2 Instructional MethodPrimarily Lecture format with discussion, simulations, and video presentationsConstructive discussion is welcomedGrading is based on six Mini-exams – NO MAKEUPS GIVENSuggestions for the study of economics
3 Definition of Economics Traditional DefinitionHow society chooses to allocate its scarce resources among competing demands to best satisfy human wantsAlternative definitionsHow society manages its scarce resources.Economics is the study of choice.Economics is what economist do.
4 Scarcity and the Fundamental Questions of Economics Unlimited wants versus limited resourcesWHFMWhat is to be produced?How is to be produced?For whom will it be produced?
5 Economics as a Science Macroeconomic vs. Microeconomics The scientific methodEconomic modelsNormative vs. positive approachesA brief history of economic thinkingThe language of economics
6 Economic Thinking How do people make decisions? How do people interact?How does the economy work overall?
7 How Do People Make Decisions? People face tradeoffsThe cost of something is what you have to give up to get itOpportunity CostsRational people think at the marginMarginal Benefits vs. Marginal Cost and Maximum Net BenefitsPeople respond to incentives
8 How Do People Interact? Trade can make everybody better off Voluntary Exchange = Mutually Beneficial ExchangeMarkets are usually a good way of organizing economic activityMarkets are institutions that have evolved as human society has developedGovernments can sometimes improve market outcomesGovernments can wisely, or unwisely, coerce the individual to act in the common interest.
9 How Does the Economy work overall? A country’s standard of living depends upon its ability to produce goods and servicesAdam Smith (1776) and the “Wealth of Nations”The general level of prices rises when the government prints and distributes too much moneyInflation versus hyperinflationSociety faces a short-run tradeoff between inflation and unemploymentRecessions and expansions and the business cycle.
10 Economics Models and Issues: Putting Economic Tools to Work The art of making models = making them simple and effectiveExample: circular flow – what, how and for whom questions.overall economy, role of economic agents, output and income, product and resource marketsResources: labor, capital, natural resources, entrepreneurshipCircular flow model indicates that consumers ultimately answer the WHAT question – consumer sovereignty, and markets determine the how and for whom.
13 Issue: An Economy in Transition (always) 1700s – WWII: agrarian to a manufacturing economyWWII – present: manufacturing to a service economyChange in consumer demands as income increase combined with technological change increased productivity in the agricultural sector spurred on by competitionResources shifted from agricultural uses to manufacturing sector.
14 Changes in consumer demands and technological change in the informational sector, have led competitive markets to move from manufacturing goods to producing services. In 2002, total consumption consisted of Durable Goods (12%), Non-Durable Goods (28%), and Services (52%).Resources are shifting from manufacturing industries to service sectors.Market or laissez-faire versus command or planned economyCapitalism and socialism and the mixed economy
15 Issue: Economic Growth and Human Welfare Example: production possibilities frontier (PPF)-scarcity: inputs labor, capital, natural resources, entrepreneurship- technology, tradeoffs, efficiency and unemployment, opportunity costs, law of increasing costs, and economic growth.
16 Causes of Economic Growth Increased number of resources: L, K, NR, EInvestmentGrowth in Labor ForceIncreased productivity of resources:Work EthicTechnologyEducationRisk-taking and innovationSocial system that allows the efficient use of resources and promotes productivityMarket system and self-interestLaws, property rights, and public orderPolitical and economic freedom
17 Production possibilities curve Opportunity CostProduction possibilities curveComputers (mill.)Computers (mill.)Attainable and unattainable production combinationsPossible combinations of computers and VCRsAAProduction possibilities curve (PPC)BProduction possibilities curve (PPC)BFunattainablePoints along PPC imply no unemployed resources and efficient productionCCForegone outputEDinefficientD
18 Law of increasing opportunity cost Computers (mill.)AA bowed outward PPC illustrates increasing opportunity costsBCD
19 Economic growth & the PPC Changes in the PPCEconomic growth & the PPCComputers (mill.)EEconomic growth is illustrated by an outward shift in a nation’s PPCFGCPPC0PPC1
20 Consumption trade-offs & growth Economic GrowthConsumption trade-offs & growthConsumer goods (hamburgers)Consumer goods (hamburgers)United StatesJapanNext year's production possibilitiesNext year's production possibilitiesJapan's choice to favor capital goods (point A) will shift its future PPC farther outThe US choice to produce more consumer goods (point A) limits future production growthAPPC0PPC0PPC1This year's production possibilitiesAPPC1This year's production possibilities
21 Economic Growth Gross Domestic Product Real Gross Domestic Product Real Gross Domestic Product Per CapitaGrowth Rates = percentage change in the above variables.Rule of 70 = = Doubling%Growth Rate Time