Economics

1. Economics
The study of choices

3. What do you
Want?
I want… We want…

4. What do you
Want?
I want… We want…
Census Bureau reports poverty at
highest rate since 1994
GDP Full employment
Low inflation
…more than I can get… …more than we can get…
I Want It All

5. Scarcity – our wants for goods and
services are virtually unlimited,
but the productive resources we
use to create them are not.
Productive Resources:
• natural
• human (labor)
• capital goods (goods used to
produce other goods and services)
Different priorities about importance of
various goods and services
(value judgments):
What contributes most to the public good ?
Is it more important to be efficient or fair?
Wants vs. needs (personal choice)
Macroeconomics
Issues affecting
the whole
economy:
unemployment,
inflation, GDP,…
Microeconomics
• Individual choices
• Individual markets
(demand and supply)
This is why
economics exists.
Complications

6. How Do You Know When
Something Is Scarce?
Scarcity Forces You to
CHOOSE
SCARCITY
CHOICE

7. Therefore, choices confront us all the time:
What combinations of goods and services to produce
How to combine resources to produce
(which production methods to use) and
How to distribute what is produced (how to decide who gets what)
Economics is the study of how we can
make the best choices for using our
scarce resources.

8. best choices?
Economic efficiency
producing the combination and
amounts of goods and services
that the society wants
fijit
Technical efficiency
using the lowest cost
production methods to
produce the largest
possible amount of
output
Allocative efficiency

9. 1. People choose.
2. All choices have costs.
3. People respond
to incentives in
predictable ways.
5. Voluntary trade
creates wealth.
4. Economic systems
influence individual
choices and incentives.
6. The
consequences
of choices lie in
the future.

10. 1. People choose.
Based on goals:
Consumers choose what combinations
of goods and services to buy and how
to behave in order to maximize
individual well being given income.
Workers choose what kind and how
much labor to supply to businesses in
order to maximize income given
preferences for work and leisure time.
(because of scarcity)

11. People choose - continued
Businesses choose what and how much to
produce and sell in order to maximize profit
(revenue minus cost).
Governments choose what combinations of
goods and services (as determined by local,
state, and federal government budgets)
will maximize society’s well being
(as measured by Gross Domestic Product
[GDP], number of jobs, purchasing power,
happiness, …?)
Anyone – choose to behave in a
way that will increase the
world’s well being?

12. 2. All choices have costs.
“What should I do today?
Play soccer or ride my scooter?”
Cost = sacrifice
“I will buy the sweater. My
opportunity cost is the books.”
(may or may not be measured in $)
Opportunity cost: the next best alternative you
sacrifice when you make a choice
What is your opportunity cost for coming to
school today?

13. Marginal rule for decision making:
choose the alternative for which
the additional benefit is more than the
additional cost
(ideally, the one that provides the most
additional benefits with the least
additional cost )

14. Negotiating with the Dentist
Economics for Leaders

15. 3. People respond to incentives in predictable ways.
People change their behavior in response to positive or
negative incentives: actions, awards, or rewards that
determine the choices people make
Do people respond in predictably rational
and/or predictably irrational ways?
It depends…

16. Did people respond to
the rising price of gas by
buying less? Yes
…but
How do people
respond in the
ultimatum game?
Homo economicus:
logical, consistent
choices
Was your decision to participate in this learning
community affected by the thought of getting into a
better college?
Do you leave a tip for a server in a restaurant you will
never go to again?

17. The Ultimatum Game Experimental Results
• When responders reject positive offers, they are signaling that their
preferences include more than just a monetary objective.
Many experiments have shown that –
• When proposers make a high offer it is either:
-- a taste for fairness -- a fear of rejection -- both
• Most proposers will be fair even if their offers can not be rejected.
• Most responders will sacrifice money to punish a proposer who
behaves unfairly to someone else.

18. The ultimatum game does not reveal
rational “homo economicus,”
but it does reveal behavior that
Adam Smith would have predicted
(yes, the same Adam Smith whose
invisible hand guides the free market
system!).

19. 4. Economic systems influence individual choices
and incentives.
The type of economic system a country has is determined by:
• Who owns the productive resources (natural, human, capital goods)?
• How it chooses what, how, and who gets what?
Are these questions answered by:
• The interaction of buyers and sellers in markets (demand and
supply)?
• Government?
• A combination?
We want a system that will help us reach our goals
as individuals and as a country.

20. Range of the World’s Economic Systems
Almost all of the countries in the world have “mixed
ePcuorneo smocieiasl.i”sm is rare.
Mixed Capitalism
Command
economy
(Based on a free market system, with some government intervention)

21. Research
• On the computer look up the following information on The CIA world fact
book ( Google it )
• Type information out on a google doc and share it (10 point assignment)
1. What is the GDP per Capita, unemployment rate, government type,
corporate tax rates of:
a) USA
b) Cuba
c) Singapore
d) Hong Kong
e) Zimbabwe
2. What other important economic factors can you find?
3. Why are the countries ranked where they are?
4. Does it all have to do with Government?
5. Is one type of government a better type of government for their
economies?

23. 1. People choose.
2. All choices have costs.
3. People respond
to incentives in
predictable ways.
5. Voluntary trade
creates wealth.
4. Economic systems
influence individual
choices and incentives.
6. The
consequences
of choices lie in
the future.

24. 5. Voluntary trade creates wealth.
People (countries) trade when they each believe there
is something to gain.
People (countries) specialize in producing what they can
produce relatively cheaper than other people (countries)
and then trade for other goods and services, allowing all to
consume more than they otherwise could.
Specialization results in less
self-sufficiency and increasing
interdependence of people, markets,
and countries.
But remember

25. 6. The consequences of choices lie in the future.
We can only influence the future;
we cannot change the past (sunk cost).
You pay $10 to see a movie. You soon regret your choice.
This is without a doubt the worst movie you have ever
seen.
What do you do?
a. Stay and watch the whole movie because
you don’t want to waste your $10.
b. Leave immediately.
Unintended consequences
Unexpected benefits: aspirin
Unexpected costs: Prohibition