ECON 101: Introduction and Principles of Economics

Economy

Just a group of people dealing with one another.

Economics

The study of how a society manages its scarce resources.

Microeconomics

The study of how the behavior or households and firms collectively influence resource allocation within a free market economy.

% Change (increase, decrease, between two numbers)

Increase: (1+ % increase in decimal form)$

decrease: (1- % decrease in decimal form) $

% change between 2 numbers: (new - original)/ original

Readings: “In Las Vegas, College has less appeal than casinos”, “Minimum wage gains college enrollment loses,” “A strong job market is causing more students to drop out of college."

• In Nevada the the thriving entertainment landscape including bars, strip clubs, and casinos offer promising server and valet parking jobs with decent salaries even without a high school diploma.

• The National Bureau of Economics finds that as minimum wage increases, community college looses students, however degree attainment rates in these community colleges remain unchanged.

• The opportunity cost for going to school is even greater for low income students, and a strong job market provides short term relief to students who drop to pursue working however sacrifices that students future earnings.

Principles of how people make decisions (1-4)

P1: People face trade-offs.

P2: The cost of something is what you give up to get it.

P3: Rational people think at the margin.

P4: People Respond to Incentives

P1 (2 examples)

People Face Trade-offs

Ex: going to a party before your midterm is trading off economic success for having fun.

Ex: Efficiency vs. Equality

• Efficiency- When a society gets the absolute most out of its scarce resources.

• Equality- When prosperity is distributed uniformly amongst a society.

• Tradeoff? Achieving greater equality through wealth distribution often reduces the incentive to work, produce, and innovate.

P2

The cost of something is what you give up to get it

Making decisions requires comparing the cost and benefit of alternative choices.

• Opportunity cost- The opportunity cost is what you give up in order to obtain a given item/service/choice.

P3

Rational people think at the margins

Rational people do their best to achieve their objectives and often make decisions by evaluating the costs and benefits of marginal changes and incremental adjustments to an existing plan.

• Ex: How much more will I gain from studying an additional hour (margin) versus stopping here?

P4:

People respond to incentives

• Incentive: something that induces a person to act a certain way due to the prospect of reward or punishment.

• Ex: When gas prices rise, consumer buy more hybrid cars and fewer SUV’s.

Principles of how people interact (5-7)

P5: Trade can make everyone better off. (no self-sufficiency)

P6: Markets are usually a good way to organize economic activity.

P7: Governments can sometimes improve market outcomes

P5

Trade can make everyone better off (no self-sufficiency)

Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods and services.

• Countries also benefit from trade specialization:

  • 1- get a better price for the goods they produce.

  • 2- get a better price on goods from abroad then the cost if they were produced at home.

P6

Markets are usually a good way to organize economic activity

• Markets- A group of buyers and sellers (need not be a single location)

• “Organize Economic Activity”- means determining:

  1) What goods to produce.

  2) How to produce them.

  3) How much of each to produce.

  4) Who gets them?

• The Invisible Hand- A term coined by Adam Smith in The Wealth of Nations.

  • The interactions of buyers and sellers determines price.

  • Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being.

Markets

A group of buyers and sellers (need not be a single location.)

“Organize Economic Activity”

means determining:

1) What goods to produce.

2) How to produce them.

3) How much of each to produce.

4) Who gets them?

The Invisible Hand

• A term coined by Adam Smith in The Wealth of Nations. The invisible hand works through the price system.

  • The interactions of buyers and sellers determines price.

  • Each price reflects the good’s value to buyers

    and the cost of producing the good.

  • Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being.

P7

Government can sometimes improve market outcomes.

Governments may alter outcomes to promote equity. If the Market’s distribution of economic well-being is not desirable, tax or welfare policies can change divisions.

• Ex: Pharmaceutical companies invest a lot in R&D for new vaccines because they know they can rely on intellectual property rights to ensure that they solely profit from their discoveries.

• Market failures: When the market fails to allocate society’s resources efficiently. The causes include:

  • Externalities- when the production or consumption of a good affects bystanders (e.g., pollution)

  • Market Power- A single buyer or seller has substantial influence on the market price.

Consider Paul’s decision to go to college. If he goes to college, he will spend $90,000 on tuition, $15,000 on room and board, and $7,000 on books. If he does not go to college, he will earn $22,000 working at a construction job and he will spend $11,000 on room and board. Paul’s cost of going to college is:*

1 point

a. $96,000

b. $110,000

c. $114,000

d. $123,000

d

The Get-There-Safe Bus company incurs an average cost of $45 for each passenger it carries on its trip from Atlanta to Chattanooga. In advance of a particular trip, four seats remain unsold. The bus company could increase its profit only if it:*

1 point

a. charged any ticket price above $0 for the four remaining seats.

b. charged at least $11.25 for each of the four remaining seats.

c. charged at least $45 for each of the four remaining seats.

d. paid four people to occupy the four remaining seats.

a

To say that government intervenes in the economy to promote efficiency is to say that government is attempting to:*

1 point

a. create a more fair distribution of income.

b. change the way in which the economic pie is divided.

c. enlarge the economic pie.

d. All of the above are correct.

c

What is an economic pie?

a metaphor representing a country's total wealth or Gross Domestic Product (GDP), where

• The size of the pie symbolizes the overall size of the economy.

• The "slices" of this pie represent how this total wealth is distributed among individuals, households, businesses, or sectors of the economy, a concept known as income distribution.

• Debates often center on whether to "grow the pie" (increasing overall wealth and productivity) or to redistribute the existing slices (changing how the existing wealth is shared).

milton friedman pencil analogy

Free-market capitalism creates complex goods like a pencil through the decentralized, spontaneous cooperation of countless individuals worldwide, even those who don't know each other. Thousands of people, using various languages and living in different countries, each contribute a small part of their labor or resources without central direction, all motivated by the desire to acquire goods and services they want through the impersonal "invisible hand" of the price system.