Econ Lecture Notes 9/3/26
Course Overview and Administrative Structure
Textbook and Chapter Coverage:
Chapter 1 material covers an introductory overview of microeconomics and macroeconomics drawn from Gregory Mankiw's Principles of Economics, which is recognized as the number one selling economics textbook.
Chapters 1 through 4 are completely identical across microeconomics and macroeconomics courses.
Homework assignments, class structure, and exam questions for these initial four chapters are entirely identical between micro and macro classes.
Students who have previously taken macroeconomics face duplicate material on the first exam and are advised to achieve an A on this test to build grade momentum before encountering new content.
Classroom Materials and Online Resources:
Typed lecture notes are spell-checked and published on Brightspace under a module titled "my notes and videos" in Microsoft Word and PDF formats.
Lecture videos recorded during remote/COVID instruction are posted on Brightspace as a backup resource for review or missed classes.
Although these lecture videos are less crisp and professional than resources like Khan Academy, they are specifically tailored to the instructor's selected exam questions, making them a more direct study tool.
Foundations of Economics: Definitions and Scarcity
Definition of Economics:
Economics is formally defined as the study of how society manages its scarce resources.
Definition and Mechanics of Scarcity:
Scarcity is defined as the limited nature of society's resources coupled with our unlimited wants.
Colloquial origin and usage: The term stems from old colloquial expressions such as "made himself scarce" (used to describe a deer vanishing during a hunt), meaning something is missing, gone, or not around in sufficient quantity.
Individual vs. Societal wants:
Individuals often claim to have limited personal wants (e.g., claiming to only need basic food and weed while on an expensive scuba diving trip).
At the aggregate societal level, human wants are fundamentally unlimited regardless of personal perceptions.
Thought Experiment: Historical Progress and Evolving Wants:
Historical baseline: In Catonsville, Maryland, during the late 1700s and early 1800s, traveling between the ports of Baltimore and Annapolis required a two-day journey on foot or horseback along dirt trails through dense woods.
Environmental conditions:
Historical travelers camping on the ground experienced rainstorms and severe mosquito infestations.
Modern developed areas avoid mosquitoes due to municipal chemical spraying trucks, whereas camping in undeveloped woods off Interstate 70 exposes individuals to heavy insect bites.
Evolution of human desire:
Travelers 150 years ago would have claimed that overnight hotel accommodations, dry shelter, and single-day travel capabilities would permanently satisfy all their desires.
Modern commuters travel between Annapolis and Catonsville in comfortable, bug-free, climate-controlled vehicles while watching storms through windows.
Despite achieving conditions that past generations prayed for, modern society remains uncontent and continuously demands more goods and technological innovations.
Categorization of Economic Goods, Bads, and Services
Economic Good:
Any tangible item that individuals are willing to pay money to acquire (e.g., bottled water, clothing, physical merchandise).
Economic Service:
An intangible action or task performed for pay (e.g., teaching/lecturing, vehicle repair, auto towing after a collision).
Economic Bad:
Any item, byproduct, or waste product that individuals or organizations must pay money to dispose of or remove.
Examples include damaged tires following an accident, municipal sewage, and landfill waste.
Business Transformation of Economic Bads into Economic Goods:
Entrepreneurs generate substantial profit margins by discovering cost-effective processing methods to convert economic bads into marketable economic goods.
Examples of transformation:
Melting down discarded plastic water bottles to produce synthetic fibers for athletic apparel (such as Under Armour clothing).
Shredding discarded tires to create recycled rubber trail surfacing, such as the springy diagonal path at UMBC running from the gym entrance to the downstairs Union Center entrance.
Financial advantage: Processors get paid to accept the input (the economic bad) and subsequently get paid when selling the final output (the economic good).
Abundance vs. Scarcity:
Abundance represents an increase in the relative supply of a resource, which shifts supply outward and lowers its market price.
Scarcity and abundance exist along a continuous quantitative spectrum rather than as binary opposites.
Core Principles of Economics: Trade-offs and Opportunity Cost
Scope of Mankiw's Principles:
The principles represent a conceptual, "mile-wide" broad overview of fundamental microeconomic and macroeconomic reasoning.
Principle 1: People Face Trade-offs ("There Is No Such Thing as a Free Lunch"):
This core axiom (also phrased as "there is no such thing as a free ride" or "nothing is free") has been used in economic discourse for 60 to 80 years.
Clarification on meaning: The phrase does not imply that every promotional offer contains hidden scams or deceptive strings attached. Instead, it signifies that because all resources are scarce, every choice requires giving up an alternative.
Principle 2: The Cost of Something Is What You Give Up to Get It:
Opportunity Cost: The total value of the next-best alternative forgone when making a decision.
Case Study: Dealership Free Lunch Promotion:
Scenario: A live radio broadcast on WRNR advertised a free lunch (a choice of tuna fish sandwiches) at a car dealership on West Street near Annapolis.
Alternative options forgone: Purchasing a lunch at Mission Barbecue or Red Hot & Blue for approximately .
Dealership business model: Car dealerships employ skilled sales staff and operate on a volume conversion rate (e.g., getting visitors onto the lot yields sales conversations, resulting in completed car sale).
Anecdote on dealership sales tactics: A vehicle owner who brought his car into a dealership for routine maintenance was pitched by sales staff and impulsively purchased a brand-new car equipped with large custom muffler rims without consulting his spouse.
Components of Opportunity Cost and Expected Cost:
Credit constraints: An individual with poor credit faces zero risk of being persuaded into buying a car, rendering that specific risk cost nonexistent for them.
Mathematical expected cost formula:
Value of time: Time passes regardless of choice; the true time cost equals the value of the forgone activities that could have been completed during that period.
Transportation costs: Any additional travel distance, fuel, or vehicle wear incurred to obtain a free item represents a real economic cost.
Marginal Analysis and Behavioral Economics
Principle 3: Rational People Think at the Margin:
Marginal Benefit and Marginal Cost Mechanics:
Comparison baseline: A free sandwich at a dealership costs and provides basic nutritional sustenance. Mission Barbecue costs and provides nutritional sustenance plus high culinary enjoyment ("yum").
When the free meal option exists, paying at Mission Barbecue buys only the incremental marginal benefit (the additional flavor and enjoyment) above basic nourishment.
The availability of a free baseline option reduces the net benefit of paying full price for higher quality, making it harder to justify spending solely for marginal flavor.
Economic Interpretation of "Thinking":
Economists do not assume that individuals explicitly conduct mathematical cost-benefit equations or formal optimization models before every mundane daily decision.
Instead, economic theory asserts that individuals behave as if they are calculating marginal costs and marginal benefits.
The Billiards (Pool) Analogy:
Physics and geometry of 8-ball billiards: Standard games utilize 16 balls and require evaluating complex reflection angles, friction, impact forces, and trajectories across the table.
Divergence in execution:
A formally educated mathematician can set up and solve explicit geometric and physics equations to calculate the optimal shot angle.
An experienced pool player (e.g., Uncle John, a high school dropout who played pool in Elkton while living on a farm) rejects formal mathematics entirely.
In head-to-head play, the experienced player consistently defeats the mathematician because he operates and executes shots as if he calculated all geometric angles and vector physics.