CHAPTER 1 THE ECONOMY IS US! Nature of Economics!

1
CHAPTER 1THE ECONOMY IS US!Nature of Economics!

• Why is the economy us?
• What kind of economy do we have?
• Why do some economies work better than others?

2
Definition of Economics?
3

• Do all countries regardless of type of economy
  deal with scarcity?
• Scarcity of what?
• Even the U.S. has a problem with this?

The scarcity of resources causes most things to
have a cost.  
4
Definition of Economics

• The study of how people, both individually and in
  groups, deal with the problem of scarcity.
• Why is economics considered a social science?
• Scarcity forces human beings to make choices
• Why has there always been an economic problem?
• mans wants are virtually unlimited
• scarcity of resources
• Have to prioritize

5
Remember

• Society has virtually unlimited wants BUT
  limited resources
• This means prioritization!
• When did you last have to prioritize?
• Companies? Are you seeing them prioritize? Where
• What about government?

6
What is your choice? Why?
7
Scarcity forces individuals and groups to do
what?

• All economies evolve around a basic conflict..
  Want more than we can have.

8
What is the difference between Micro and
Macroeconomics?
9
Micro vs Macro

• Economists do not formulate economic objectives
• Economists job is to design policies that best
  achieve economic goals. (who establishes those
  goals?) Name one in existence today..
• Microeconomics study of individual behavior in
  the economy by parts that comprise the larger
  economy businesses, individuals, govt agencies.)
  (CocaCola output/hour)
• Macroeconomics study of the aggregate economic
  behavior of economy as a whole (inflation/unemploy
  ment)

10

• Choices- Trade-offs (giving up one thing to get
  another)
• Example Barrel of crude oil?
• What is thing given up called?
• Examples of Opportunity Cost

11
Reality of Trade-offs

• Just a few of the products getting a start from a
  barrel of oil
• Aspirin furniture not to mention
  gasoline
• Candles hair dryers carpets
• CD players lipstick paints
• Clothing luggage fertilizer
• Compact discs perfumes oils of all kinds
• Computers photographs
• Credit cards piano keys
• Deodorant roller blades
• Diapers shampoo
• Dinnerware soft contact lenses
• DVDs toothpaste
• Eyeglass frames vitamin capsules

12
Economics is a Social Science

• What does that mean?

13
Economics is NOT Pure!!

• Hypothesis are formed (what if? This
  should?Models are Created (trial and error)
• Assumptions are made
• Trial and error (revisited)

14
Rational Self-Interest

• Individuals act as if motivated self interest
• Idea first brought forth- Adam Smith- Wealth of
  Nations. Father of Market Economics.
• Did you arise this a.m. and saygtgtgtgt I want to
  make terrible decisions all day that are NOT in
  my self-interest???
• Assumption then is that you will make decisions
  in your best self-interest based on incentive.
• BUT bottom line is we dont always do that!

15
Rational Self-interest

• What is your incentive to brush your teeth?
• Why did you begin that habit?
• Did you continue to do it later?
• Do you think about it now?
• So rationally you have deduced that it is in your
  best interest to brush daily- preserving your
  self-interest.

16
RATIONAL BEHAVIOR/ CONSUMERS/GOVERNMENT

• If analyzing is so important to economics, what
  are the pit falls in formulation of decisions?
• How were those decisions derived?
• Emotion
• Biases
• Illiteracy
• Political
• Some person you hear speak
• Text from some book
• Periodicals
• Peers

17
Some people just cant make a decision.

• ARE WE RATIONAL IN OUR DECISION-MAKING?

18
Rational Decisions involve all aspects of
society!

• Governments (guns v butter)
• Individuals (buy or rent house)
• Businesses (expand or lay off)
• Non-profits (providing for greater good)

19

• Economic Wants
• These wants vary from culture to culture.
• One cultures ideas may not be the goals of
  another cultures.
• Ones we satisfy in the economic system.
• Ones that money will buy.

20
Do incentives work?

• Give me some examples.
• What about negative incentives? Any ideas?
• Is Self-interest always a concept of greed?
• Can charitable acts be in ones self-interest?

21
(No Transcript)
22
Economic wants vs non-economic wants

• Economics Wants
• a concept underlying for all mankind.
• things we feel we need to have so we can live
  the style of life we want to enjoy.

