1. © 2010 Pearson Addison-Wesley For Whom? 3. For Whom? Who gets the goods and services depends on the incomes that people earn.  Land earns rent.  Labor earns wages. (Around 70%)  Capital earns interest.  Entrepreneurship earns profit. What, How, and For Whom?

2. © 2010 Pearson Addison-Wesley self- interestsocial interest 2) When do choices made in the pursuit of self- interest also promote the social interest?  You make choices that are in your self-interest—choices that you think are best for you.  Choices that are best for society as a whole are said to be in the social interest. Two Big Economic Questions (2)

3. © 2010 Pearson Addison-Wesley The Big Question Is it possible that when each one of us makes choices that are in our self-interest, it also turns out that these choices are also in the social interest? ---Isn’t this perfect? Two Big Economic Questions (2)

4. © 2010 Pearson Addison-Wesley In The Wealth of Nations(1776), Adam Smith writes: "By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.“ *Economics Noble Prize--Ken Arrow, John Hicks, and Gerard Debreu, as well as John Nash of “Beautiful Mind” Youtube: a beautiful mind-game theory

5. © 2010 Pearson Addison-Wesley Five topics that generate discussion and that illustrate tension between self-interest and social interest are  Globalization (Whose self-interest does this serve?)  The information-age economy  Global warming  Natural resource depletion  Economic instability Two Big Economic Questions (2)

6. © 2010 Pearson Addison-Wesley To think as an Economist! Choices and Tradeoffs tradeoff You can think about every choice as a tradeoff—an exchange—giving up one thing to get something else. “Guns versus Butter.”

7. © 2010 Pearson Addison-Wesley WhatHowFor Whom What, How, and For Whom Tradeoffs What Tradeoffs arise when people choose how to spend their incomes, when governments choose how to spend their tax revenues, and when businesses choose what to produce. To think as an Economist! OR?

8. © 2010 Pearson Addison-Wesley How Tradeoffs arise when businesses choose among alternative production technologies. For Whom Tradeoffs arise when choices change the distribution of buying power across individuals. Government redistribution of income from the rich to the poor creates the big tradeoff—the tradeoff between equality and efficiency. To think as an Economist!

9. © 2010 Pearson Addison-Wesley Choices Bring Change What, how, and for whom get the quality of our economic lives change. How to choose? gain vs. cost To think as an Economist!

10. © 2010 Pearson Addison-Wesley Opportunity Cost “There’s no free lunch” The highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen. To think as an Economist!

11. © 2010 Pearson Addison-Wesley Choosing at the Margin People make choices at the margin. The benefit/opportunity cost from pursuing an incremental increase in an activity is its marginal benefit/cost. Marginal Benefit vs. Marginal Cost To think as an Economist!

12. © 2010 Pearson Addison-Wesley Responding to Incentives Our choices respond to incentives. To think as an Economist! vs. vs.

13. © 2010 Pearson Addison-Wesley Economics as Social Science and Policy Tool Economics as Social Science Economists distinguish between positive and normative statement:  What is—positive statements  What ought to be—normative statements Test only Positive Statement.

14. © 2010 Pearson Addison-Wesley Economists create and test economic models. An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. It is a very very useful tool! Economics as Social Science

15. © 2010 Pearson Addison-Wesley Economics is a way of approaching problems in all aspects of our lives. Three broad areas are  Personal economic policy (student loan)  Business economic policy (New Branch of Chase)  Government economic policy (How to save Cal. from bankcruptcy) Economics as Policy Tool

16. © 2010 Pearson Addison-Wesley End of Chapter 1 End of Chapter 1