What is Economics

1
What is Economics ?

• Economics is the study of mankind in the
  everyday business of life.
• Alfred Marshall (1842 -1924)

2
What Is Economics ?
Economics is the study of choices made by
people who are faced with scarcity. Scarcity is
a situation in which resources are limited and
have alternative uses.
3
CHOICES
GOODS
WORK
4
ECONOMIC QUESTIONS

• What goods and services do we produce ?
• How do we produce these goods and services ?
• Who consumes the goods and services produced ?

5
SCARCITY AND PRODUCTION POSSIBILITY CURVES

• Production Possibility Curve
• A visual representation of tradeoffs that
  arise in an economy that produces two goods.
• A picture of the choices which can be made
  when considering the production of two goods.

6
PRODUCTION POSSIBILITY CURVE(FRONTIER)

• A production possibility curve shows how all
  of an economies available RESOURCES can be used
  to produce various combinations of goods and
  services.

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WHAT ARE RESOURCES?

• Labor
• -- human effort used to produce
• Physical capital
• -- machines, buildings equipment
• Human Capital
• -- knowledge and skills acquired by workers
• Natural Resources (LAND)
• -- things created by acts of nature and used
  to produce

8
Y
GRAPHING POSSIBILITIES
PRODUCTION POSSIBILITY CURVE
Thousands of computers per year
e
UNATTAINABLE
380
f
ATTAINABLE
300
i (inferior) (idle resources)
200
X
4
5
2
Number of Space Missions Per Year
9
SCARCITY

• The limit to available resources
• Illustrated by the envelope of the production
  possibility curve.
• To obtain more of one of the two choices, one
  must give up more of the other choice.

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MACROECONOMICS vs MICROECONOMICS
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THE STUDY OF

• (MICROECONOMICS)
• choices made by individual consumers and firms
  how these decisions affect the market for a
  particular good or service.

• (MACROECONOMICS)
• The nations economy as a whole. Issues include
• unemployment
• inflation
• budget deficit
• trade deficit

12
MICROECONOMIC ANALYSIS

• We use microeconomic analysis
• To understand how markets work
• To make personal or managerial decisions
• To evaluate merits of public choices

13
MARKET

• An arrangement which allows buyers and sellers to
  exchange money and goods.

14
THE ECONOMIC WAY OF THINKING

• John Maynard Keynes
• The theory of economics does not furnish a body
  of settled conclusions immediately applicable to
  policy. It is a method rather than a doctrine,
  an apparatus of mind, a technique of thinking
  which helps its processor to draw correct
  conclusions.

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SIMPLIFYING ASSUMPTIONS

• (Eliminate Irrelevant Detail)
• 1. People act on the basis of self interest.
• 2.People make informed decisions based on
  information from
• a) Producer
• b) Government.

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GIVEN

• My income doesnt change
• No other major expense occurs
• I dont suffer a major illness or injury
• etc.....
• I should be able to buy the new stereo I would
  like to own.

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EXPLORING THE RELATIONSHIP BETWEEN TWO VARIABLES

• Variable -- A measure of something that can take
  on different values.

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EXPLORING THE RELATIONSHIP BETWEEN TWO VARIABLES

• CETERIS PARABUS
• Other things being equal to what they were
  before
• Other variables remain fixed.

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GRAPHING

• Economists use this in a two dimensional form as
  a way of showing the relationship between two
  variables.

20
Y
BASIC GRAPHING
170
variable 2
Q U A N T I T Y
160
150
140
d
130
120
110
c
100
90
80
WEEKLY INCOME
70
60
b
50
15
40
change in weekly allowance
30
20
a
X
10
5
30
25
35
10
15
20
variable 1
QUANTITY (HOURS WORKED)
20 Weekly Allowance (No hours worked)
21
Y
BASIC GRAPHING
170
variable 2
Q U A N T I T Y
x
160
150
140
d
y
130
120
110
c
100
90
z
80
WEEKLY INCOME
70
60
b
50
15
40
change in weekly allowance
30
20
a
X
10
5
30
25
35
10
15
20
variable 1
QUANTITY (HOURS WORKED)
20 Weekly Allowance (No hours worked)
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Graphing allows us to think in a marginal way

• Marginal - How much of a change occurs in one
  variable for a specific incremental change in the
  other variable.
• How much of a change occurs in income for an
  additional hour worked.

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Y
SHOWING THE SLOPE
INCOME
108
60
X
10
22
HOURS WORKED
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SLOPE

• Change in the vertical-axis variable for a given
  change in the horizontal-axis variable.
• Change in income for a given change in hours
  worked.
• Rise Run

25
Y
SHOWING THE SLOPE
INCOME
108
RISE
60
RUN
X
10
22
HOURS WORKED