The World of Economics

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The World of Economics

• The study of how societies allocate scarce
  resources to meet unlimited wants and needs

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THREE QUESTIONS

• WHAT TO PRODUCE?
• HOW TO PRODUCE?
• FOR WHOM?

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ECONOMIC SYSTEMS

• TRADITIONAL
• MARKET
• COMMAND

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Traditional Economic Systems

• Economic decisions repeat those made in earlier
  times

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Traditional Economic Systems

• Strengths
• Sets forth certain economic roles for all members
  of the community
• Stable, predictable and continuous life

• Weaknesses
• Discourages new ideas and new ways of doing
  things
• Stagnation and lack of progress

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ECONOMIC SYSTEMS

• COMMAND
• SOCIALISM OR COMMUNISM
• GOVERNMENT OWNERSHIP OF RESOURCES
• CENTRAL PLANNING
• NORTH KOREA AND CUBA

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Command Systems

• Strengths
• Capable of dramatic change in a short time

• Weaknesses
• Does not meet wants and needs of consumers
• Lacks effective incentives to get people to work
• Requires large bureaucracy which consumes
  resources
• Has little flexibility to deal with small
  day-to-day changes
• New and different ideas discouraged, no room for
  individuality

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Economic Systems

• MARKET
• PRIVATE OWNERSHIP OF RESOURCES
• USE OF MARKETS AND PRICES TO DIRECT ECONOMIC
  ACTIVITY

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ECONOMIC SYSTEMS

• MARKET
• COMPETITION
• Producers how to produce
• Consumers what to produce
• SELF INTEREST, MAXIMIZING PROFIT OR SATISFACTION
• LAISSEZ-FAIRE

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Market Systems

• Strengths
• Able to adjust to change gradually
• Individual freedom for everyone
• Notable lack of government interference
• Incredible variety of goods and services
• High degree of consumer satisfaction

• Weaknesses
• Rewards only productive resources. Many people
  are too old, or too sick to work.
• Must guard against market failures

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The World of Economics

• The study of how societies allocate scarce
  resources to meet unlimited wants and needs

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SCARCE RESOURES

• LAND
• LABOR
• CAPITAL
• ENTREPRNEUR

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SCARCE RESOURCES

• LAND
• Gifts of nature (natural resources)
• Oil, iron ore, cotton, water
• LABOR
• Human efforts in production
• Doctor, machine operator, computer technician

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SCARCE RESOURCES

• CAPITAL
• Human made resources
• Physical Capital Tools to produce
• Human Capital Skills and knowledge gained
  through education and training
• ENTREPRENEUR
• Risk taker
• Brings it all together

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TWO FIELDS OF ECON

• MICROECONOMICS
• INDIVIDUALS, HOUSEHOLDS AND FIRMS
• MACROECONOMICS
• ECONOMY WIDE PHENOMENA
• UNEMPLOYMENT, INFLATION, INTEREST RATES

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SCIENTIST OR POLICY ADVISOR?

• POSITIVE
• VERIFIABLE
• FACTS
• NO VALUE JUDGEMENTS
• ECONOMIST AS SCIENTIST
• DESCRIPTIVE

• NORMATIVE
• NON-VERIFIABLE
• VALUE BASED
• HOW THINGS SHOULD BE
• ECONOMIST AS POLICY ADVISOR
• PRESCRIPTIVE

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USE OF MODELS

• DELIBERATE SIMPLIFICATION
• STRIPS AWAY UN-NECESSARY DETAILS TO MORE EASILY
  UNDERSTAND
• CETERIS PARIBUS
• ALL ELSE EQUAL

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CAUTIONS WHEN USING MODELS

• CAUSALITY VS. CORRELATION
• CAUSE EVENT A CAUSES EVENT B TO OCCUR
• PRESSING THE ACCELORATOR ON YOUR CAR INCREASES
  SPEED
• CORRELATION TWO VARIABLES TEND TO CASUALLY
  COEXIST
• SUNNY WEATHER AND AUTO ACCIDENTS

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Correlation vs. Causation

• Parents income vs. SAT scores
• Causation or Correlation?
• The real story?

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CAUTIONS WHEN USING MODELS

• REVERSE CAUSALTIY
• NUMBER OF OFFICERS VS. AMOUNT OF CRIME IN CITIES