What is economics?

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

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

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

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

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

The Economic Perspective

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

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

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

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

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

The Economic Way of Thinking

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

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

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

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

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

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

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

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

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”

What is economics?

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

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

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

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

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

The Economic Perspective

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

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

2. The real cost of something is what you must give up to get it opportunity cost –

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

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

The Economic Way of Thinking

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

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

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

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

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

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

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

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

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”