Presentation is loading. Please wait.

Presentation is loading. Please wait.

WHAT IS ECONOMICS? 1. Economics is….. 2 the social science that studies the production, distribution, and consumption of goods and services the social.

Similar presentations


Presentation on theme: "WHAT IS ECONOMICS? 1. Economics is….. 2 the social science that studies the production, distribution, and consumption of goods and services the social."— Presentation transcript:

1 WHAT IS ECONOMICS? 1

2 Economics is….. 2 the social science that studies the production, distribution, and consumption of goods and services the social science that studies the production, distribution, and consumption of goods and services An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area an economy delivers the goods an economy delivers the goods

3 The Economy of the United States: 3 US has a market economy US has a market economy production and consumption are the result of decentralized decisions by many firms and individuals production and consumption are the result of decentralized decisions by many firms and individuals opposite is a command economy – where there is a centralized authority making decisions about production and consumption (Soviet Union) opposite is a command economy – where there is a centralized authority making decisions about production and consumption (Soviet Union)

4 Adam Smith, The Wealth of Nations 4 individuals, in pursuing their own interests, ended up serving the interests of society as a whole individuals, in pursuing their own interests, ended up serving the interests of society as a whole invisible hand – refers to the way a market economy manages to harness the power of self- interest for the good of society invisible hand – refers to the way a market economy manages to harness the power of self- interest for the good of society

5 Microeconomics: 5 Microeconomics Microeconomics individuals pursuing their own interests often do promote the interests of society as a whole individuals pursuing their own interests often do promote the interests of society as a whole Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole Fluctuations Fluctuations series of ups and downs which are a feature of modern economies series of ups and downs which are a feature of modern economies the economy just does not always run smoothly the economy just does not always run smoothly recessions – economic downturns recessions – economic downturns

6 Macroeconomics: 6 concerned with the overall ups and downs of the economy concerned with the overall ups and downs of the economy economic growth is the growing ability of the economy to produce goods and services economic growth is the growing ability of the economy to produce goods and services

7 THE ECONOMIC PERSPECTIVE 7

8 The Economic Perspective: 8 Economic perspective is the economic way of thinking Economic perspective is the economic way of thinking There are four economic principles that underlie the economics of a individual choice There are four economic principles that underlie the economics of a individual choice

9 1. Resources are scarce 9 A resource is anything that can be used to produce something else A resource is anything that can be used to produce something else Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers) Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers) Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it ex. natural resources, limited quantity of human resources, even clean air and water ex. natural resources, limited quantity of human resources, even clean air and water

10 2. The real cost of something is what you must give up to get it 10 opportunity cost – what you must give up in order to get it opportunity cost – what you must give up in order to get it every choice you make means forgoing some other alternative every choice you make means forgoing some other alternative

11 3. How much? is a decision at the margin 11 usually the question Is not whether but how much usually the question Is not whether but how much this is a question whose answer hinges on the costs and benefits of dong a bit more or bit less this is a question whose answer hinges on the costs and benefits of dong a bit more or bit less decision usually involves a trade-off – a comparison of the costs and benefits decision usually involves a trade-off – a comparison of the costs and benefits marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis

12 4. People usually exploit opportunities to make themselves better off 12 it is a good bet that people will exploit opportunities to make themselves better off it is a good bet that people will exploit opportunities to make themselves better off incentives – anything that offers rewards to people who change their behavior incentives – anything that offers rewards to people who change their behavior

13 THE ECONOMIC WAY OF THINKING 13

14 1. Everything has a cost 14 there is no such thing as a free lunch there is no such thing as a free lunch Everything action costs someone time, effort or lost opportunities to do something else Everything action costs someone time, effort or lost opportunities to do something else Opportunity costs Opportunity costs

15 2. People choose for good reasons 15 Everyone faces choices and everyone should chose the alternative that gives them the most advantageous combination of costs and benefits Everyone faces choices and everyone should chose the alternative that gives them the most advantageous combination of costs and benefits Normative economics –economic analysis that makes predictions about the way the economy should work Normative economics –economic analysis that makes predictions about the way the economy should work Positive economics – economic analysis that describes the way the economy actually works Positive economics – economic analysis that describes the way the economy actually works

16 3. Incentives matter 16 Economics is all about incentives Economics is all about incentives Supply and demand analysis if about incentives Supply and demand analysis if about incentives Theory of the firm and factor markets are about incentives Theory of the firm and factor markets are about incentives Government decision making is about incentives Government decision making is about incentives When incentives change, peoples behavior changes in predictable ways When incentives change, peoples behavior changes in predictable ways

17 4. People create economic systems to influence choices and incentives 17 Cooperation among people is governed by written and unwritten rules that are the core of an economic system Cooperation among people is governed by written and unwritten rules that are the core of an economic system As rules change, incentives and behavior change As rules change, incentives and behavior change The success of market systems and the failures of communism are rooted in incentives The success of market systems and the failures of communism are rooted in incentives

18 5. People gain from voluntary trade 18 Economics is about trade Economics is about trade People trade when they believe the trade makes them better off, if there are no benefits, they wont trade People trade when they believe the trade makes them better off, if there are no benefits, they wont trade People, not countries, trade People, not countries, trade Market system is about trade Market system is about trade Economics is about trade Economics is about trade

