society!

• Governments (guns v butter)
• Individuals (buy or rent house)
• Businesses (expand or lay off)
• Non-profits (providing for greater good)

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• Economic Wants
• These wants vary from culture to culture.
• One cultures ideas may not be the goals of
  another cultures.
• Ones we satisfy in the economic system.
• Ones that money will buy.

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Do incentives work?

• Give me some examples.
• What about negative incentives? Any ideas?
• Is Self-interest always a concept of greed?
• Can charitable acts be in ones self-interest?

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Guns vs Butter?

• What does that mean?

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Remember this comes from tax dollars. Cant
pass a hat and get an F72. Choice in government
and choice in the market!

• !

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Economic wants vs non-economic wants

• Economics Wants
• a concept underlying for all mankind.
• things we feel we need to have so we can live
  the style of life we want to enjoy.

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What are some non-economic wants?

• Friendship
• Health
• Self Esteem
• Love

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Two things that allow economies to progress

• This is an Adam Smith concept
• Division of labor
• Specialization of labor

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4 Types of economic wants

• Basic or subsistence
• difference between developed and underdeveloped
  countries is whether basic wants are taken care
  of.) (U.S. poor are not as poor as other poor-
  relative to poor in U.S. difference from absolute
  poverty like in India, Afghanistan, Iraq, or
  Iran.
• U.S. citizens have a higher plan of basic
  wants which includes social wants. These wants
  come out of our culture. Such as
  air-conditioning, television, education, internet
  connections, going to dinner .vast majority of
  our wants are culturally determined.

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• Individual or Collective Wants
• Individual things we want as individuals
• pizza vs hamburgers
• Ford truck vs Chevy truck
• most of our wants are individual, but some are
  Collective such as
• clean water good roads garbage collection
• good schools

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• Public Wants
• Market does not take care of public wants- these
  are decided usually by the federal government
• defense homeland security. We all enjoy the
  benefits at the same time.

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• Consumptive
• Basic or ultimate aim of any economic system is
  consuming goods and services.
• Consumption is how we satisfy our wants.
• But cant completely satisfy all of our wants
  because___??????_ ????

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Economics depends on models

• Models are used to predict behavior.
• Models are simplified replica of real world
• Empirical Evidence and data- material gathered by
  observation or experience. Usually a working
  hypothesis that is testable.
• Enter Ceteris Paribus
• Economicsts models do not relate to how people
  think, but how they behave.

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Behavior Economics may interfere with rational
decision-making

• Unbounded selfishness people interest only in
  their own satisfaction
• Unbounded willpower choices always in line with
  long-term goals
• Unbounded rationality- able to consider every
  relevant choice

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What is Standard of Living?How can you calculate
it?
How well off people are! How well off are you?
Divide total production by population If
production is high and population is low. get
more stuff. 3rd world countries high
population/low production
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What are the three questions every economy asks?

• What to produce?
• How to produce?
• For whom to produce?
• Why do econ texts always include these
  questions???????
• Key is how the society or country answers these
  questions.
• Traditional Economics? What is that?

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Beware of Brainwashing Techniques

• How biased is your textbook?
• What about the newspaper? (inflammatory print,
  how can you tell?)
• Book states High profits may be obscene! Low
  wages may be called explosive. What about the
  terms rich or poor?
• What should we look for?
• What about correlations? Are they causal in
  nature?
• Book states Correlation between income and
  education(old adage is it causal?) What about
  income and salaries?

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Terms to Know

• Positive economics deals with facts what is
• Normative economics involves someones judgment
  what ought to be
• Fallacy of Composition it is not correct.. (the
  validity of a particular generalization for an
  individual or part does not necessarily ensure
  its accuracy for the group or the whole) I stand
  up everyone stands up
• Post Hoc Fallacy Be careful concluding that
  because event A precedes event B that A is the
  cause of B. Wear purple shirt to ballgamewin..
  Need to wear purple shirt again to win. Rooster
  crows before dawn rooster responsible for
  sunrise.
• Rational Behavior based on rational
  self-interest. People make different choices
  because their circumstances and available
  information differs.
• Marginalism extra or less (one more unit, one
  less unit)

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Marginalize in Economics

• Keeping decisions within perspective involves
  marginal analysis.
• Marginal Benefits vs Marginal Costs is the
  benefit greater than the cost or vice-versa.
  Obviously, either can elicit changes in status
  quo.
• Scarcity is the key ingredient here also.

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Think on this!

• Cap and Emissions Legislation
• Marginal Cost (who will bear the burden here?
  What are the implications?
• Marginal Benefit (who will see the
  benefit?)
• Unintended consequences?
• Intended consequences?
• Efficiency MCMB

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Can there be too much education,health insurance,
homeland defense?

• Answer Yes. IF MC gtMB
• If the marginal costs (value of forgone options)
  exceeds their benefit
• then we are sacrificing alternative goods and
  services more valuable at the margin.
• (which means the last place where we consider the
  very last unit of each)
• Hence, margin one more or one less.
• Take small incremental steps in decision-making!

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SO..Are You Rational?What is rational?

• Are you pursuing opportunities to increase your
  utility?
• Are you allocating your time, energy and money to
  maximize your well-being?
• Do you weigh your decisions looking at costs vs
  benefits? If you do you are rational.
• If you do not you may be random or haphazard
  with your decisions.

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So if you are rational, are you selfish?We all
make decisions for a reason

• Answer No.Not necessarily
• Rational in the sense we have discussed means
  that you are looking after your self interest
• Your self-interest decisions will change through
  your years. Maybe it is in your best interest to
  work for yourself after working 15 years for IBM
  Do you just whimsically decide or do you have a
  plan cost of doing so vs benefit.

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Micro vs Macro

• Economists do not formulate economic objectives
• Economists job is to design policies that best
  achieve economic goals. (who establishes those
  goals?) Name one in existence today..
• Microeconomics study of individual behavior in
  the economy by parts that comprise the larger
  economy businesses, individuals, govt agencies.)
  (CocaCola output/hour)
• Macroeconomics study of the aggregate economic
  behavior of economy as a whole (inflation/unemploy
  ment)

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Conventional wisdom accepts economic goals

• Economic growth
• Full Employment
• Economic Efficiency
• Price-level stability
• Economic Freedom
• Equitable Distribution of Income (authors
  bias)
• Economic Security
• Balance of trade

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How are Theories in economics formed?

• Models are used to draw inferences about human
  behavior and then theories are drawn from those
  models
• Variables are held constant, isolation of certain
  tendencies, assumptions ignored, then predictions
  occur within certain parameters.
• Ceteris Paribus emerges..
• Glitches to the above politics and imperfect
  knowledge.
• Remember Economics Social Science

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Any Questions?