What is Economics? Lesson 3: The Ideas Economics in One Lesson Chocolate, Vanilla, or Strawberry When a woman working for a consumer polling firm asked three shoppers about their favorite ice cream flavors, two said they prefer chocolate to vanilla and two said they prefer vanilla to strawberry. After answering the woman's questions, the shoppers were treated to a free serving of ice cream, but they could choose between only two flavors: chocolate and strawberry. To the woman's surprise, two of the shoppers picked strawberry. Had they lied to the woman about their preferences? Economics in One Lesson Neapolitan! Not necessarily. The shoppers could have ranked the flavors this way: One prefers chocolate to vanilla and vanilla to strawberry. One prefers vanilla to strawberry and strawberry to chocolate. One prefers strawberry to chocolate and chocolate to vanilla. While two of the shoppers prefer chocolate to vanilla and two prefer vanilla to strawberry, it's also true that two prefer strawberry to chocolate. Economics in One Lesson Readings and Assignments • • • • • • • • Economic Reasoning Intro to 1 Junior Achievement Chapter 1 “Barstool Economics” “Heidi’s Bar” “Death by Bureaucrats” “Something for Nothing” “The Individual in Society” Lessons for the Young Economist, 1 Economics in One Lesson The Economics of Real People Economics deals with the real actions of real men. Its [laws] refer neither to ideal nor to perfect men, neither to the phantom of a fabulous economic man (homo oeconomicus) nor to the statistical notion of an average man. . . . Man with all his weaknesses and limitations, every man as he lives and acts, is the subject matter of [economics]. —Ludwig von Mises, Human Action Economics in One Lesson What is Economics? Economics in One Lesson Praxeology Study of human action. Etymologically defined as "the science of human action" Economics in One Lesson Fundamentals of Human Action • • • • • • • Purposeful Human (Individual) actions Teleological (Intentional), and end in view Exchanges, economizing More satisfactory state of affairs Scales of value, opportunity costs ORDINAL Time, production takes time* – Before – During – After Economics in One Lesson Means • General conditions • Time – Production • Working time • Maturing time • Entrepreneurship • Goods – Consumers’ goods (1st order) – Producers’ goods (higher order) • Land • Labor • Capital Economics in One Lesson Economics • The study of the conscious, purposive actions of individuals, seeking to relieve some "felt uneasiness" and thus to accomplish the most urgent goal on his or her personal scale of subjective values. • Individuals are able to act to attain various goals because of the nature of our "ordered universe." Economics in One Lesson Principles that underlie the interaction of individual choices • There are gains from trade. • Markets move (tend) toward equilibrium. • Resources should be used as efficiently as possible to achieve society’s goals. • Free markets lead to more efficiency. • When markets don’t achieve efficiency, government intervention is seen by many to improve society’s welfare, which leads to more regulations, ad infinitum. Economics in One Lesson Economics in One Lesson Making Choices: The Rules • When making choices, people ALWAYS chose the option that will make them better off. – This is called Self Interest. – This is subjective • People will make a choice if, and only if, the expected benefits of the choice are greater than the expected costs. – This is called Rational Decision Making. – These are perceived benefits versus Costs. – Don’t judge!! Economics in One Lesson Choice • Because the world is characterized by scarcity, we are forced to make choices. – We must allocate scarce resources among competing uses. • Wood that is used for tables cannot be used for crutches. • Land that is kept undeveloped cannot be used to build housing for the poor. Economics in One Lesson What is the Study of Economics really about? • Economics can be defined as the study of exchanges • Robinson Crusoe? Economics in One Lesson • Scarcity • The Economic Problem • Tradeoffs • Economizing Scarcity, Goods and Bads • An item that costs something is called scarce. – Anything with a price on it is called an economic good—these include goods and services. – A free good is a good for which there is no scarcity. • An economic bad is anything you want to get rid of (pollution, disease, garbage) Economics in One Lesson Clarifying Concepts • Scarcity means that not enough is available for free. • A shortage occurs when not enough is available at the current price. A shortage is a problem of price. • Poverty occurs when the goods are scarce, and those who need them do not have the income to obtain them. Poverty is a problem of income. Economics in One Lesson Lets Play a Game • Round 1 – You give me $0.05 and I will give you $0.50 • Round 2 – You give me $0.05 and I will give you $0.25 • Round 3 – You give me $0.05 and I will give you $0.10 • Round 4 – You give me $0.05 and I will give you $0.05 • Round 5 – You give me $0.05 and I will give you $0.01 Economics in One Lesson Let’s Play a Game • • • • • • • • • Do 20 Push-ups and I will pay you $0.25. Do another 20. Do another 20. Do another 20. Do another 20. Do another 20. Do another 20. Do another 20. Do another 20. Economics in One Lesson A Little More or a Little Less • Most choices focus on choosing a little more or a little less of something. – Consider your choices when you ate breakfast. • More fruit – Less fruit? • One juice or two? • When we make choices