Economics Defined

1
Economics Defined

• The social science concerned with the efficient
  use of limited or scarce resources to achieve
  maximum satisfaction of human wants and needs.
• Wants are unlimited
• Resources are limited so satisfying wants can be
  a problem

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Perspectives in Economics

• Scarcity and choice
• Resources can only be used for one purpose at a
  time
• Scarcity thus requires that choices must be made
• The cost of any good, service, or activity is the
  value of what must be given up to get it. This
  is opportunity cost. This is a most important
  concept which we will refer to over and over.

3
Rational Behavior

• Rational self interest means you make decisions
  to achieve the maximum fulfillment of your goals
• Different preferences (personal wants and needs)
  and circumstance lead to different choices for
  individuals
• Rational self interest is not to be equated with
  selfishness although an argument could be made to
  do so. (Also known as the invisible hand)

4
Marginalism How much wood..

• In economics marginalism refers to extra. If you
  talk about marginal benefit or marginal cost your
  are talking about extra or added to the original.
• Most decisions concern a change in current
  conditions so the focus of choice is based on
  marginal analysis or is the benefit of the choice
  greater than the cost of the choice. This is true
  for each additional choice involved with this
  decision.

5
Marginalism

• Economics uses certain short cuts to refer to
  marginalism
• MB marginal benefit. That is the added benefit
  one receives for making or doing a particular
  thing.
• MC marginal cost. That is the added cost one
  receives for making or doing a particular thing.

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Marginalism cont.

• This applies to individuals, firms, and
  government. The principle is the same.
• If the marginal cost of an action or decision
  exceeds the marginal benefit then it should not
  be done or chosen.
• TINSTAAFL-this is no such thing as a free lunch.
  Learn this acronym!!!!!!
• Lets look at this to see if it is true.

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Why should I study economics? This is a good
question.

• Most political issues have economic aspects or
  consequences
• If you understand economics you can make a more
  informed political decision
• Economics can help you make better personal
  decisions as well.
• Economics is not finance and is not going to
  teach you how to get rich quickly or otherwise.

8
Methodology of the Science of Economics

• Observation
• Formulation of explanations for the cause and
  effect relationships(hypotheses)
• Testing hypotheses
• Accepting, rejecting, or modifying the hypotheses

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continued

• Many economic principles are embodied in
• Theories
• Laws
• Models
• You can usually tell who has studied economics
  too long because they have a law named after
  them.

10
Ceteris Paribus

• This assumption is all important when working
  with assumptions and information in economics.
  Essentially, what it means is all other things
  being equal or we are going to keep all factors
  the same except one which we are going to change
  and see what happens.
• In most circumstances only ONE condition is
  changed at a time allowing us to look at its
  effect. If asked for then another condition would
  change and we would do the same thing.

11
Theoretical versus Policy

• Theory economics is intellectual and academic. It
  is used to test abstractions and connections of
  hypotheses, models, usually in the most simple
  way. In this economics models scientific
  experiment.

12
Policy Economics

• Policy economics uses economic facts and
  principles to resolve specific problems and
  achieve certain goals in a specific economic
  function.

13
Formulating Policy

• State goals for policy
• Recognize options that may be used to achieve
  goals
• Evaluate the options on the basis of criteria
  specific and important to those who are in power.
  (decision makers)

14
Economic Goals common to Western Capitalist
Democracies

• Economic growth
• Full Employment (low unemployment)
• Economic Efficiency
• Price Level Stability (low inflation)
• Economic Freedom
• Equitable Distribution of Income
• Economic Security
• Economic Justice

15
Issues with goals

• Some are contradictory
• Some are complementary
• Some are wishes and unfulfillable
• Not all goals can be attained at the same time or
  with the scarce resources we have so choices must
  be made

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There are two schools of economics

• Macroeconomics is the study of the economy as a
  whole by looking at large segments known as
  aggregates such as GDP, unemployment, inflation,
  etc.
• Microeconomics is the study of specific economic
  units such as households, firms, and specific
  markets and products

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Positive and normative

• Positive economics describes the economy as it
  actually is, avoids value judgment and bias, and
  attempts to establish scientific statements about
  economic behavior.
• Normative economics involves value judgments and
  bias in which the economy is seen as it SHOULD be
  according to the perspective of that person and
  what needs to be done to get it to that point.
  Most political economic statements are normative.

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Pitfalls for economic students

• Bias and preconceptions should be limited
• Loaded terminology enhances bias and should be
  used as little as possible.
• Not knowing the correct economic language to use.
  Terms are important and should be learned as
  appropriate.
• Fallacies Post Hoc Fallacy and Correlation
  versus Causation. I will give examples.