1. What is economics?

2. Economics is…..
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 delivers the goods

3. The Economy of the United States:
US has a market economy
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)
no central authority telling people what to produce or where to ship it
individual consumers make what they think will be most profitable and each consumer buys what he or she chooses

4. Adam Smith, The Wealth of Nations
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

5. Microeconomics: Microeconomics Fluctuations
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
Fluctuations
series of ups and downs which are a feature of modern economies
the economy just does not always run smoothly
recessions – economic downturns

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

7. The Economic Perspective

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

9. 1. Resources are scarce
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)
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

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

11. 3. “How much?” is a decision at the margin
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
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

12. 4. People usually 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

13. The Economic Way of Thinking

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

15. 2. People choose for good reasons
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
Positive economics – economic analysis that describes the way the economy actually works

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

17. 4. People create economic systems to influence choices and incentives
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
The success of market systems and the failures of communism are rooted in incentives

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

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

20. 7. The value of a good or service is affected by people’s choices
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

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

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

23. What is economics?

24. Economics is…..
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

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

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

27. Microeconomics: Microeconomics Fluctuations
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
Fluctuations
series of ups and downs which are a feature of modern economies
the economy just does not always run smoothly

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

29. The Economic Perspective

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

31. 1. Resources are scarce
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)
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
opportunity cost –

33. 3. “How much?” is a decision at the margin
usually the question is not “whether” but “how much”
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

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

35. The Economic Way of Thinking

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

37. 2. People choose for good reasons
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

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

39. 4. People create economic systems to influence choices and incentives
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

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

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

42. 7. The value of a good or service is affected by people’s choices
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

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

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