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Economics
The study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions
Scarcity
Human wants (infinite) for goods, services and resources exceed what is available (finite).
Ex: homeless people, but all experience scarcity like time
Economics & Information
Economics is greatly impacted by how well information travels through society (Social Media)
People use information to make decisions: can be wrong: Imperfect Information
Need data like from FRED to describe & measure issues
Assumption #1
People are rational and base decisions on imperfect information
Adam Smith
Introduced the idea of dividing labor into discrete tasks, in his famous 1776 book, titled The Wealth of Nations.
Division of labor
The way in which different workers divide required tasks to produce a good or service. Produces greater quantity of goods/services.
Ex: Workers in an assembly line
Specialization
When workers or firms focus on particular tasks for which they are well-suited within the overall production process.
Do not need to hunt, farm, or build own house
Benefits of Specialization
Allows workers to focus on part of production w/ advantage
Learn to produce quicker & better over time
Economies of Scale: For many goods, as the level of production increases, the average cost of producing each individual unit declines
Specialization Requires
Trade to purchase goods/services with pay from specialized job
Consume all goods and produce what specialized at
Economies of Scale Graph
Cost on y-axis
Quantity on x-axis
Long-run average total cost
Minimum Efficiency of Scale: Get unit price to lowest point
Diseconomies of scale: after MES, making too much quantity requires more resources, increasing unit cost
Why Study Economics
Tool to solve major issues with data
Ex: Model how small changes affect poverty/education
Make informed decisions like voting intelligently
Well-rounded thinker
Economics Subject
Concerned with the well-being of all people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes
Microeconomics
Focuses on the actions of individual agents within the economy, like households, workers, and businesses
Theory Consumer Behavior: Budgets, choices, work, saving, borrowing
Theory of the Firm: Product and quantity choices, prices, production, # workers
Macroeconomics
Focuses on broad issues such as growth, unemployment, inflation, deficits, and trade balance
Main Goals:
Improve standard of living
Decrease unemployment
Decrease inflation
Monetary policy
Nation’s Central Bank (Federal Reserve)
Policy that involves
Altering the level of interest rates
The availability of credit in the economy
The extent of borrowing.
Fiscal Policy
Nation’s Legislative Body (Congress)
Economic policies that involve
Government spending
Taxes
Classical vs. Keynesian Economics
Keynesian: Govt. should be involved because the market takes too long to correct itself (John Keynes)
Classical (laissez-faire): Let the free market decide
Theory
A simplified representation of how two or more variables interact with each other
Simple enough to understand, while complex enough to capture the key features of the object or situation you are studying
Model v. Theory
Economists use models to test theories, but for this course we will use the terms model and theory interchangeably
y= B0 + B1 * X1 + B2 * X2 + e (everything else)
Circular Flow Diagram
The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market.
In the goods and services market, households receive goods and services and pay firms for them.
In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits.
Traditional Economy
Typically an agricultural economy where things are done the same as they have always been done
Oldest economic system
Used in parts of Asia, Africa, and South America
Occupations tend to stay in the family
What you produce is what you consume
Little economic progress or development
Command Economy
An economy where economic decisions are passed down from government authority and where the government owns the resources.
Very little trade between countries
Government decides what goods and services will be produced and what prices it will charge for them.
The government decides what methods of production to use and sets wages for workers.
The government provides many necessities like healthcare and education for free
Former USSR & communism, Current Cuba, N Korea
Market Economy
An economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand.
Income from what society values
Market
Interaction between potential buyers and sellers; a combination of demand and supply.
Ex: NYSE, NBA Signings
Private enterprise
System where private individuals or groups of private individuals own and operate the means of production (resources and businesses)
Reality of Economies
Most economies in the real world are mixed. They combine elements of command, traditional, and market systems
The U.S. economy is toward the market-oriented end
Many European/S American market-oriented with more govt. involvement than US
China & Russia more command, but have some market-oriented aspects
Regulations
There is no such thing as an absolutely free market
Regulations always define the “rules of the game” in the economy
Economies that are primarily market-oriented have fewer regulations
Just enough to maintain an even playing field for participants (balance market freedom & govt. rules)
Safeguard theft, outlaw violence, uphold contracts, collect taxes
Underground Economies
Markets where the buyers and sellers make transactions without the government’s approval where there are heavily regulated economies
Globalization
The trend in which buying and selling in markets have increasingly crossed national borders
Expanding cultural, political, and economies interactions
Exports
The goods and services that a nation produces domestically and sells abroad
Imports
The goods and services that are produced abroad and then sold domestically
GDP
Gross Domestic Product: measures the size of total production in an economy within country’s borders
Reasons for Globalization
Cargo ships / planes
Computing for long-distance communication
Information
Software / music
International agreements
Exports / GDP
Production sold abroad
Net Export
Export - Import
Note 
Flashcard (102)