Economics For

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Economics For Everyday Life Glenn
Rivera October 11, 2009
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What is the Economy?

• Money/Banks
• The Federal Reserve
• Businesses
• Wall Street/Stock Market
• All are correct because of one common item
  People
• The economy is people buying, selling,
  consuming
• Are we in the economy at this moment?

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Overview

• Definition of Economics
• The Greatest Constraint
• Economic Goals
• Three Questions Every Economy Must Answer
• Economic Assumptions
• Role of Government
• Benefits of Public Expenditures
• Costs of Public Expenditures
• How to increase GDP
• What can we learn?

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Definition of Economics

• Economics is the study of how individuals/societie
  s distribute scarce resources for unlimited
  wants.

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Study of

• Study of - Implies a discipline
• Economists study consuming behavior - Social
  Science
• Why are Economists interested in consuming
  behavior?
• The purpose of an economy is to provide a living
  for people
• Economics is a philosophy Capitalism vs.
  Communism

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Distribute

• An economy is a distribution/rationing system.
  It answers the question of, Who gets it?
  Different economies answer in different ways
• Market Economy (Capitalism) - demand no
  0 demand
• Need does not equal demand
• Demand is the ability and willingness to pay for
  goods and services
• Most Efficient
• Command Economy (Soviet style Communism)
• An administrative attempt to determine what to
  make and who gets it.
• Most Inefficient
• Mixed Economy Mix of Capitalism and Socialism
• All economies today are mixed
• Mix levels determined by values of society

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Scarce

• Scarcity What is Scarcity?
• From Websters Deficient in quantity or number
  compared with the demand not plentiful or
  abundant
• What is scarce in a Market Economy?
• Anything that demands a price
• Is there anything that we consume that is not
  scarce?

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Scarce Resources

• Four Factors of Production
• Land Any natural resource
• Labor People
• Capital The machines, tools, buildings used to
  produce final consumer goods and services
• Entrepreneurship/The Entrepreneur The risk taker

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Unlimited Wants

• People have unlimited wants
• More is better (More of Everything) - The Pig
  Principle
• College graduate story
• Applies to all individuals, businesses, Nation
  States
• WE ARE CONSTRAINED

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Greatest Constraint

• Opportunity Cost - The next best good/service
  that is forfeit in order to obtain something
  else.
• Nothing is free. There are only tradeoffs
  between alternatives. Blue Jeans Example.
• True because of finite resources/income
• We cannot escape this fact Bill Gates
• Individuals and societies must make choices
• Guns/Butter, Roads/Schools, Police/Healthcare,
  etc.
• Societies/People do not act/think this way
• Historically we take it or pretend it does not
  exist
• Oakland CA example

There is no such thing as a free lunch!
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Definition of Economics

• Economics is the study of how individuals/societie
  s distribute scarce resources for unlimited
  wants.

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Economic Goals

• If our resources are scarce, and our wants
  unlimited, what should we be?
• Efficient
• Productive Efficiency
• Allocative Efficiency

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Efficiencies Defined

• Productive Efficiency Maximum output with
  resources
• Allocative Efficiency The optimal mix of goods
  and services
• Private Goods/Services and Public Goods/Services
• The wrong mix is bad for society Allocative
  Inefficiency

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The Questions Every Economy Must Answer

• What to Make?
• How to Make it?
• Who Gets it?

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1 - What to Make?

• Determined by Free Market and Government Mixed
  Economy
• Free market - Price signals tell producers what
  to produce
• Where there is a demand, there will be a supply
• Government Determined by values of society
  (welfare)

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2 - How To Make It?

• The cheapest way
• The cheapest mix of the factors of production are
  used to produce final goods and services
• American economy is capital intensive Capital
  is cheaper than labor
• Mexican economy is labor intensive - Labor is
  cheaper than capital

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3 - Who Gets It?