based on a little more or a little less, we call it Marginal Decision Making Economics in One Lesson Choices are Made at the MARGIN……More Pop? Source: The Onion __________ Costs? Economics in One Lesson Making the Choice • People will choose to do an activity so long as the Marginal Benefit is equal to or greater than the Marginal Cost: – The Rules •IF MB ≥ MC then DO IT •IF MB < MC then DO LESS Economics in One Lesson But be careful • Not all alternatives • We all prioritize • “Put in order” Economics in One Lesson Characteristics of Cost • Costs are the results of ACTIONS • Costs are to people; things have no cost –People choose – so people bear costs. –“Governments,” “societies,” countries, nations don’t choose –People do. –Don’t confuse cost and price Economics in One Lesson Characteristics of Cost • Costs are the results of ACTIONS • Costs are TO people; things have no cost • All costs lie in the FUTURE –The future is uncertain. When we choose, we anticipate costs, but we don’t know for sure until the act of deciding is complete. –Cost ≠ Consequence (Getting a speeding ticket!!) Economics in One Lesson Rational Self-Interest • Economists believe that people choose options that give them the greatest satisfaction. • This means that people: – use all available time and information, – weigh the costs and benefits of all available alternatives, – and choose the alternative that they believe will bring them the most benefit at the lowest cost. This is the alternative that they believe will bring them the most satisfaction. • This does not mean that people are innately selfish. Self-interest is not greed. Economics in One Lesson TANSTAAFL • Since the world is characterized by scarcity we are forced to make choices. • Since we are forced to make choices we face costs. Economics in One Lesson It’s a Lamp Economics in One Lesson Sunk Cost Fallacy • Don’t think about costs already spent. • Remember all costs are future. • Sitting through a boring movie? • Nickel and diming for a junker? Economics in One Lesson Opportunity Cost Analysis What was the 1st decision you made this morning? Economics in One Lesson Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Benefits Refused Economics in One Lesson Get Up Now Don’t Get Up Now Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Benefits Refused Economics in One Lesson Get Up Now Shower Bkfst Don’t rush On time coffee Don’t Get Up Now More sleep Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Opp. Cost Benefits Refused Economics in One Lesson Get Up Now Shower Bkfst Don’t rush On time Coffee Don’t Get Up Now More sleep X X Opportunity Cost Analysis Decision Maker: YOU Alternatives: Perceived Benefits Choice Get Up Now Shower Bkfst Coffee Don’t rush On time X Opp. Cost Benefits Refused Economics in One Lesson Don’t Get Up Now X More sleep Tanstaafl Marginal costs gas, other car expenses $5.00 paper & ink used 0.25 opportunity costs (watching Judge Judy) 0.10 total marginal costs $5.35 Marginal benefits higher lifetime income due to better economics grade earned because you learned about opportunity costs in class today $0.17 were able to socialize with other students 0.10 were able to be in the same room with me for 50 minutes 7.25 total marginal benefits $7.52 Totals??? Economics in One Lesson Marginal benefits $7.52 Marginal Costs $5.35 MB>MC $2.17 More Examples • Ask me about……. • • • • • Driving to NY to see the Yankees Free Neil Young concert Cuban cigars Burundi Coffee Being here Economics in One Lesson Goods to Produce Goods • Resources are the elements needed to produce goods. Resources are also called – factors of production – inputs • They are: – Land (includes natural resources) – Labor (physical and intellectual services of people) – Capital (plant, machinery, equipment used in production) – Entrepreneurs Economics in One Lesson Resources in Production land rent labor Resource Suppliers wages capital Producers of Goods interest entrepreneur Wages/profit (loss)/Pure interest Economics in One Lesson What is the stuff? Economics in One Lesson How? Economics in One Lesson The Circular Flow of Resources, Goods, Services and Money Payments Economics in One Lesson Marginal Opportunity Cost • The Production Possibilities Curve (PPF) illustrates the concept of opportunity cost. Each point on the PPF means that every other point is a forgone opportunity. • The PPF bows outward because there are ever-increasing marginal opportunity costs to the production of any good. Economics in One Lesson A Production Possibilities Table % of resources % of resources devoted to devoted to production production Pounds Number of guns of butter of butter of guns 0 20 40 60 80 100 Economics in One Lesson 0 4 7 9 11 12 100 80 60 40 20 0 15 14 12 9 5 0 Row A B C D E F A Production Possibility Frontier for a Society 10 9 8 7 6 5 4 3 2 1 0 If the slope of the production curve is -2 at A, the A opportunity cost of 1X is 2Y. 2Y . 