Introduction to Economics

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Meredith Mitchell
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1 Introduction to Economics Economic Reasoning Principles and Scarcity

2 People Face Tradeoffs! Scarcity exists and it does not go away.! Because resources are limited people must make choices.! Give me an example of a resource that is scarce and choices that must be made in regards to that resource.

3 People Economize! People choose alternatives that they perceive to off the greatest benefits over costs.

4 Economic Reasoning Principle #2: Choices impose costs; people receive benefits and incur costs when they make decisions.! The cost of a choice is the value of the nextbest alternative foregone, measurable in time or money or some alternative activity given up.

5 All choices involve costs! The opportunity cost of a choice is the forgone alternative, the (benefits of the) alternative that was given up.! Don t ask: What could I have done? Ask: What would have I done.! It s only the next-best alternative that matters.

6 The Consequences of Choices Lie in the future! Decision are made in the light of an unknown future, based on expected costs and expected benefits. Information, experience, and knowledge inform decision-making but do not eliminate uncertainty.

7 Rational Decisions Occur at the Margin! All or nothing decisions are extremely rare. Most decisions are best made by by weighing the expected costs of the next increment: For example, the decision is not Should we paint the house? But Should we paint the house or wait a year or Should we pain the house ourselves or hire someone to do it?

8 People Respond to Incentives! Incentives are rewards or punishments that influence people s decisions.! When incentives change, people s behavior changes in predictable ways. Incentive are shaped by a society s institutions, the formal and informal rules of the game

9 Prices are Extremely Powerful Incentives! Prices change in dynamic economies as the relative demands for and supplies of goods, services, and resources changes. The changing prices change people s opportunity costs and thus, the choices they make.

10 Voluntary Trade Creates Wealth! Voluntary trade occurs only when both parties expect to benefit from the exchange. Giving up things of lesser value for things of greater value makes all parties to the exchange better off.! Specialization allows people to produce more by concentrating on what they do best and trading their surplus goods or services to obtain other goods and services. Society benefits as producers specialize in what others value.

11 Markets Facilitate Exchange and Increase Individual Freedom! Market institutions, the written and unwritten rules governing exchange in the economy, enhance personal freedom by allowing people to make decisions in light of their perceptions of the expected costs and expected benefits they face.

12 Governments can sometimes improve market outcomes! Externalities, lack of competition, defining and enforcing property rights, free-rider problems, and the desire to promote social goals like equity, bring the government into the economy. The pertinent question when considering government action is Do the benefits outweigh the costs?

13 Individual and National Standards of Living Depend on the Ability to produce goods and Services! Increased labor productivity raises incomes and standards of living. Productivity levels can be changed over time, with improvements in education and technology.

14 Hypothesis for the Week: Human prosperity and social cooperation develop spontaneously in societies that protect private property rights and encourage voluntary trade.

15 Low, Middle, & High Income Nations Why are some countries rich and others poor?

16 Economic Growth! Economic growth raises standards of living, even in the continuing face of scarcity! Growth does not eliminate scarcity but may attenuate it (some things become less scarce)! Growth is Not even across times and countries Not automatic Not irreversible BUT! It is the most powerful weapon against poverty ever discovered!

17 Economic Growth improves the lives of the poor by making the pie bigger Bigger slices mean higher standards of living

18 Population Growth and Important World Events ~1750

21 Scarcity Isn t Optional! Fact: Resources ARE limited Land (natural resources) Labor (human effort) Capital (buildings, machines, & technology) Entrepreneurship (willingness to risk) Time! Fact: Human desires are boundless

22 Why can t we have all we want?! Available resources are limited Land (57,506,000 sq mi. & not even all habitable!) Labor (6.7 bil. souls x 24 hrs a day) Capital (less than, trust me) Entrepreneurship (not everybody is Jeff Bezos)! Human desires are boundless : 6.7 billion & increasing

23 Productivity! The output produced from a given set of resources in a given period of time.! Increasing productivity means that greater output is produced from a given set of resources in a given period of time.

24 The Secret to Economic Growth: Productivity! The output produced from a given set of resources in a given period of time.! Increasing productivity means that greater output is produced from a given set of resources in a given period of time.! farminginthe50s/machines_plowing.html

25 Key to Productivity: Institutions! The formal and informal rules of the game that shape incentives and outline expected and acceptable forms of behavior in social interaction our institutions help protect property rights. Institutions in your life:

26 Institutions! the formal and informal rules of the game that shape incentives and outline expected and acceptable forms of behavior in social interaction.

27 What are the rules of the game (the accepted and expected forms of social interaction) in: Dating?

28 The Institutions that matter for economic growth...! Open markets! Property rights! The rule of law! Entrepreneurship and innovation... are the institutions that shape the Incentives for choices about the uses of scarce resources.

29 Incentives! The reward or penalties that influence people s choices and behavior.

30 The Big Ideas from Lesson 1: 1. Scarcity forces us to choose among alternatives 2. Economic growth gives us more to choose from and raises standards of living by: reducing infant mortality, Increasing life expectancy, reducing hunger, improving environmental quality, and reducing the incidence of debilitating diseases.

31 The Big Ideas from Lesson 1: 3. Some institutions and institutional arrangements encourage economic growth and some do not. 4. The institutions that foster growth and economic development include: Open markets Property rights and the rule of law Entrepreneurship and innovation

32 Questions:???! Why are some countries rich and others poor?! Why have some countries experienced economic growth and others have not? (What factors lead to economic growth?! Why are some countries growing rapidly today and others are not, even though they may have experienced significant growth in the past?! What can be done to promote economic growth and reduce poverty?

1 Ten Principles of Economics CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 0

1 Ten Principles of Economics CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 0 In this chapter, look for the answers to these questions: What kinds of questions does economics address? What are the principles of