Introduction to Economics

1
Introduction to Economics

• D.W. Hedrick
• Fall 2003

2
Instructional Method

• Primarily Lecture format with discussion,
  simulations, and video presentations
• Constructive discussion is welcomed
• Grading is based on five of seven quizzes (25),
  three midterms (25 each), and an optional
  comprehensive final (replaces lowest midterm)
  NO MAKEUPS GIVEN

3
Instructional Method

• Suggestions for the study of economics

4
Definition of Economics

• Mankiws definition
• How Society manages its scarce resources
• Hedricks definition
• How society chooses to allocate its scarce
  resources among competing demands to best satisfy
  human wants
• Alternative definitions
• Economics is the study of choice.
• Economics is what economist do.

5
Scarcity and the Fundamental Questions of
Economics

• Unlimited wants versus limited resources
• WHFM
• What is to be produced?
• How is to be produced?
• For whom will it be produced?

6
Economics as a Science

• The scientific method
• Normative vs. positive approaches
• A brief history of economic thinking
• The language of economics

7
The Ten principles of Economic Thinking
8
Categories of Basic Principles of Economics

• How people make decisions?
• How people interact?
• How does the economy work overall?

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How People Make Decisions

• Principle 1 - People face tradeoffs
• Time allocation an example of tradeoffs
• Efficiency versus equity
• Production Possibilities Frontier

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How People Make Decisions

• Principle 2 - The cost of something is what you
  have to give up to get it
• Opportunity costs come from Von Weiser, a German
  economist late 1800s
• Opportunity costs are independent of monetary
  units
• TINSTAAFL
• The real costs of going to college

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How People Make Decisions

• Principle 3 - Rational people think at the
  margin
• Rational or irrational decision-making
• Marginal benefits and costs versus total benefits
  and costs
• Weighing marginal costs and benefits leads to
  maximizing net benefits (total welfare)

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How People Make Decisions

• Principle 4 People respond to incentives
• Reactions to changes in marginal benefits and
  costs
• Increases (decreases) in marginal benefits mean
  more (less) of an activity
• Increases (decreases) in marginal costs mean less
  (more) of an activity
• Example of seat belts leading to increased speeds
• Example of SUV (with child car seat) in Issaquah

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How People Interact

• Principle 5 - Trade can make everybody better
  off
• Adam Smith author of the An Inquiry into the
  Causes and Consequences of the Wealth of Nations
  1776
• Gains from the division of labor and
  specialization
• Mercantilists perspectives
• Example of why Ellensburg

14
How People Interact

• Principle 6 - Markets are usually a good way of
  organizing economic activity
• Feudal times and haciendas in the new world
• The power of trade cooperation versus conflict
• Markets prices and quantities traded, typical
  and abstract

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How People Interact

• Principle 6 - Markets are usually a good way of
  organizing economic activity creativity and
  productivity and resource allocation
• Failure of centrally planned economies
• set it and forget it becomes compete or be
  obsolete

16
How People Interact

• Principle 7 Governments can sometimes improve
  market outcomes
• Market signals can fail to allocate resources
  efficiently or equitably
• Public goods, the exclusion principle, the
  free-rider problem and non-rival consumption
• External costs and benefits
• Examples vaccines, education, pollution

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How People Interact

• Principle 7 Governments can sometimes improve
  market outcomes
• Equitable or fair distribution of resources
• Efficiency and equity the pie analogy
• Government Failure is government intervention
  always the proper solution?

18
How the Economy works as a Whole

• Principle 8 A countrys standard of living
  depends upon its ability to produce goods and
  services
• Adam Smiths An Inquiry into the Nature and the
  Consequences of the Wealth of Nations
• Materialism more toys mean more welfare
• wealth a necessary or sufficient condition for
  happiness (are rich people happier, children with
  lots of toys)

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How the Economy works as a Whole

• Principle 8 A countrys standard of living
  depends upon its ability to produce goods and
  services
• leisure time and productivity
• the factors of production land or natural
  resources, labor, capital, entrepreneurship
• technology and productivity
• the rule of 72 for growth rates

20
How the Economy works as a Whole

• Principle 9 The general level of prices rises
  when the government prints and distributes too
  much money
• Definition of money, and economic language

21
How the Economy works as a Whole

• Principle 9 The general level of prices rises
  when the government prints and distributes too
  much money
• Examples Not worth a continental and Argentina
• Establish of the Federal Reserve and the
  introduction of sustained inflation in the US

22
How the Economy works as a Whole

• Principle 10 Society faces a short-run
  tradeoff between inflation and unemployment
• Short-run and the long-run
• Demand and supply shocks
• Short-run increases (decreases) in output above
  (below) long-run potential output lead to
  adjustments

23
How the Economy works as a Whole

• Principle 10 Society faces a short-run
  tradeoff between inflation and unemployment
• Counter-cyclical stabilization versus
  pro-cyclical destabilization
• Political business cycles