ECONOMICS 101 INTRODUCTION AND BASICS

NATURAL SCIENCES vs. SOCIAL SCIENCES “HARD”“SOFT” STUDIES NATURAL DATA DRIVEN PHENOMENOM Examples include BIOLOGY CHEMISTRY PHYSICS ASTRONOMY EARTH SCIENCE STUDIES HUMAN BEHAVIOR IN A SCIENTIFIC MANNER Examples include SOCIOLOGYECONOMICS PSYCHOLOGY ANTHROPOLOGY POLITICAL SCIENCEHISTORY

BUT… ECONOMICS DREAMS TO BE A NATURAL SCIENCE AND TRIES TO DRAW FROM ITS METHODS. THE SCIENTIFIC METHOD IS “BORROWED” OBSERVING HYPOTHESIS TESTING ACCEPTING REJECTING MODIFYING CONTINUED TESTING ECONOMIC PRINCIPLE – WELL TESTED, WIDELY ACCEPTED THEORY

COMPLEXITY vs. SIMPLICITY

ECONOMICS – THE SOCIAL SCIENCE ABOUT HOW WE MAKE OPTIMAL CHOICES UNDER CONDITIONS OF SCARCITY. OPTIMAL – PERSONAL BEST – DIFFERENT FOR EVERY PERSON. EVERYBODY MAKES CHOICES THAT ARE OPTIMAL FOR THEMSELVES. IN ECONOMICS, WE CALL THIS RATIONALITY AND IT IS ASSUMED FOR THE MAJORITY OF OUR MODELS SCARCITY – LIMITED RESOUCES vs. UNLIMITED WANTS - IN CAPITALISM, MORE IS BETTER, SO WE ASSUME UNLIMITED WANTS

SCARCITY HOW DO WE DECIDE WHO SHOULD GET WHAT? THERE IS ONLY A LIMITED AMOUNT OF ANYTHING (RESOURCES) BUT MR. D… WHAT ABOUT THINGS LIKE AIR AND SUNLIGHT. THOSE DON’T RUN OUT. SILENCE!!!! WHAT I MEAN, IS GOOD POINT. BUT EVEN AIR IS LIMITED, THINK OF CLEAN AIR IN INDUSTRIAL CITIES OR DIRECT SUNLIGHT THAT CAN BE USED FOR SOLAR GENERATION. WE FURTHER DEFINE RESOURCES INTO TWO CATEGORIES

RESOURCES CAN GENERALLY BE SPLIT INTO TWO GROUPS RENEWABLE  SOMETHING THAT CAN REPLENISH WITH THE PASSAGE OF TIME  CROPS  WOOD  SOLAR  WATER NON-RENEWABLE  SOMETHING THAT IS FINITE AND DOESN’T RENEW AT A SUSTAINABLE RATE  METALS  MINERALS  HYDRO-CARBONS  NUCLEAR MATERIAL

OPPORTUNITY COST - WHAT YOU GIVE UP TO OBTAIN SOMETHING ELSE. -THE VALUE OF THE BEST ALTERNATIVE FORGONE. A SIMPLE DEFITION THAT HAS MAJOR IMPLICATIONS. WHENEVER YOU MAKE A CHOICE, YOU ARE CHOOSING TO NOT DO SOMETHING ELSE. THE COST YOU INCUR VS THE OTHER CHOICE IS THE OPPORTUNITY COST. IT IS USUALLY DESCRIBED AS EITHER “HIGH” OR “LOW”

OPPORTUNITY COST EXAMPLES WHAT WOULD THE OPPORTUNITY COST BE FOR THIS WOMAN TO OPEN UP A NEWSPAPER STAND IN NY? HIGH OR LOW WHAT WOULD THE OPPORTUNITY COST BE FOR THIS BASKETBALL MAN TO PLAY AFTER HIGHSCHOOL INSTEAD OF ATTENDING COLLEGE ? HIGHORLOW

WE HAVE DEFINITION WITH SCARCITY OF RESOURCES AND OPTIMIZATION BUT WE NEED SOME SORT OF MEASUREMENT, AND ECONOMISTS HAVE USED SEVERAL SYSTEMS OVER THE YEARS SUCH AS VALUE, TIME, AND MONEY MANY FOCUS ON A GREATER CONCEPT CALLED UTILITY UTILITY – PLEASURE OR SATISFACTION GAINED FROM CONSUMING A GOOD OR SERVICE RATIONALITY OR RATIONAL SELF INTEREST WOULD REQUIRE MAXIMIZING UTILITY EVERYONE DECIDES THEIR OWN UTILTY

UTILTY CONCEPT IS INVENTED JEREMY BENTHAM 19 TH CENTURY BRITISH PHILOSOPHER CREATES UTILITARIANISM AS A MORAL AND LEGAL CODE “THE ACTION SHOULD BE TAKEN THAT RESULTS IN THE GREATEST TOTAL UTILITY” UTIL – ONE STANDARD UNIT OF BENEFIT/SATISFACTION PROBLEMS 1.MEASUREMENT 2.TYRANNY OF THE MAJORITY 3.UTILITY OF ANIMALS 4.FUTURE GENERATIONS

