1 Introduction to Econ.

2 What is Economics? Some definitions of economics: The social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity. Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. The study of how people make choices under conditions of scarcity and of the results of those choices for society.

3 Scarcity Remember a key point of the definition of economics - limited resources and unlimited wants. Scarcity really is the condition that human wants always exceed what can be produced with the limited resources and time that we have available. Because of scarcity, choices must be made as to how to use our resources. Some folks who study economics like to say there is an “economic way of thinking.” In other words, there are certain aspects to looking at the world from an economic perspective.

4 Opportunity cost The opportunity cost of something is what you give up to get it. The consequence of limited resources and unlimited wants - scarcity - is that choices of how to use resources must be made. If we use resources to produce one thing we can not, obviously, use those very resources to produce something else. From the above statement we understand that there is a trade-off each time we do one thing. If we do one thing, what we give up the ability to do is called the opportunity cost of what we do. Really the opportunity cost of an activity is the value we would have received had we done the next best activity. All costs in economics are opportunity costs.

5 This first part of the economic way of viewing the world is a statement of what we say is a fact – there is scarcity. The second part of the economic way of thinking is the idea that people, when they act or do things, have a purpose or are on a mission. The third part of the economic way of thinking is really a method employed to make sense of information that is available. I will get back to these pieces of the economic way of thinking, but I want to digress and explain briefly what are considered the basic economic resources.

6 In general there are 4 Basic Economic Resources: Land, labor, capital and entrepreneurial ability are the 4 basic economic resources. Land includes the soil, water, trees and other natural resources. Labor is that human effort that is not entrepreneurial. You could say labor is the working. Capital (or capital goods) includes all those man made tools and stuff we use to make other goods. Entrepreneurial ability is that human effort devoted to the combining of the other three resources in production of goods and services.

7 Rational In economics we make a major assumption about people. This assumption is that people ACT in their own self- interest. This is what we mean by rational. Another way to understand the idea that people are rational is to say that people have well defined goals and they try to fulfill their goals the best way they can. So, when I say people are on a mission I mean they are rational or act with a purpose. A big idea here is that people try to maximize their utility. Utility is the happiness or satisfaction people get from consuming goods and services.

8 Utility I get a lot of utility from listening to the group Green Day. In their song Warning there is a line that goes, “did you remember to pay the utility.” Please do not confuse their use of the word utility, where they mean paying a bill, with our use. We mean happiness or satisfaction! You can get some satisfaction, yes you can.

9 Marginal Analysis The third part of the economic way of thinking is a method we call marginal analysis. I will use an example to give you the feel for marginal analysis. Say after 5 weeks of class you find you study economics 3 hours a week. You wonder if you should study a 4 th hour. Note you already have benefits from the 3 hours of study and these include the utility you get from grades and the conversation you can have with others about meaningful topics.

10 Marginal analysis If you study the 4 th hour you will get extra or additional, what we call marginal, benefits from the 4 th hour of study. You can be sure that if you add the 4 th hour of study their will also be marginal costs to that hour of study. If you are like me, you spend some couch time each week watching shows like South Park, Scrubs and the Daily Show. Maybe the 4 th hour of study on econ will mean you give up some of this. Surely you would give up something! Rule of thumb: Change your behavior (like how many hours you study econ) when the marginal benefits are at least as great (or better) than the marginal costs.

11 Economic Models Have you every used a map of a city so that you could drive around to places you wanted to get to? Was the map part of a circular globe? Maps I have used were flat, but they were fairly decent. As a model of the world the map being flat wasn’t true, but it was useful. Economic models may have assumptions built into them that are not exactly true, like maps of the world assuming the world is flat, but they help us make sense of the world.

12 Economics is a science - really! In economics, like other scientific fields, models are used to predict and explain activity or actions. A model is judged to be useful by how well it predicts and explains these actions. The better the predictions and explanations, the better the model. There are two main branches of economics as a science: microeconomics and macroeconomics.

13 Microeconomic topics Economics has two main branches of study: micro and macro (please do not report me to the Department of Redundancy Department). Micro topics include (ECO 203 is a micro course) 1) How markets work - we are concerned about how the price of a product and how much of the product is sold changes due to changing conditions in the world. 2) We focus on the decisions individual people and firms make. 3) From time to time we will ask questions about what role the government should play and what impact that role will have on a market.

14 Macroeconomic topics Some macro topics (ECO 202 is a macro course) 1) How the national economy works - we are concerned about things like inflation, unemployment, international trade and economic growth. 2) We will ask what role the government plays in the economy and explore what impact that role has on the economic system. 3) We will want to understand how changes in variables such as the interest rate affect our lives in the roles we play in households, firms, and governments.

15 Positive and normative economics What is the difference in the following two statements? 1) Raising the minimum wage will not change the unemployment rate at all. 2) I think we should raise the minimum wage. To me both of these statements sound like my opinion. BUT, the first may, or may not, be right. It is a statement that can be put to the test. If economics were like chemistry you could conduct an experiment to see if the statement is true. (In fact, statistical tools help economics be like chemistry.)

16 Positive and normative economics Statements like 1) above that can be put to the test are POSITIVE economic statements. Much of the work in science is formulating and testing positive statements. Statement 2) above is a statement about what someone thinks SHOULD BE. We call it a normative economic statement.