1. The Study of Economics
Lesson 1
Section 1

2. What is Economics?
Economics can be looked at in a couple of essential ways.
Study of Behavior: Individual Choice
Economics can be used as a Social Science, to attempt to answer why people do what they do, and to predict behavior
Finding answers to fundamental questions
Any society needs to answer some fundamental questions in order to function, such as how do we distribute food to society?

3. The Economy
The “Economy” is the system that coordinates choices about production and distribution
Three Questions
What do we make?
How do we make it?
Who gets it?
Market Economy (Capitalism)
Decisions are decentralized
The economic system currently used in the U.S. and most countries around the world.
Personal Incentives to motivate people (starvation)
Property Rights
Command Economy (Communism)
Centralized decision making
Used in few countries (North Korea, Cuba?, Old Soviet Union)
Community Incentives (noble but largely unworkable)
No (or few) personal property (everything belongs to the “State”)

4. Macro and Micro Economics
Individual Decisions
Households
Businesses
Macroeconomics
The Big Picture
Economic Aggregates
National Income (GDP)
Inflation

5. Scarcity Defining axiom of economics
There exists a limited quantity of resources to meet unlimited needs
Example – everyone wants a house, but there is not enough land (it is also used for other essential things like farming, and not all land is readily usable for homes)
These resources are factors of production
What else would be a factor of production?

6. Factors of Production Land Labor Capital
Agriculture, mining, logging, water (rivers), housing, parks, buildings, office space
Labor
Educated vs. non-educated, skilled vs. non-skilled, high-wage vs. low-wage, domestic vs. foreign
Capital
Money, equipment, assets, products, raw materials
Entrepreneur-ship (On – tray – pren – ur)
Risk taking, innovation, organization of resources

7. Goods and Services
Goods and Services are the products that come from the factors of production that we buy from other people and companies.
The good could be an ice cream cone, and a service could be mowing your lawn.
By the book, capitalists supply goods and services to those who demand it.

8. Choices and Trade-Offs
In any situation you will find that there is a choice to be made. Some decisions are easy, some are very difficult.
Economics makes a study of these choices; what people get or do, versus what they do not get or do. These are Trade-Offs.
Example – After school you could do your homework, or go out with your friends. What is the trade-off in each case? What other things could you do with this time?

9. Opportunity Cost Opportunity costs are trade offs that you accept.
The opportunity cost is the best thing or activity you are willing to give up, to get something else you want.
This opportunity cost can be expressed as a good, service, your time, expense, or even a relationship.

10. Margins
Incremental Cost vs. Benefit – For most economists, thinking at the margin is essential to economic thinking.
The idea of “thinking at the margin” is all about what it will cost to produce just one more item. If there is benefit, you do it, then consider the next item.
Marginal Analysis
Marginal Benefit
Marginal Decision
On The Margin

11. Use of Models in Economics
Economics is so complex with so many variables that it is literally (at this time) impossible to Model directly. Therefore Economics uses approximations, and simplified Models to try to understand what is happening.
The use of Models is necessary, but at the same time it introduces Assumptions about the economy and the world. Assumptions are guesses that allow us to ignore many variables to simplify the Model.
For example, if you were a economist tasked by the Governor of California to determine if a new Tax would benefit or hurt the economy, you would have to make certain assumptions about peoples behavior with regards to the tax in order to create a Model.
One form of assumption that is regularly used it Ceteris Paribus, which means (loosely) “all other things being equal” (or we are changing one variable, but we think everything else will remain the same.)

12. The Rational Actor in Economic Theory (1)
Homo economicus is a term used for an approximation or model of Homo sapiens that acts to obtain the highest possible well-being for himself given available information about opportunities and other constraints, both natural and institutional, on his ability to achieve his predetermined goals. This approach has been formalized in certain social science models, particularly in economics.

13. The Rational Actor in Economic Theory (2)
Homo economicus is seen as "rational" in the sense that well-being as defined by the utility function is optimized given perceived opportunities. That is, the individual seeks to attain very specific and predetermined goals to the greatest extent with the least possible cost. In other words, we are all “Rational Maximizers”

14. The Rational Actor in Economic Theory (3)
Note that this kind of "rationality" does not say that the individual's actual goals are "rational" in some larger ethical, social, or human sense, only that he tries to attain them at minimal cost. Only naïve applications of the Homo economicus model assume that this hypothetical individual knows what is best for his long-term physical and mental health and can be relied upon to always make the right decision for himself.

15. Positive vs. Normative Economics, and why Economists Disagree
Positive Economics
Based on fact
I.e. The economy added 240,000 jobs last month.
Normative Economics
Opinion (What should be done)
I.e. We should spend more on education.
Why Economists Disagree
Most economists agree on most issues
Disagreements come from interpretation of facts and what is and is not a causal factor.
I.e. Economists disagree on the effects of taxation, and how taxation should be applied to get the best performance out of the economy.