Intro to Economics and Price Analysis

AGBU 230

what is economics?

the allocation of scarce resources

what is the main reason that all bison were hunted when it was in society’s best interest to leave some males and females?

property rights were not well-defined, everyone acted in their own self-interest not society’s best interest

macroeconomics

large scale economics, study of the economics of entire countries

microeconomics

small scale economics, study of individual fields or individual firms

list some examples of microeconomics

• - environmental and natural resource economics

• - behavioral economics

• - labor economics

• - agricultural economics

what are the 3 common goals of economics?

1. 1. to better understand the world

2. 2. to prepare students for the world of business

3. 3. to identify ways to make self-interest align with social interest

what are the three I’s when it comes to how an economist thinks?

• - incentives

• - interactions

• - indifference

incentive

people try to make themselves better off

give an example of incentives

an argument between politicians and economists:

• - politicians claim a raise in taxes won’t affect consumption

• - economists say an increase in the price will reduce consumption

  • - studies tend to find evidence in favor of economists

interaction

actions taken by one person affect another

give an example of interactions

• - yachts

  • - congress decided to tax yachts meaning to tax the rich while leaving the poor unaffected

    • - what happened to boat sales?

    • A: the rich quit buying yachts, yacht makes decreased prices in efforts to sell more boats

    • - what happened to consumption of the wealthy?

    • A: ultimately yacht makers (poorer people) lost money due to the tax rather than yacht consumers

    • - who was ultimately affected?

    • A: the rich had options to avoid paying the tax, the producers did not

indifference

incentives influence interactions which influence incentives which influence interactions… until we reach the point of indifference

give an example of indifference

checkout lines

• - you approach a checkout line and one is considerably shorter

• - people are incentivized to move to the shorter line in the hopes they will finish faster

• - through people’s interactions the line reaches the length of all the other checkout lines

• - the next person who approaches is indifferent about which line they will join

what are the two components that the full price of an item can be broken down into?

transaction price and transaction cost

transaction price

the money the buyer gives to the seller

transaction cost

any other costs the buyer or seller incurs in the transaction

what are some examples of transaction costs?

location, time, form

what does the indifference principle allow for in transaction costs?

allows price differences to occur but limits the extent to which they can differ

list the 6 economic lessons

• - toys, not dollars

• - beware the Law of Unintended Consequences

• - Markets works well (if prices reflect all costs and benefits)

• - value can only be measured by willingness to pay

• - people’s actions are driven by opportunity costs

  • - time value of money

explain “toys, not dollars”

toys: pleasure from consumption

happiness from toys is not directly equivalent to amounts of money spent

explain “beware the law of unintended consequences”

“good intentions paved the road to hell”

government policy is often created with one intention and another less desirable thing occurs

explain “markets work well (if price reflects all costs and benefits)”

most goods and services we obtain are from market

these markets work well because buyers/sellers don’t buy/sell unless they will be better off

what is one exception to “markets work well”

externalities: when a third party uninvolved in the transaction is affected

negative externalities are an example of…

market failure

give an example of negative externalities

• - water is polluted as a result of chicken farming

explain “value can only be measured by willingness to pay”

economics is a science, and science must be both measurable and observable

explain “people’s actions are driven by opportunity costs”

opportunity cost - the cost of the next best alternative

explain “time value of money”

time value of money is an extension of opportunity costs