23
What are some non-economic wants?

• Friendship
• Health
• Self Esteem
• Love

Are non-economic wants important????
24
Two things that allow economies to progress

• This is an Adam Smith concept
• Division of labor
• Specialization of labor

25
4 Types of economic wants

• Basic or subsistence
• difference between developed and underdeveloped
  countries is whether basic wants are taken care
  of.) (U.S. poor are not as poor as other poor-
  relative to poor in U.S. difference from absolute
  poverty like in Haiti , Afghanistan, or Iraq.
• U.S. citizens have a higher plan of basic
  wants which includes social wants. These wants
  come out of our culture. Such as
  air-conditioning, television, education, internet
  connections, going to dinner .vast majority of
  our wants are culturally determined.

26

• Individual or Collective Wants
• Individual things we want as individuals
• pizza vs hamburgers
• Ford truck vs Chevy truck
• most of our wants are individual, but some are
  Collective such as
• clean water good roads garbage collection
• good schools

27

• Public Wants
• Market does not take care of public wants- these
  are decided usually by the federal government
• defense homeland security. We all enjoy the
  benefits at the same time.

28

• Consumptive
• We want to be able to consume (buy things)
• Basic or ultimate aim of any economic system is
  consuming goods and services.
• Consumption is how we satisfy our wants.
• But cant completely satisfy all of our wants
  because___??????_ ????

29
Economics depends on models

• Models are used to predict behavior.
• Models are simplified replica of real world
• Empirical Evidence and data- material gathered by
  observation or experience. Usually a working
  hypothesis that is testable.
• Enter Ceteris Paribus
• Economists models do not relate to how people
  think, but how they behave.
• Economic models have to be tested on real world.

30
Marginalize in Economics

• Keeping decisions within perspective involves
  marginal analysis.
• Marginal Benefits vs Marginal Costs is the
  benefit greater than the cost or vice-versa.
  Obviously, either can elicit changes in status
  quo.
• You have an opportunity to go to Rose Bowl
  game!You know it will cost you 1,000. Do you
  want to go to the RB Parade while you are there?
  That is going to cost another 300 On margin?
  Is it worth it?
• Scarcity is the key ingredient here also.

31
SO..Are You Rational?What is rational?

• Are you pursuing opportunities to increase your
  utility?
• Are you allocating your time, energy and money to
  maximize your well-being?
• Do you weigh your decisions looking at costs vs
  benefits? If you do you are rational.
• If you do not you may be random or haphazard
  with your decisions.

32
So if you are rational, are you selfish?We all
make decisions for a reason

• Answer No.Not necessarily
• Rational in the sense we have discussed means
  that you are looking after your self interest
• Your self-interest decisions will change through
  your years. Maybe it is in your best interest to
  work for yourself after working 15 years for IBM
  Do you just whimsically decide or do you have a
  plan cost of doing so vs benefit.

33
Terms to Know

• Positive economics deals with facts what is
• Normative economics involves someones judgment
  what ought to be
• Fallacy of Composition it is not correct.. (the
  validity of a particular generalization for an
  individual or part does not necessarily ensure
  its accuracy for the group or the whole) I stand
  up everyone stands up
• Post Hoc Fallacy Be careful concluding that
  because event A precedes event B that A is the
  cause of B. Wear purple shirt to ballgamewin..
  Need to wear purple shirt again to win. Rooster
  crows before dawn rooster responsible for
  sunrise.
• Rational Behavior based on rational
  self-interest. People make different choices
  because their circumstances and available
  information differs.
• Marginalism extra or less (one more unit, one
  less unit)

34
What is Standard of Living?How can you calculate
it?
How well off people are! How well off are you?
Divide total production by population If
production is high and population is low. get
more stuff. 3rd world countries high
population/low production
35
What are the three questions every economy asks?

• What to produce?
• How to produce?
• For whom to produce?
• Why do econ texts always include these
  questions???????
• Key is how the society or country answers these
  questions.
• Traditional economic forms are not part of the 3
  basic, but what does traditional entail?

36
3 Basic Economic Systems of the World

• Capitalism
• Socialism
• Communism

37
Any Questions?