Ch 1 - Welcome to Economics

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35 Terms

1

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

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2

Scarcity

Human wants (infinite) for goods, services and resources exceed what is available (finite).

Ex: homeless people, but all experience scarcity like time

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3

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

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4

Assumption #1

People are rational and base decisions on imperfect information

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5

Adam Smith

Introduced the idea of dividing labor into discrete tasks, in his famous 1776 book, titled The Wealth of Nations.

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6

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

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7

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

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8

Benefits of Specialization

  1. Allows workers to focus on part of production w/ advantage

  2. Learn to produce quicker & better over time

  3. Economies of Scale: For many goods, as the level of production increases, the average cost of producing each individual unit declines

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9

Specialization Requires

Trade to purchase goods/services with pay from specialized job

Consume all goods and produce what specialized at

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10
<p>Economies of Scale Graph</p>

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

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11

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

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12

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

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13

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

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14

Macroeconomics

Focuses on broad issues such as growth, unemployment, inflation, deficits, and trade balance

Main Goals:

  • Improve standard of living

  • Decrease unemployment

  • Decrease inflation

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15

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.

<ul><li><p>Nation’s Central Bank (Federal Reserve)</p></li><li><p>Policy that involves</p><ul><li><p>Altering the level of interest rates</p></li><li><p>The availability of credit in the economy</p></li><li><p>The extent of borrowing.</p></li></ul></li></ul>
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Fiscal Policy

  • Nation’s Legislative Body (Congress)

  • Economic policies that involve

    • Government spending

    • Taxes

<ul><li><p>Nation’s Legislative Body (Congress)</p></li><li><p>Economic policies that involve</p><ul><li><p>Government spending</p></li><li><p>Taxes</p></li></ul></li></ul>
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17

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

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18

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

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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)

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20

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.

<ul><li><p>The <strong>circular flow diagram</strong> shows how households and firms interact in the goods and services market, and in the labor market.</p><ul><li><p>In the <strong>goods and services market</strong>, households receive goods and services and pay firms for them.</p></li><li><p>In the <strong>labor market</strong>, households provide labor and receive payment from firms through wages, salaries, and benefits.</p></li></ul></li></ul>
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21
  1. 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

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22
  1. 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

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23
  1. 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

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24

Market

Interaction between potential buyers and sellers; a combination of demand and supply.

Ex: NYSE, NBA Signings

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25

Private enterprise

System where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

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26

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

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27

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

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28

Underground Economies

Markets where the buyers and sellers make transactions without the government’s approval where there are heavily regulated economies

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29

Globalization

  • The trend in which buying and selling in markets have increasingly crossed national borders

  • Expanding cultural, political, and economies interactions

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Exports

The goods and services that a nation produces domestically and sells abroad

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Imports

The goods and services that are produced abroad and then sold domestically

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32

GDP

Gross Domestic Product: measures the size of total production in an economy within country’s borders

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Reasons for Globalization

  • Cargo ships / planes

  • Computing for long-distance communication

  • Information

    • Software / music

  • International agreements

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34

Exports / GDP

Production sold abroad

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35

Net Export

Export - Import

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