REVIEW
           FIRST PRINCIPLES
CHOICES
Caused by Scarcity.
There isn’t enough, no matter how much there is.


The prob...
REVIEW
             FIRST PRINCIPLES
    Opportunity Costs


The Real Cost of Something Is What You Must Give Up
To Get It...
REVIEW
          FIRST PRINCIPLES
People are Rational

 Choices are made which best suit the individual
 making them.


 W...
REVIEW
            FIRST PRINCIPLES
The Invisible Hand

Coined in 1776, Adam Smith, The Wealth of Nations

Individual choi...
REVIEW
             FIRST PRINCIPLES
 The Invisible Hand (Continued)
An economy exceeds only to the extent it delivers the...
REVIEW
              FIRST PRINCIPLES
 Invisible Hand/Self Interest
Self interest suggests we will select what is best for...
REVIEW
        FIRST PRINCIPLES


People exploit opportunities to make
themselves better.
  All other things being equal, ...
We left off here
             FIRST PRINCIPLES
   There is a gain from trade.

We did the trade game.

One reason for gain...
FIRST PRINCIPLES
Markets tend toward Equilibrium

  Markets tend to be most efficient
         they bring only what we wan...
FIRST PRINCIPLES
Resources should be used EFFICIENTLY
 Class room assignments (large # in small rooms
 and small # in larg...
FIRST PRINCIPLES
 Markets Lead to Efficiency

The invisible hand does the work.

Incentives generally insure that resource...
Assumptions made in Economics
  Models for planning

 1. Other things being equal assumptions.
TRADE OFFS
  The Production Possibility Frontier
Discuss Tom Hanks, Castaway.
                                 Note three ...
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Review Of First Principles

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Review Of First Principles

  1. 1. REVIEW FIRST PRINCIPLES CHOICES Caused by Scarcity. There isn’t enough, no matter how much there is. The problem with scarcity is that you have decide between competing options. What to do, what to do One way of measuring economies is the Number of Choices Available. Give Assignment to Group 1 and 2 One Problem with choices is who gets them.
  2. 2. REVIEW FIRST PRINCIPLES Opportunity Costs The Real Cost of Something Is What You Must Give Up To Get It Sometimes this is Money, but not always. It can include the value of the next best thing.
  3. 3. REVIEW FIRST PRINCIPLES People are Rational Choices are made which best suit the individual making them. We can help others make choices by Providing INCENTIVES. We can help others make choices by increasing the costs of a choice by providing added COSTS.
  4. 4. REVIEW FIRST PRINCIPLES The Invisible Hand Coined in 1776, Adam Smith, The Wealth of Nations Individual choices select the product mix. It is because of Responses to Demand, the baker bakes the bread. Why does Whatcom College Exist? Or Wal-Mart? Or Exxon? The invisible hand is the best government. rules of the road for cars rules of the road for pedestrians rules of the road on a skate park. http://www.skateparkofgreenville.com/SPOG/index.html
  5. 5. REVIEW FIRST PRINCIPLES The Invisible Hand (Continued) An economy exceeds only to the extent it delivers the goods. Let’s think on this a minute. In the perfect economy, are there no goods? What would be different in a PERFECT economy from what we have? We have a market economy, that is, the market dictates. This is opposed to a Command Economy. Soviets, China, Cuba (any similarities?) long lines, no goods. Why? Unplanned chaos does a better job, the invisible hand
  6. 6. REVIEW FIRST PRINCIPLES Invisible Hand/Self Interest Self interest suggests we will select what is best for us. Suppliers, based on knowing that, will produce what we want, in their self interest. What we want gets provided for better than any other system. Think of last week’s floods. Think thru the lane changes we make, the way home when a road is closed. If you pull up to a light, you are second in line in the right hand lane and no one is in the left lane,, ,what do you do? WHY? Think thru lines at grocery stores or gas stations.
  7. 7. REVIEW FIRST PRINCIPLES People exploit opportunities to make themselves better. All other things being equal, do you buy the same produce at $4 or $3? Why? We want to exploit what is best for US, Difference between Self Interest versus Selfishness. Talk about that.
  8. 8. We left off here FIRST PRINCIPLES There is a gain from trade. We did the trade game. One reason for gains is that we value things differently Not everyone values Universal Health Care Another reason is that we can do better trading when we specialize, we all get more. Assign Wealth of Nations Reading. http://www.econlib.org/library/Smith/smWN.html (link in website. Read chapter I, OF THE DIVISION OF LABOR Specialization gives jobs, creates wealth. We really do need each other. Give Pencil Assignment to group #5 (Friday present)
  9. 9. FIRST PRINCIPLES Markets tend toward Equilibrium Markets tend to be most efficient they bring only what we want Suppliers have to do it at costs we accept because of choices and what is best for us we won’t pay just anything, we are rational and we have choices When Markets appear not to be working, Government thinks it can do better. Right now, for instance.
  10. 10. FIRST PRINCIPLES Resources should be used EFFICIENTLY Class room assignments (large # in small rooms and small # in large rooms) Inefficient Efficiency in Economics is not about money, it is about the proper allocation of RESOURCES so that everyone is better off. Opportunities, fully exploited, where everyone wins. A less desirable view is when opportunities are exploited such that there are only winners and no losers, some people are better off without making anyone less well off. Problems with equity, fairness, both real and perceived. Is it fair to reward some differently than others? Story of employer Is it fair that some win and others, while not losing, don’t win any?
  11. 11. FIRST PRINCIPLES Markets Lead to Efficiency The invisible hand does the work. Incentives generally insure that resources are used in the most efficient way. We adjust, think of the lines.
  12. 12. Assumptions made in Economics Models for planning 1. Other things being equal assumptions.
  13. 13. TRADE OFFS The Production Possibility Frontier Discuss Tom Hanks, Castaway. Note three areas on board Draw on the board and discuss: 1. Feasible and Efficient Quantity of coconuts Quantity of fish 2. Not Feasible 3. Feasible but not Remember: scarcity and choices efficient 4. (replace this with a JING presentation

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