19 6. Economic thinking is marginal thinking 19 Marginal choices involves the effects of additions and subtractions from current conditions Marginal choices involves the effects of additions and subtractions from current conditions

20 7. The value of a good or service is affected by peoples choices 20 Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers Price of a good or service is set by supply and demand Price of a good or service is set by supply and demand

21 8. Economic actions create secondary effects 21 Good economics involves analyzing secondary effects Good economics involves analyzing secondary effects Example: Example: Rent controls make apartments more affordable to some consumers Rent controls make apartments more affordable to some consumers Controls make it less profitable to build and maintain apartments Controls make it less profitable to build and maintain apartments Secondary effect is a shortage of apartments and houses for rent Secondary effect is a shortage of apartments and houses for rent

22 9. The test of a theory is its ability to predict correctly 22 If the theory correctly predicts the consequences of actions it is a good theory If the theory correctly predicts the consequences of actions it is a good theory Nothing is good in theory but bad in practice Nothing is good in theory but bad in practice

23 WHAT IS ECONOMICS? 23

24 Economics is….. 24 the social science that studies the production, distribution, and consumption of goods and services the social science that studies the production, distribution, and consumption of goods and services An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area

25 The Economy of the United States: 25 US has a market economy US has a market economy production and consumption are the result of decentralized decisions by many firms and individuals production and consumption are the result of decentralized decisions by many firms and individuals individual consumers make what they think will be most profitable individual consumers make what they think will be most profitable each consumer buys what he or she chooses each consumer buys what he or she chooses opposite is a command economy opposite is a command economy

26 Adam Smith, The Wealth of Nations 26 individuals, in pursuing their own interests, ended up serving the interests of society as a whole individuals, in pursuing their own interests, ended up serving the interests of society as a whole invisible hand – invisible hand –

27 Microeconomics: 27 Microeconomics Microeconomics individuals pursuing their own interests often do promote the interests of society as a whole individuals pursuing their own interests often do promote the interests of society as a whole Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole Fluctuations Fluctuations series of ups and downs which are a feature of modern economies series of ups and downs which are a feature of modern economies the economy just does not always run smoothly the economy just does not always run smoothly

28 Macroeconomics: 28 concerned with the overall ups and downs of the economy concerned with the overall ups and downs of the economy economic growth is the growing ability of the economy to produce goods and services economic growth is the growing ability of the economy to produce goods and services

29 THE ECONOMIC PERSPECTIVE 29

30 The Economic Perspective: 30 Economic perspective is the economic way of thinking Economic perspective is the economic way of thinking

31 1. Resources are scarce 31 A resource is anything that can be used to produce something else A resource is anything that can be used to produce something else Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers) Countries resources: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers) Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it

32 2. The real cost of something is what you must give up to get it 32 opportunity cost – opportunity cost –

33 3. How much? is a decision at the margin 33 usually the question is not whether but how much usually the question is not whether but how much decision usually involves a trade-off – a comparison of the costs and benefits decision usually involves a trade-off – a comparison of the costs and benefits marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis

34 4. People usually exploit opportunities to make themselves better off 34 incentives – anything that offers rewards to people who change their behavior incentives – anything that offers rewards to people who change their behavior

35 THE ECONOMIC WAY OF THINKING 35

36 1. Everything has a cost 36 there is no such thing as a free lunch there is no such thing as a free lunch Everything action costs someone time, effort or lost opportunities to do something else Everything action costs someone time, effort or lost opportunities to do something else

37 2. People choose for good reasons 37 Normative economics –economic analysis that makes predictions about the way the economy should work Normative economics –economic analysis that makes predictions about the way the economy should work Positive economics – economic analysis that describes the way the economy actually works Positive economics – economic analysis that describes the way the economy actually works

38 3. Incentives matter 38 Economics is all about incentives Economics is all about incentives When incentives change, peoples behavior changes in predictable ways When incentives change, peoples behavior changes in predictable ways

39 4. People create economic systems to influence choices and incentives 39 Cooperation among people is governed by written and unwritten rules that are the core of an economic system Cooperation among people is governed by written and unwritten rules that are the core of an economic system As rules change, incentives and behavior change As rules change, incentives and behavior change

40 5. People gain from voluntary trade 40 Economics is about trade Economics is about trade People, not countries, trade People, not countries, trade

41 6. Economic thinking is marginal thinking 41 Marginal choices involves the effects of additions and subtractions from current conditions Marginal choices involves the effects of additions and subtractions from current conditions

42 7. The value of a good or service is affected by peoples choices 42 Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers Goods and services do not have intrinsic value – value is determined by the preferences of buyers and sellers Price of a good or service is set by supply and demand Price of a good or service is set by supply and demand

43 8. Economic actions create secondary effects 43 Good economics involves analyzing secondary effects Good economics involves analyzing secondary effects Example: Example:

44 9. The test of a theory is its ability to predict correctly 44 If the theory correctly predicts the consequences of actions it is a good theory If the theory correctly predicts the consequences of actions it is a good theory Nothing is good in theory but bad in practice Nothing is good in theory but bad in practice


Download ppt "WHAT IS ECONOMICS? 1. Economics is….. 2 the social science that studies the production, distribution, and consumption of goods and services the social."

Similar presentations


Ads by Google