What is Economics College Notes Supplement Mathias Economics: The study of choices made by people faced with scarcity  A situation in which resources are limited and can be used in different ways so we must sacrifice one thing for another.  How many of you had breakfast?   WHY? WHY NOT?  WHAT DID YOU GIVE UP to have or have not? Breakfast Analogy for Scarcity  We all have the same amount of time ( a scarce resource) but we choose to allocate it differently.   OPPORTUNITY COSTS: What we give up. OPPORTUNITY BENEFITS: What we get in our decision. Scarcity  A situation in which resources are limited and can be used in different ways – so we must sacrifice one thing for another. Positive v. Normative Analysis  Positive answers questions of fact. “What is?”  Normative answers “what ought to be.” EXAMPLE: WHICH IS IT?  Mr. Alumni Bigbucks has donated 50million dollars to UNL. It can be used to build a new football practice facility OR a state of the art library / technology center. What would make the positive a normative analysis?  What do they think should be built and why? TRIP DOWN MEMORY LANE: The Father of Economics – ADAM SMITH    1723 – 1790 Scottish professor First to propose CAPITALISM   The foundation of our economy Wrote WEALTH OF NATIONS in 1776.  The “bible” of our economy. Adam Smith’s “radical” ideas.  Let the people decide for themselves the three basic economic questions:    What to produce? How to produce? For whom to produce? What was the INCENTIVES for people to decide the 3 questions?  PROFIT!   It gives incentive to others to work. Psychic Income  The “personal satisfaction” in working. Adam Smith’s “radical” ideas  Government should stay out of people’s way.     Not tax too much. Let people enjoy their money how they want. Don’t regulate business. LAISSEZ-FAIRE Adam Smith didn’t mean NO government!  Provide INFRASTRUCTURE:       Police and Fire protection Public Education Transportation (roads) Communications (mail) Military Civil Court System Adam Smith’s INVISIBLE HAND  Working in one’s own SELF-INTEREST is also other people’s SELF-INTEREST.  Self interest is NOT selfishness. The Invisible Hand  Individuals, business firms and governments come up with similar answers to:    What goods and services do we produce? How do we produce these goods and services? Who consumes the goods and services that are produced? Economic Way of Thinking   ASSUMPTION 1: People act in their individual selfinterest. ASSUMPTION 2: People make informed decisions.  Act in what we think is a rational manner. Economic Way of Thinking  The CETERIS PARIBUS is that when we consider changes in one variable we hold all other variables constant. Economic Way of Thinking  THINKING ON MARGIN:  Small, incremental changes to determine if it is desirable to change the level of economic activity.  Adding on one more worker on the assembly line.   Do we get more product? Eating the fourth piece of pizza when you aren’t hungry! Productions Possibilities Curve  A curve that shows the possible combinations of good and services available to an economy GIVEN that all productive resources are fully employed and EFFICIENTLY used. PPCs can show what is given up as well PPCs can SHIFT if there is a change to: Natural Resources      Labor (physical / mental effort) Physical Capital (machines, building, roads, etc) Human Capital – knowledge and skills. Entrepreneurship – effort to coordinate production and sales.  ALSO comes up with the idea of what to produce and how to produce! Test Your Knowledge!  Economics is best defined as the study of:     Financial decision-making How consumers make purchasing decisions Choices made by people faced with scarcity Inflation, unemployment, and economic growth Economics Financial How is best defined as the study of: decision-making consumers make purchasing decisions Choices made by people faced with scarcity Inflation, unemployment, and economic growth Test Your Knowledge  Because resources are limited:     Only the very wealthy can get everything they want. Firms will be forced out of business. The availability of goods will be limited but the availability of services will not. People must make choices Because Only resources are limited: the very wealthy can get everything they want. Firms will be forced out of business. The availability of goods will be limited but the availability of services will not. People must make choices Check Your Knowledge!  Resources are all the following EXCEPT:     Unlimited and in abundance. The things we use to produce goods and services. Limited in quantity and can be used in different ways. Scarce and therefore requiring choices to be made.  Resources are all the following EXCEPT:  Unlimited and in abundance.    The things we use to produce goods and services. Limited in quantity and can be used in different ways. Scarce and therefore requiring choices to be made. Check Your Knowledge!  An arrangement that allows buyers and sellers to exchange things is called:     Contract Market Money efficient  An arrangement that allows buyers and sellers to exchange things is called:  Contract  Market  Money efficient  Check Your Knowledge!  In which of the following markets is time exchanged for money?     Consumer market Political market Labor market None of the above.  In which of the following markets is time exchanged for money?  Consumer market Political market  Labor market  None of the above.  Check Your Knowledge!  Markets perform all the following functions EXCEPT:     Determining the prices of goods and services. Helping firms decide what to produce Helping firms decide how to produce All the above are functions that markets perform.  Markets perform all the following functions EXCEPT:     Determining the prices of goods and services. Helping firms decide what to produce Helping firms decide how to produce All the above are functions that markets perform. An Adam Smith Question  Adam Smith used the metaphor of the invisible hand to explain how:     Markets mismatch buyers and sellers. The butcher and the baker are benevolent People acting in their own self-interest promote the interest of society as a whole. The production possibilities frontier illustrates efficient outcomes.  Adam Smith used the metaphor of the invisible hand to explain how:   Markets mismatch buyers and sellers. The butcher and the baker are benevolent  People acting in their own self-interest promote the interest of society as a whole.  The production possibilities frontier illustrates efficient outcomes. Check Your Knowledge!  Deciding if a company will produce cars by manual labor or robotics answers the economic question of:     Who consumes the products produced? What will be produced? Where will the products produced by consumed? How will we produce it?  Deciding if a company will produce cars by manual labor or robotics answers the economic question of:     Who consumes the products produced? What will be produced? Where will the products produced by consumed? How will we produce it? Positive v. Normative Economics  Positive Economics:     Is the focus of most modern economic reasoning. Concerns the forces that affect economic activity Predicts the consequences of alternative actions All of the above is correct. Positive v. Normative Economics  Positive Economics:     Is the focus of most modern economic reasoning. Concerns the forces that affect economic activity Predicts the consequences of alternative actions All of the above is correct. Positive v. Normative Economics  Which of the following is a question answered with normative economic reasoning?     If the college offers free parking for students, will more students drive to campus? If the college provided more financial aid assistance, would more students benefit? If the college increases tuition, would class size decline? Should the college cut tuition to stimulate enrollments? Positive v. Normative Economics  Which of the following is a question answered with normative economic reasoning?     If the college offers free parking for students, will more students drive to campus? If the college provided more financial aid assistance, would more students benefit? If the college increases tuition, would class size decline? Should the college cut tuition to stimulate enrollments? Question:  To think at the margin means to consider:     How nothing remains constant over time. How a small change in one variable affects another variable. How people behave in their own self-interest. How people will decide what to purchase. Answer!  To think at the margin means to consider:  How nothing remains constant over time.  How a small change in one variable affects another variable.  How people behave in their own self-interest. How people will decide what to purchase.  LAST!  A student has a D grade average in her accounting course and a B grade average in Economics. She decides to study an extra hour for her accounting exam.