Lecture 2: ECN 111 The Basics

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Lecture 2 ECN 111 The Basics

• Scarcity
• Choice and opportunity cost
• Defining Economics
• Policy and Economic Science
• Market Institutions

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From Last Time

• Course Home Page
• www.public.asu.edu/ifdlh/
• Econ 111 Macro Happens (MW)
• Econ 111 Macro Plus (MWF)

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Assignment for the Weekend.

• Reading chapters 1 and 2 - begin 3
• Experiment with EIA
• Work on EIA chapters 2and 3
• Those in Section xxxxx, names listed in class,
  who meet MWF, we will see you in BAxxx at
  1040am on Friday.

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Scarcity

• When wants exceed the resources available to
  satisfy them, there is scarcity.
• People have unlimited wants.
• Resources to satisfy those wants are limited.

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Scarcity and Poverty

• Scarcity is not poverty.
• The poor and the rich alike face scarcity.
• Faced with scarcity, people must make choices.

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Big Ideas of Economics

• The questions give you a sense of what economics
  is about.
• The Big Ideas of Economics describe how
  economists think about these questions and seek
  answers to them.

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Big Ideas of Economics

• IDEA 1
• A choice is a tradeoff we give up something to
  get something else and the highest valued
  alternative we give up is the opportunity cost of
  the activity chosen.

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Big Ideas of Economics

• IDEA 2
• We make choices in small steps, or at the margin,
  and choices are influenced by incentives.
• Marginal Benefit vs. Marginal Cost
• Incentives are inducements to take particular
  actions

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Big Ideas of Economics

• IDEA 3
• Voluntary exchange makes both buyers and sellers
  better off, and markets are an efficient way to
  organize exchange.
• Buyers receive goods or services
• Sellers receive money.

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Big Ideas of Economics

• IDEA 3 (cont.)
• Markets are efficient because they ensure that
  resources will be used where they are valued most
  highly.
• Alternative to Market Economy
• Command Economy

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Big Ideas of Economics

• IDEA 4
• The market does not always work efficiently and
  sometimes, government action is necessary to
  overcome market failure and lead to a more
  efficient use of resources.
• Market failure is a state in which the market
  does not use resources efficiently.

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Big Ideas of Economics

• IDEA 5
• For the economy as a whole, expenditure equals
  income equals the value of production.

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Big Ideas of Economics

• IDEA 6
• Living standards improve when production per
  person increases.
• This increase in output per person will enable
  more people to own goods and services.

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Big Ideas of Economics

• IDEA 7
• Prices rise when the quantity of money increases
  faster than production.
• Inflation results from too much money chasing
  too few goods.

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Big Ideas of Economics

• IDEA 8
• Unemployment can result from market failure but
  some unemployment is productive.
• Unemployment rates vary
• Some unemployment results from employees
  searching for a suitable job and employers
  searching for suitable workers.
• This unemployment improves productivity.

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What Economists Do

• Economic questions can be divided into two big
  groups microeconomics and macroeconomics.

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Microeconomics

• Microeconomics is the study of the decisions of
  people and businesses and the interaction of
  those decisions in markets.
• Goal to explain the prices and quantities of
  individual goods and services.
• these topics are covered in ECN112

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Macroeconomics

• Macroeconomics is the study of the national
  economy and the global economy and the way that
  economic aggregates grow and fluctuate.
• Goal to explain average prices and total
  employment, income, and production.
• these topics are covered in ECN111

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Positive Versus Normative Statements

• A positive statement can be tested by checking it
  against facts. e.g. When prices rise the quantity
  of a good demanded will fall.
• A normative statement depends on values and
  cannot be scientifically tested. e.g. We should
  redistribute income from the rich to the poor.

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The Task ofEconomic Science

• Economic science discovers and catalogs positive
  statements that are consistent with what we
  observe.
• Normative issues are typically tackled in
  political and social debate.
• Our discussion will be primarily about positive
  issues. But the role of normative issues will
  also be addressed.

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Unscrambling Causeand Effect

• The nature of economic data makes it difficult to
  identify what is a cause and what is an effect.
• The logical tool all scientists use is ceteris
  paribus, a Latin term that means other things
  being equal.
• By changing one factor at a time, we can
  investigate its effects clearly.

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Post Hoc Fallacy

• Post hoc ergo propter hoc is a Latin phrase
  meaning after this, therefore because of this.
• Just because two events happen together does not
  mean one caused the other.
• e.g. are Presidents(or Governors) responsible for
  Economic performance. What do you think?

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Markets

• A market is any arrangement that enables buyers
  and sellers to get information and to do business
  with each other.
• Goods markets are markets for goods and services.
• Factor markets are markets for factors of
  production.

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Factors of Production

• Factors of production are the economys
  productive resources, including
• Labor, what is the return
• Land, what is the return
• Capital, what is the return
• Entrepreneurial ability, what is the return? Who
  can name an entrepreneur?

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Coordinating Decisions

• Conflicting choices by households, firms, and
  governments are resolved by markets.
• This is depicted in the following picture of the
  economy

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Alternative Coordinating Mechanisms

• A command mechanism is a method of determining
  what, how, when, and where goods and services are
  produced and who consumes them, using a
  hierarchical organization structure in which
  people carry out the instructions given to them.
• Is this better than a market economy? What do you
  think?

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Market Economies

• An economy that uses a market coordinating
  mechanism is called a market economy.

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Remember Your Assignment for the Weekend.

• Reading chapters 1 and 2 - begin 3
• Experiment with EIA
• Work on EIA chapters 2
• Those in Section xxxxx, names listed in class,
  who meet MWF, we will see you in BAxxx at
  1040am on Friday.