1. Thinking Like an Economist
what is Economics

2. Thinking Like an Economist
Economists:
People who specialize in economics
People who have extensive knowledge in economics
Economics:
Subject about the economy
Economy:
A system that coordinates economic activities

3. Core Economic Activities
Production:
Transforming inputs into outputs
Using resources to get products
Inputs (resources): L, K, N, etc
Output (products): goods and services
Technology: the body of knowledge and techniques used in the process of transforming inputs into outputs

4. Scarcity: The basis of all economic problems
Goal:
satisfy human needs and wants
Unlimited
Means: resources
L, K, N, E
Limited

5. Principle of Scarcity
Scarcity: resources available are not enough to satisfy all human needs and wants
Since we have boundless needs and wants, but the resources available to us are limited, or the resources are not enough relative to our needs and wants. Therefore, having more of a good thing usually means having less of another.
When getting something good, there is always sacrifices involved.

6. Final Purpose of Production
To satisfy consumer desires (needs and wants):
To create what people want
To get what people want to the people who want them
To get what people want to who want them when they want them

7. Economics: Redefined
Economics is the subject that studies how to allocate and utilize the limited resources to produce goods and services that best satisfy the various, unlimited, competing human desires

8. What to Do under Scarcity?
Having more of a good thing means having less of another
Choose
How to make choices?
Compare cost and benefit of having more of a good thing
Cost-benefit analysis: compare the extra cost to the extra benefit of taking an action

9. Principles of Cost-Benefit Analysis
Compare marginal cost to marginal benefit:
If MC < MB, should take the action
If MC > MB, should not take the action
Not to compare average cost to average benefit Higher average benefit does not mean higher extra benefit
Marginal cost / benefit:
the increase in total cost / benefit that results from taking one additional unit of an activity
The additional cost incurred / benefit gained when taking one more unit of an activity
The extra cost / benefit from taking an action
Average cost / benefit:
The total cost / benefit of undertaking N units of an activity divided by N

10. Principles of Cost-Benefit Analysis
Should consider opportunity cost (example 1.3)
The value of the next-best alternative that has to be forgone in order to take an activity
the value of the next best alternative sacrificed
the value of what must be given up to get what you decide to have
The implicit value of the activity that did not happen
The Value of best alternative, not combined value of all alternative
“The dog that did not bark in the night ”

11. Principles of Cost-Benefit Analysis
Should not consider sunk cost (example 1.4)
A cost that is beyond recovery at the time when a decision must be made
Irrelevant to the decision of whether or not to take an action
The only costs to consider when making a decision about whether or not to take an action are those that we can avoid by taking no action

12. Recap: Cost-Benefit Principle
Economic Surplus:
The benefit of taking an action minus the cost of taking the action
Cost-benefit analysis:
An action should be taken if and only if the extra (marginal) benefit of taking the action is at least as great as the extra (marginal) cost of taking the action
An action should be taken if and only if the economic surplus is non-negative

13. Economist: specializes in Economics
A study of mankind in the ordinary business of life
How to use limited resources to satisfy needs and wants as many and best as possible
mainly concerned with ordinary things
not the body of concrete truth
a way of thinking
an engine for the discovery of concrete truth.

14. Economics: a science of decision-making
Economic activities require decision making
Decision making because choices have to be made
Choices because resources are scarce relative to human needs and wants
(Scarcity Principle)

15. Choices to make: what and how many
Should I spend the money on a movie or on a dinner?
Should the firm product chips for handphone or for computer?
Should the country encourage more investment or more consumption?
How
How goods and services are produced?
How does the economic system work?
When and why economic system does not work?
When do people become counterproductive?
For whom
How should the results of economic growth be distributed? …

16. Basic Fields of Economics:Macro vs. Micro
Macroeconomics:
overall ups and downs of the national economy
GDP, growth, inflation, unemployment,
International trade. International finance
Monetary policies, fiscal policies …
Microeconomics:
how individuals make decisions and how these decisions interact
individual consumers and producers as decision makers
single products
single market

17. Microeconomics
Individual decisions about what to do and what not to do.
Decisions about production and consumption made by individual firms and consumers (market economy)
How individuals’ pursuit of self interest leads to good results as a whole (the invisible hand).
Market usually leads to efficiency, but not necessarily equity.
When market fails, it calls for government interventions.
Proper “incentives” may help reach society’s goals.

18. Homework Exercise 1.6, P. 18 (Optional, extra credit)
In 500 words or less, use cost-benefit analysis to explain some pattern of events or behavior you have observed in your own environment.
Due Monday, 3/8/2010
Reading: REQUIRED
Chapter 1: Thinking Like an Economist
Appendix to Chapter 1: Working with Equations, Graphs, and Tables
Chapter 2: Comparative Advantage: the Basis for Exchange