What is Economics? Basics and 6 core principles

Warm-up What do government tax revenue, water in Colorado, and good parking spots have in common?

The Basics Economics is a social science that studies how resources are allocated and used in conditions of scarcity. (Economists are interested in what choices people make given limited alternatives.) Economists are often concerned with determining how resources can be used to their fullest potential. Is it wise for the United States to explore outer space? hY

The Economics of Your Life Consider the case of a student who has only 24 hours to spend each day. What are some things that are going to take up their time?: Necessities of life (eating, sleeping, etc.) Studying? Sports/activities? Work? Socializing? Relaxing?

Economics is everywhere ***Any time someone is trying to make the most out of the limited stuff they have, we are in the realm of economics***

Macro v. Microeconomics Macroeconomics – involves economic problems encountered by the nation as a whole. Example macro questions: Do we spend too many of our resources on national defense and not enough on education of our youth? If households are required to pay fewer taxes, will national savings be affected? Will prices rise or fall because of a tax cut? Will increasing the money supply increase production levels in the economy?

Macro v. Microeconomics Microeconomics – concerned with the economic problems faced by individual units within the overall economy. (E.g. individuals, families, and firms.) Example micro questions: Does a particular family save enough to provide for its future needs? How will a tax break affect XYZ Corporation’s output? If Mr. Hendrikson won the lottery, how would his spending patterns change?

The 6 central principles of Economics

Principle #1 – People Choose People economize, that is, they choose the alternative which seems best to them because it involves the least cost and greatest benefit compared to any other alternative.

#1 in a nutshell… We always want more than we can get. Productive resources (human, natural, capital) are always limited. Therefore, because of this major economic problem of scarcity we usually choose the alternative that provides the most benefits with the least cost.

Principle #2 – All choices involve costs This important principle tells us that everyone gives up something when he or she makes a choice. Choosing actually involves two actions. When more than one alternative is available we choose and refuse at the same time. Therefore when you chose to go out to the movies last Friday night, you gave up the opportunity to put that $10 in your gas tank (this is called the opportunity cost.)

#2 in a nutshell… The opportunity cost is the next best alternative you give up when you make a choice. When we choose one thing, we refuse something else at the same time.

Activity: The Economics of Dating Situation: You’ve asked someone to go out with you for the first time and now you need to decide where you are going to take them. How is scarcity involved in this decision?

Activity: The Economics of Dating 5 step decision-making process: 1. Define the problem 2. List your alternatives 3. State your criteria 4. Evaluate your alternatives 5. Make a decision by ranking your alternatives.

Principle #3 – People respond to incentives in predictable ways Incentives are any actions, awards, or rewards that encourage people to act. Incentives can be positive or negative. When incentives change, the choices people make also change, and in predictable ways.

Principle #4 – Economic systems influence individual choices and incentives People cooperate and govern their actions through both written and unwritten rules that determine methods of allocating scarce resources. These rules determine what is produced, how it is produced, and for whom it is produced. As the rules change, so do individual choices, incentives, and behavior.

Principle #5 – Voluntary trade creates wealth People throughout the world voluntarily trade with other people to gain goods and services they want. Trade has existed because people can improve their situation by trading something of which they have a relative surplus for something of which they have relative scarcity.

#5 in a nutshell… People specialize in the production of certain goods and services because they expect to gain from it. People trade what they produce because they expect to gain from it. Some benefits of voluntary trade include higher standards of living and broader choices of goods and services.

Principle #6 – The consequences of choices lie in the future We are all economic forecasters (you cannot make a decision that impacts the past, therefore all of your decisions impact your future.) Since we cannot know the outcome of our decisions, choices can often lead to unintended consequences.

Assignment After looking over your notes and rereading each of the major principles of economics, now apply them to your life. Come up with an example from your own life to illustrate each of the 6 principles. (Examples should demonstrate depth of thought and an explanation as to why/how they illustrate each principle.)