Positive Economics Normative Economics 1. Can be tested 1. Cannot be tested 2. Scientific 2. Value judgment 3. In the economy 3. Ought to be in the economy Positive [Scientific] v. Normative [ Prescriptive (personal) ] [describing “just the facts”] v. [the economist being “a policymaker”] 1. The economy grew at 2.6%.1. The economy ought to grow more. 2. Unemployment is 5.4%. 2. Unemployment is too high. INTERESTINGLY ENOUGH, IT IS NOT COMMON TO DEBATE THE FACTS AND FIGURES. MOST ARGUMENTS IN MOST SUBJECTS ARE FOCUSED ON THE NORMATIVE ARGUMENTS. WE KNOW WHAT THE PROBLEMS ARE, WE JUST DO NOT AGREE ON THE SOLUTIONS WE JUST DO NOT AGREE ON THE SOLUTIONS Straight facts “In my opinion…”

Macro economy 1. Macro [national] economics – concerned with the economy as a whole as a whole or with aggregates – like government, business sectors, or households. Macroeconomics is concerned with an overview of the economy overview of the economy. “forest, not the trees, Macro examines the “forest, not the trees, leaves, or specific pieces of bark.” leaves, or specific pieces of bark.” It gives “bird’s-eye view” of the economy.” us a “bird’s-eye view” of the economy.”. Micro specific 2. Micro [details of the big picture] – concerned with specific economic units economic units or individual markets under a microscope. Emphasis is on individual households, industries, or firms [like the # of workers employed by Ford] [Concerns the components of the economy] “trees, leaves, & pieces of bark, Micro examines the “trees, leaves, & pieces of bark, rather than the forest.”“worm’s-eye rather than the forest.” It gives a “worm’s-eye view” view” of a specific component of our economy.

Macro Micro Macro [large](telescope) “whole economy” [economy-wide issues] Micro [small](microscope] “segment of the economy” [issues in the economy]. Production Production MicroeconomicsMacroeconomics How much steelTotal industrial output How much office spaceGross Domestic Product How many carsTotal decline during recession Prices Prices Price of individual goodsAggregate price level Price of medical careConsumer Price Index Apartment rentsRate of inflation Employment Jobs in the steel industryTotal number of jobs # of employees in a firmEconomy’s unemployment # of doctors/accountants# of discouraged workers “Check out those pieces of bark!. “Beautiful, beautiful forest!”

Is the following Micro or Macro ? Is the following Micro or Macro ? 1. The price of digital cameras increased 5% last year. 2. Unemployment was 5.4% for the U.S. workforce. 3. Unemployment in the auto industry was 8% last year. 4. Duck National Bank lowered its interest rates on CDs to 8%. 5. The Consumer Price Index rose to 2.7% last year. 6. The computer industry laid off 8% of its workers last year. 7. The price of gasoline rose 25% last year.

ADDITIONAL ECONOMIC PRINCIPLES  WE IDENTIFIED THAT PEOPLE ARE OPTIMIZERS. THEY DO WHAT IS RATIONAL AND BEST FOR THEMSELVES.  CETERIS PARIBUS – LATIN FOR “WITH OTHER THINGS THE SAME”  A CONCEPT INVOKED WHEN YOU WANT 1 ON 1 COMPARISON  SIMILAR TO THE HEISENBERG’S UNCERTAINTY PRINCIPLE  WHEN WE WANT TO MANIPULATE SOMETHING (GRAPH, EXAMPLES, REAL WORLD INSTANCES) WE ASSUME THAT EVERYTHING ELSE IS EQUAL TO ISOLATE THE VARIABLE.

MORE ECONOMIC CONCEPTS MARGINAL ANALYSIS – COMPARISONS OF MARGINAL BENEFITS AND MARGINAL COSTS MARGINAL MEANS THE NEXT UNIT FOR ECONOMISTS, IT IS NOT JUST A QUESTIONS OF MORE THERE NEEDS TO BE A COST / BENEFIT ANALYSIS HOW MUCH DID IT COST TO MAKE THE ADDITIONAL UNIT? IF A COMPANY SELLS A PRODUCT AND MAKES A MILLION DOLLARS; IS THAT GOOD? BAD? MARGINAL ANALYSIS PROVIDES CONTEXT FOR THE DECISIONS.

DIAMOND - WATER PARADOX WHY DO DIAMONDS COST SO MUCH MORE THAN WATER? WATER IS NOT SCARCE AND PEOPLE USUALLY HAVE A LOW MARGINAL UTILITY FOR WATER DIAMONDS ARE (REASONABLY) SCARCE AND PEOPLE HAVE A HIGH MARGINAL UTILITY FOR DIAMONDS SITUATIONAL SCARCITY AND MARGINAL UTILITY BUT IN A DESERT… A GLASS OF WATER IS WORTH DOZENS OF DIAMONDS

THERE’S NO SUCH THING AS A FREE LUNCH  THE ECONOMIC HANDSHAKE  IT IS IMPOSSIBLE TO GET SOMETHING FOR NOTHING  EVEN IF SOMEONE ELSE IS PAYING, THERE IS STILL A COST  EVEN IF THE ITEM IS FREE, THERE IS STILL A COST  TIME AND EFFORT HAS BEEN MADE TO CREATE OR OBTAIN ANYTHING  SOOO…. THERE IS NO SUCH THING AS A FREE LUNCH