Chapter 1. Economics and Life

Transcription

1 Chapter 1 Economics and Life Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2 What is economics? Economics is the study of how people manage resources. Decisions made by individuals and also by groups. Resources are both physical objects and intangibles such Economics is divided into two broad fields: Microeconomics: Study of individuals and firms. Macroeconomics: Study of the economy on a regional, na@onal, or interna@onal scale. 1-2

3 Choices and ra1onal behavior Economists assume that people Compare all available choices. Purposefully behave in the way that will best achieve their goals, called ra.onal behavior. Peoples decisions can be studied using four main 1. What are their wants and constraints? 2. What are their trade- offs? 3. How will others respond? 4. Why isn t everyone doing it? 1-3

4 Scarcity People make decisions aimed at geqng the things they want. People want a lot of things, but they are constrained by limited resources. Scarcity is the condi@on of peoples wants being greater than available resources. Individuals and money. Socie@es resources: factors of produc@on, such as labor and technology. 1-4

5 Opportunity cost Every decision in life involves weighing the trade- off between costs and benefits. behavior dictates that when people choose between two things, the one with the greatest net benefit (benefits minus costs) is chosen. The benefits are oven easily calculated. The costs include both the direct cost and opportunity cost. The direct cost includes all associated costs. The opportunity cost includes the value of the next best Opportunity cost is based on people s valua@on of the best alterna@ve. 1-5

6 Opportunity cost behavior suggests that people compare the benefits of a choice against the addi@onal costs. Referred to as marginal decision making. No considera@on of past benefits or costs, both referred to as sunk. Opportunity cost helps understand adages such as the mechanic s car is the worst one on the block. 1-6

7 Incen1ves behavior suggests that people respond to incen.ves. An is something that causes a change in the tradeoffs that people face. Posi@ve incen@ve: Makes people more likely to do something by lowering their opportunity cost. Nega@ve incen@ve (disincen@ve): Makes people less likely to do something by raising their opportunity cost. When an incen@ve is provided on a large scale, the consequences can be extremely large. 1-7

8 Efficiency behavior suggests that people seek to get what they want. Given this behavior, individuals and firms will act to provide the things people want. If a profit- making opportunity exists, someone will provide the good or service. This leads to efficiency: resources are used to produce goods and services with the greatest economic value. 1-8

9 Efficiency economies do not operate efficiently. Yet to be discovered increase efficiency. Market failure: People and firms may be prevented from capturing the benefits of the opportunity or incur costs. in the economy cause to not take place. Most oven government policies. Goals other than profit: Individuals and governments have goals other than profit. 1-9

10 Problem- solving toolbox Accurately spoqng the fundamental economic concepts at work in the world is difficult. Economic analysis requires: Theory to be combined with of both theory and before drawing conclusions. These analyses between: Posi.ve analysis: The way things are. Norma.ve analysis: The way things should be. 1-10

11 Correla1on and causa1on When two events occur together, there is a tendency to assume that one causes the other. Economists differen@ate between two rela@onships. Correla.on: A consistently- observed rela@onship between two events. Posi@ve correla@on: Increase in A and B. Nega@ve correla@on: Increase in A and a decrease in B. Causa.on: A rela@onship between two events in which one brings about the other. A causes B. 1-11

12 Correla1on and causa1on There are three reasons why an assumed causal may be false: without Two events may be extremely correlated, making it appear that a causal rela@onship exists. Omiced variables: Two events may be extremely correlated due to a third event causing the two. Reverse causa@on: Some@mes it is unclear whether Event A causes Event B or if Event B causes Event A. 1-12

13 The circular flow diagram The circular flow model represents a basic economy. Land, labor, and capital Income Households Spending Goods and services bought Market for the factors of production Market for goods and services Purchased land, labor and capital Wages, rent, and profit Firms Revenue Goods and services to be sold Flow of dollars Flows of goods and services 1-13

14 Summary Four concepts of economics are discussed Scarcity: Constraints on obtaining everything wanted. Opportunity cost: Given scarcity, people face trade- offs. Economic agents can alter people s trade- offs by providing incen@ves/disincen@ves. Efficiency: Markets typically provide the highest value of goods/services. The differences between correla@on and causa@on are analyzed. Economists u@lize models to understand decision making. 1-14