• Determined by Free Market and Government
• Free Market - Demand is ability and willingness
• Government - Reallocation of Goods Services via
  Taxes
• Determined by values of society Societies
  sense of equality
• Free Rider Problem - Occurs with consumption
  without payment
• Abuse-When pain of cost is removed, over
  consumption occurs

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Economic Assumptions

• Why do Economists make assumptions?
• Economic world is too big, too complex
• Markets/People are inherently unpredictable

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Self Interest

• All human activity is motivated by self interest
• It is not from the benevolence of the butcher,
  the brewer, or the baker that we expect our
  dinner, but from their regard of their own
  interest. Adam Smith - The Wealth of Nations
  (1776).
• Greed is Good
• Greed defined No moral connotation greed
  drives efficient markets
• Greed is Good - Spurs competition among firms
• Promotes efficiency which lowers cost
• Promotes innovation for newer products
• Promotes quality products
• Greed is good from the buyers perspective too.
• Rotten apple example

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Rational

• Humans are always rational
• It is rational to be a pig. More is better.
• It is rational to make the most out of your
  purchases.

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Role of Government

• Should Government be involved?
• Adam Smith Laissez Faire Leave it Alone
• Rule of Law Enforce the rights of the people
• Criminal Law Police/Courts/Jail
• Corporate Law Needed for Business
• Equity - Distribution of Resources
• Public Schools/Roads/Health Care
• Social Stability
• Economic Growth/Stability
• Monetary/Fiscal Policy
• International Trade/Globalization
• Regulation of Common Areas

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Benefits of Public Expenditures

• Stimulate/Stabilize the Economy During Recession
• Unemployment Benefits Less likely to beg,
  borrow, steal
• Fiscal Policy Government Spending
• Monetary Policy Increase/Decrease of the money
  supply
• Technological Spin-Offs (military spending)
• Medicine
• Metallurgy - Aerospace Industry
• Cell Phone Technology
• Human Capital Investments Investment in
  education/training of Workforce and the Returns
  to that Investment
• Public Education/Grants/Loans
• Investment in education and training of
  government workforce
• Example - Here

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Costs of Public Expenditures

• Current National Debt 11.2T as of 30 April 09
• Taxes/Government expenditures divert resources
  from private investment
• When consumers/businesses have less money they
  save less, spend less and invest less
• Inefficient Bureaucracies
• No bottom line (profit) to measure productivity
• Few incentives to increase productivity/spend
  efficiently
• Financed with Debt
• Debt must be serviced (paid 451.2 Billion in
  2008)
• Inflation from increased demand
• Market economy rations with higher prices

http//www.treasurydirect.gov/NP/BPDLogin?applica
tionnp Source Treasury Direct
www.treasurydirect.gov/govt/reports/ir/ir_expense.
htm
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Costs of Public Expenditures Cont

• What can you do with 451,154,049,951?

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Costs of Public Expenditures Cont

• If an average home costs 250,000 then
• 451.2B/250K 1,804,616 homes
• If the average cost of 4 year degree is 200,000
• 451.2B/200K 2,255,770 4 year degrees
• or 11.2T/155.2M 72.2K
• Huge Opportunity Cost
• If we want more, what can we do?
• Increase GDP

Source CIA World Fact Book -https//www.cia.gov/l
ibrary/publications/the-world-factbook/geos/us.htm
l
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Gross Domestic Product (GDP)

• GDP is the final market value of all goods and
  services produced within a nations borders in a
  years time.

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U.S. GDP 1929 to 2008
How Do We Get More?
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How to increase Gross Domestic Product (GDP)?

• Save Money/Invest Money
• Makes money more available which reduces interest
  rates
• Increases capital investment and personal
  expenditures
• Spend Money
• Spending demand price signal
• Puts people to work and leads to more demand
• Increase Technology And Use It
• Allows us to produce more efficiently
• Increase Productive Efficiency
• Improve processes/Work smarter, not harder
• Have we been doing this?

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U.S. Productivity 1992-2008

• 1992 100
• 2008 139
• 2.4 Average Annual Increase

Source Bureau of Labor Statistics, Productivity
and Cost
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Conclusion

• What can we learn from this as stewards of
  Government resources?
• We need some government spending
• Understand opportunity cost No Free Lunch
• Look for Productive Efficiency Work smarter,
  not harder
• Be prepared to adapt to a changing
  economic/business environment

Some knowledge of basic economics is necessary
for stewardship of Government resources
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Questions