Ch 1 - Welcome to Economics

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).

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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.

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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

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

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

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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

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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.

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

2) 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

3) 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