What is Economics? Economics is a study of human behavior. Economics helps us understand what means love of gain (money is a root of all evil) Scarcity Economics is the study of the choices made by people when there is scarcity, that is there are limits to what they can get. We must sacrifice one good or service for another. Because of scarcity people must make choices to get something in exchange to give up something else. Consumption trade offs Devotions Exercise Production trade offs (labor, land, buildings, etc. to devote to one or another production) Page 1 out of 5 Lec 1
Israelites gave up tenth of what they produced (instead of more housing, food, they built temple) Cars TV set Markets and the Invisible Hand (Adam Smith, Wealth of Nations) To save people in mines or submarine is different matter. Positive Economics What is? Positive Economics concerns itself with predictions (how will increase in taxes effect labor supply). Wage Labor What is or What will be? What will happen if we break one of the ten commandments? Page 2 out of 5 Lec 1
Normative Economics What ought to be? Should the government interfere in the markets? How should we behave (ten commandments) Normative branch of economics seeks to find the best solution to a particular problem. To accomplish this goal objective function should be employed, which describes goals (win a soccer game, goal of the company maximize profits minimize cost) Analysis Why it is dark now? Two possible way to answer this question: - General: it is night time, so it is always dark at night (white nights) - Analytical: begin with sun s production of light, nature of the light waves, they travel in a straight line but cannot pass through the earth. Theory Theory is a set of assumptions followed by a series of conclusions deduced using certain rules. Assumptions are made to simplify our analysis: - people are greedy and selfish pursuing their own self interest - informed decisions are made Ceteris Paribus = other things being equal or all variables are being fixed (oil taxes effect on gas consumption ceteris paribus meaning holding incomes of people constant) Variable is measure of something that could take different values. Marginal change: small change in the variable. (increasing my devotions by one hour will decrease my excise by 50 minutes and 10 for show) Page 3 out of 5 Lec 1
Principles of Economics The opportunity cost of something is what you sacrifice to get it. What is opportunity cost for me to go on the mission trip or what is the opportunity cost for me not to go on the mission trip? In the first case it is the best alternative give up (if I need money) which is my wage rate multiply by number of missing working hours. The opportunity cost for not going on the mission trip could be future God s blessings or nothing at all if God did not bless this trip. In some cases, a good that appears to be free actually has a cost. That is why economists are fond of saying: There is not such thing as a free lunch. Consumption Here is opportunity cost of my devotion time: Sleep time hours 24 16 8 8 16 24 Devotion time hours Who of you had a chance to sleep for 24 hours? Stay awake for 24 hours? In the given setting extra 8 hours of sleep cost me 8 hours of devotion ( or maybe studying time to you if you do not have devotion this day) Page 4 out of 5 Lec 1
Production Apples and oranges are grown at the different farms, so if we employ our limited labor (30 students in our class) to go either to pick apples or oranges or both. Apples A U1 U2 U3 Q1 Q2 Q3 Oranges U1 is reduced production possibility frontier with drought U2 is normal production possibility frontier U3 is production possibility frontier with lots of sunshine which increase number of apples and oranges on the trees. For a given number of apples (say 50 pounds) PPP allows us to collect different quantity of oranges Page 5 out of 5 Lec 1