1X 1 2 Economics in One Lesson 3 4 5 6 7 8 9 X A Production Possibilities Frontier (PPF) Butter 1 pound 15 A of butter 14 2 pounds of butter 12 B C D 9 5 E 5 pounds of butter 0 4 4 guns Economics in One Lesson 7 3 guns 9 F 11 12 Guns 1 gun Specialization • Economic agents (individuals, firms, nations) will be better off if they choose to produce those things for which they have the lowest opportunity costs, and trade for those with higher costs. • Agents do this because such choices involve giving up the least amount of other things. Economics in One Lesson A Production Possibility Curve for a Society • Comparative advantage explains why opportunity costs increase as the consumption of a good increases. – Some resources are better suited for the production of some goods than to the production of other goods. Economics in One Lesson Specialization & Trade • Comparative Advantage: the ability to produce a good or service at a lower opportunity cost than someone else. • Law of Association: – proposition that the joint output of trading partners will be greatest when each good is produced by the low opportunity cost producer. Economics in One Lesson Determining Comparative Advantage (Output Method) 1. Which nation has an absolute advantage in producing CDs? 2. Which nation has an absolute advantage in producing beef? 3. Which nation has a comparative advantage in producing CDs? 4. Which nation has a comparative advantage in producing beef? 5. Should Japan specialize in CDs or beef? 6. Should Canada specialize in CDs or beef? Economics in One Lesson This increase in output is due to specialization: Each person specializes in the task that he or she is good at performing. Leads to greater efficiency! Follow your bliss! Economics in One Lesson Efficiency In production, we’d like to have productive efficiency – achieving as much output as possible from a given amount of inputs or resources. Economics in One Lesson Efficiency • Any point within the production possibility curve represents inefficiency. • Inefficiency – getting less output from inputs which, if devoted to some other activity, would produce more output. Economics in One Lesson Efficiency Any point outside the production possibility curve represents something unattainable, given present resources and technology. Economics in One Lesson Efficiency and Inefficiency Unattainable point, given available technology, resources and labor force 10 Guns 8 6 C Efficient points B 4 2 0 Economics in One Lesson Inefficient point 2 4 D Butter A 6 8 10 Growth • The PPF moves outward (growth occurs) as the result of: – Increased resources • Larger labor force • Change in labor force participation • Chance in labor-leisure decision – Improved technology (innovation) – Expansion of capital stock – An improvement in the rules (laws, institutions, and policies) of the economy Economics in One Lesson Shifts in the Production Possibility Curve • Society can produce more output if: –Technology is improved. –More resources are discovered. –Economic institutions get better at fulfilling our wants. Economics in One Lesson A Shift of the PPF 225 A 2 Defense Goods 200 A1 B2 175 B1 C2 Defense Non-defense A2 225 0 B2 200 75 C2 175 120 D2 130 150 E2 70 160 F2 0 165 150 C1 125 D2 100 75 D1 0 E1 25 50 75 100 125 150 Economics in One Lesson E2 F2 Nondefense Goods Shifts in the Production Possibility Curve Neutral Technological Change Butter C A 0 Economics in One Lesson B D Guns Shifts in the Production Possibility Curve Biased Technological Change Butter C B 0 Economics in One Lesson A Guns Quote From Thomas Sowell Once, after giving a talk, I was confronted by a lady in the audience who asked what some people regard as the ultimate question: "What is YOUR solution?“ "There are no solutions," I said. "There are only trade-offs.“ "The people DEMAND solutions!" she shot back angrily. The people can demand square circles if they want. But that doesn't mean that they will get them. What they are more likely to get is the illusion of a solution by someone seeking their vote. Economics in One Lesson Opportunity Cost! Micro vs. Macro • Microeconomics – Studies the economy at the level of individual consumers, workers, firms, goods, and markets • Macroeconomics – Studies the economy at the aggregate level, at the level of the economy as a whole. – Examines total consumer behavior, total employment, total production, total sales, etc. Economics in One Lesson Ideas to Take Away from Lesson 3 • Scarcity forces us to choose and every choice has an opportunity cost. • Not all of our desires can be satisfied. • People make these choices based on their perceptions of the expected costs and benefits of the alternatives. • Because costs lie in the future, the relevant costs and benefits occur at the margin. • Voluntary trade creates wealth. • Open markets are a key institution for fostering economic growth and improving standards of living. Economics in One Lesson Opportunity Cost: the foregone alternative Think: “next-best” Economics in One Lesson Use the concept of opportunity cost to discuss the following questions: • Who might choose to get bumped from a flight? • Should Tiger Woods mow his own lawn? • What is the cost of attending college? –for LeBron James? –for you? Economics in One Lesson Economics in One Lesson Examples of Shifts in the Production Possibility Curve • Test your understanding: –A meteor hits the world and destroys half the earth’s natural resources. –Nanotechnology is perfected that lowers the cost of manufactured goods. Economics in One Lesson Examples of Shifts in the Production Possibility Curve • Test your understanding: –A new technology is discovered that doubles the speed at which all goods can be produced. –Global warming increases the cost of producing agricultural goods. Economics in One Lesson Some Questions • • • • Can economics make you rich? Is economics a science? Why or why not? Does scarcity affect everyone? Do the laws of economics still work inside a maximum security prison? • *Isn’t it just as important for the average person to understand particle physics, since much of the funding for this research comes from government grants? Economics in One Lesson
© Copyright 2024