1. Lecture 2: ECN 111 The Basics
Scarcity
Choice and opportunity cost
Defining Economics
Policy and Economic Science
Market Institutions
In this chapter, most of the major and minor points are included in the 80 slides. That’s too many for most classes. You should pick those that suit your classroom needs and discard the rest.

2. From Last Time Course Home Page www.public.asu.edu/~ifdlh/
Econ 111 Macro Happens (MW)
Econ 111 Macro Plus (MWF)

3. 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 10:40am on Friday.

4. Scarcity
When wants exceed the resources available to satisfy them, there is scarcity.
People have unlimited wants.
Resources to satisfy those wants are limited.
Emphasize that scarcity means there are not enough resources available to produce as many goods and services as people want.
Illustrate this point by asking the class if any of them truly has everything they want. If someone insists they are happy, ask why they’re getting a college degree. There are few students that won’t ultimately admit part of their motivation is to get a better job and lead a better life.

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

6. 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.

7. 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.

8. 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

9. 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.

10. 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

11. 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.

12. Big Ideas of Economics IDEA 5
For the economy as a whole, expenditure equals income equals the value of production.

13. 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.

14. 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”.

15. 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.

16. What Economists Do
Economic questions can be divided into two big groups: microeconomics and macroeconomics.

17. 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
Microeconomics studies the way individual markets work and how specific regulations and taxes affect a single market.

18. 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
Macroeconomics studies employment, real GDP, total national income, interest rates, the money supply, and other “big” economic variables.

19. 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.

20. The Task of Economic 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.

21. Unscrambling Cause and 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.

22. 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?
Specifically, just because two lines on a graph seem to move together does not mean they are related.
Use the Super Bowl “theory” of stock market prediction to point this out. This theory says that in years when the National Conference wins the Super Bowl, the stock market will go up, but when the American Conference wins, the stock market will go down. Merely looking at the data will tell you this theory is true. However, that doesn’t mean the National Conference winning the Super Bowl causes the stock market to rise. (The spurious correlation occurs because the National Conference usually wins the Super Bowl and the stock market rises on average.)

23. 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.
Most people earn a living by selling their labor in the labor market.

24. Factors of Production
Factors of production are the economy’s 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?

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

26. 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?
A command mechanism is when a few people tell the rest of the economy what to produce and who to give the goods and services to.
Command economies don’t work well because they don’t make use of incentives.

27. Market Economies
An economy that uses a market coordinating mechanism is called a market economy.

28. 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 10:40am on Friday.