Production Possibilities Oppurtunity Cost marginal Analysis Economic Growth

What is Economics?

  • Economics is about people and how they use resources.

Scarcity

  • Resources are limited, while uses are many, leading to competing ends.

Choice

  • Scarcity forces individuals to make choices, which involve trade-offs between different options.

Opportunity Cost

  • Opportunity cost is what you give up when you make a choice.
  • It is the value of the most highly valued alternative that you don’t choose, not the sum of all the things you didn’t choose.

Incentives Matter

  • Our choices depend on the incentives that we face.

Economic Unit

  • An economic unit is an individual.
  • Methodological individualism: Action by individuals is purposeful.
  • Information is limited and imperfect.
  • Choices are rational.
  • Individuals make choices, trade-offs, and valuations.

Subjective Value

  • Value is subjective and specific to individuals.
  • Values depend on utility.
  • Utility is the usefulness of a resource as a means to achieve individual ends.
  • Utility depends on marginal costs and benefits.

Cost and Benefits

  • The most basic tool in economics is the comparison of costs and benefits.
  • Everything has a cost and a benefit.

Marginal Analysis

  • Individuals weigh the incremental costs and benefits associated with a choice.
  • Marginal costs and benefits are forward-looking.
  • Sunk costs and benefits are irrelevant to current decisions.

The Broken Window Fallacy

  • It's important to consider the interests of everyone, as consumers and producers, to avoid illusions when focusing on a single economic group.

The Goal of Economic Science

  • To see the problem as a whole, and not in fragments (Henry Hazlitt).

Normative vs. Positive Statements

  • Normative Statement: What should be; an opinion that cannot be tested (e.g., "Everyone should have health insurance").
  • Positive Statement: What is; can be tested and verified by observation (e.g., "The cost of health insurance is $8,211").

Economic System

  • Decisions:
    • What to produce? How much?
    • How to produce?
    • How to distribute what is produced?

What to Produce?

  • Goods and services that people value and use to achieve their ends.

How to Produce?

  • Entrepreneurs organize resources in production processes.
  • Factors of Production:
    • Land: The “gifts of nature” used in production.
    • Labor: The work time and effort of people in production.
    • Capital: The tools, instruments, machines, buildings that businesses use in production.
    • Entrepreneur: The person that organizes land, labor, and capital in production processes.

For Whom?

  • Distribution is a byproduct of production.
    • Land earns rent.
    • Labor earns wages.
    • Capital earns interest.
    • Entrepreneurship earns profit.

Coordination Mechanisms

  • How do individual choices determine how resources are used to produce goods and services?
  • Can individuals acting in their own self-interest create a beneficial outcome for society overall?
  • Coordination Mechanisms:
    • The market.
    • Central planning.

Efficiency and Equality

  • Efficiency: Producing goods and services at the lowest cost, using the least resources.
  • Equality:
    • All people are free to act within a universal set of rules.
    • The outcome is the same for everyone.

Individual vs. Society

  • Is there a conflict between the individual and society?
  • Is there a trade-off between efficiency and equality?
  • Largest Economy in the World since 1870s
  • Real GDP 2024 23.4T23.4T

Market System

  • Depends on equality type 1: people are free to make their own choices in the context of a universal set of rules.
  • Would you try to achieve greater equality if everyone was more equal but worse off?
  • What happens to the incentives that people face?
  • What system creates the highest standard of living for the greatest number of people?
  • The benefits of achieving greater equality have to be compared to the costs of lesser efficiency.

Thinking Like an Economist

  • People, Resources, Scarcity
  • Focus on Individuals
  • Choices are trade-offs
  • Everything has a cost and a benefit
  • People maximize utility
  • View problems in totality
  • The market is a process.

Key Principles of Economic Thinking

  • Economics is a social science - it is about human action.
  • People act to overcome scarcity.
  • Scarcity requires people to make choices.
  • A choice is a trade-off.
  • Only Individuals can make choices and valuations.
  • Valuations are subjective.
  • Individuals are rational – they make rational choices.
  • Information is always limited and imperfect.
  • All action, all choices, involve comparing costs and benefits.
  • Cost is what you give up, what you lose, to get something.
  • All action, all choices, are made at the margin.
  • Choices are made in the context of incentives.
  • Entrepreneurs organize resources-factors in production.
  • You must see the problem as a whole, and not in fragments.
  • The market is a process - it takes place over time.

Economic Science

  • The task of economic science is to discover positive statements that are consistent with what we observe in the world and that enable us to understand how the economic world works.
  • Economics relationships involve complex phenomena
  • An economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand…
  • Economic models always involve Abstractions.
  • There are no constants in Economics…
  • Testing an economic model is difficult.
  • Unscrambling Cause & Effect