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A way of thinking about the relationship between wants & needs and how to obtain them.

So What is Economics?

• Economics is how people decide to use their limited resources for their unlimited wants– Basically – getting the most with what you have

• It is NOT just about money– Economics deals with things of any VALUE, not

just monetary value– Everyone has different values and different wants

• It is NOT full of mathematical equations– It is more conceptual than mathematical

• There is some math involved but it is not the focus

The Start of Economics

• The notion of Economics was started by Adam Smith

– Wrote The Wealth of Nations in 1776– Explained that countries/companies/communities

and people were better off when they compete with one another

• Not competition by war, but by production/selling of goods

– Said people needed more than food, shelter, clothing

• The more of these “things” they have – the richer they are

The Start of Economics• Adam Smith and the Free Market

– That people, acting in their own self-interest, would work hard and produce what consumers want as if directed by an invisible hand.

• Smith argued for trade– Saying it opened new markets where surplus goods could be sold and

allowed for cheaper goods to be imported.

– Believed that competition among businesses would keep prices in check.

• Smith believed there was a limited but important role for government to do things such as;– Enforce contracts, grant patents and copyrights, and provide public

works such as roads.

• Smith observed that specialization and division of labor in a pin factory allowed workers to produce many times more pins than if each worker had been working alone.

 

The Start of Economics

(Cont.)• Led to studies of how to control/run an

economy

•What is an economy of a country?– A national economy deals with how a country or

government uses or utilizes its limited resources to get the most out of production and consumption of these goods.

What Economics Does• Economics works to explain why things are the

way they are– For example, why charge 1.99 instead of 2.00?

• Explains how and why people use their resources– For greatest profit, meet most demand, etc.

• Resources are important because they are scarce– Scarcity – People have unlimited wants, but all

resources are essentially available in limited amounts.• Explains how and why people make the life decisions that

they make.

• Jobs, houses, moving, more or less children, etc.

Examples of Limited Resources in the U.S.

• What are some of the limited resources we have here in the United States?– Limited resource – any product or service that we do

not have an unlimited amount of…

• Why do we continue to use such a large amount of these resources?

• What are we doing to address these limitations?

Comprehending Economics boils

down to….• People make choices

• People’s choices involve cost

• People respond to incentives in predictable ways

Two distinct views of Economics as a field of study

and practice

• Macroeconomics = economic issues of a nation.

• Microeconomics = economic issues of the individual, household or business.

Different Types of Economic Analysis

• Positive Economics – uses analysis to explain how things are (cause & effect) – focuses on facts and data.

• Normative Economics – uses data and analysis to find the greatest value in each decision made – uses value judgements and opinion (how things should be).

• In the end, economics HELPS MAKE DECISIONS

        

                        

Positive Economics

Normative Economics

3 Main Tools of Economist• Scientific Method

– Using hypotheses and research to make decisions

• Graphs– Use data of variables to show visual evidence– The curve: shows the representation b/w variables

• Does not actually have to be curved

• Economic Models– Uses simplified models to try to predict outcomes– Also called “rational-behavior model”– Also requires the belief that all things are equal in the models

Scenarios to Figure Out• Which area of economics would be used for each

scenario – hint: more than one can be used

• Should a tax return be used to fix up the house or to buy a new TV?

• What could Broad Run do to reduce the sports fee required to play sports?

• What are the costs to increase our workforce by 5 workers next year?

• Should we impose an embargo on all Communist countries to force them to become free-market?

7 Principles to Economic Thinking

• Economic thinking – using economic view to make decisions– Purchases, job choices, education, taxes, banking,

fiscal and monetary policy etc…• Principle 1: Scarcity and Tradeoffs • Principle 2: Costs and Benefits• Principle 3: Marginal Thinking• Principle 4: Incentive Thinking• Principle 5: Beneficial Trading• Principle 6: Markets Coordinating Trade• Principle 7: Future Consequences Thinking

Principle 1: Scarcity and Tradeoffs• Explains that there will never be enough of ANY

resource to meet everyone’s wants– Lack of an unlimited supply creates scarcity

• When a choice must be made for one resource over another, that choice has created a tradeoff– Tradeoff – what is given up for another resource

• This is known as the “no-free-lunch-principle”– Known for this because even when lunch is free, someone had

to pay for the goods to make it

• This principle is prevalent in everyday life, think of different examples…

Principle 2: Costs vs. Benefits

• Scarcity forces decisions, so people are forced to weigh the costs and the benefits of each decision– Costs – what must go in to get the

product/outcome– Benefit – what is gained from the decision

• Leads to “cost-benefit analysis” - CBA– Looking at what is spent versus what is earned

from a potential decision

Principle 3: Marginal Thinking

• Margin – the outer edge of our decision– Refers to a little more or less of whatever we desire

• Example: What is your favorite food?– Eat it on Monday – 100% happiness– Tuesday – still very happy, Wednesday – still good, but…– Thursday – good, but getting sick of it– Friday – you are ready for something new

• Tells you that 2-3 days is where your happiness starts to fade, which is your margin.

• Marginal Cost – what you give up for 1 more– Is one more dinner of your favorite food worth not

eating something else for dinner that you also enjoy?

Principle 4: Incentives

• Incentive – something that promotes choosing one decision over another– Examples: coupons, sales, rebates, etc…

• Two types of incentives – Positive Incentive – encourages people to choose by

rewarding them with something by their own choice.

– Negative Incentive – encourages people to do things by charging some kind of penalty, fine or tax, if not done.

• What are examples of positive and negative incentives that you can think of?

Principle 5: Benefits of Trade

• People cannot and do not live self-sufficiently– They don’t grow their own food– They don’t build their own homes

• Trade benefits everyone and allows specialization– Allows people to gain better products and gain

resources such as time

• We trade for almost everything from food to clothing to homes and other products

Principle 6: Market Coordinates Trade

• Market – any arrangement that brings together buyers and sellers to do business– Markets can be a single place or an undefined location, such as

the internet or cyberspace

– Examples: grocery store, flea market, lunch table, Ebay, Craig’s list

• Markets that work without government interference usually work best – “The invisible hand”– Allows buyers to find sellers -- both benefit

• At times, Government is forced to interfere to protect buyers and sellers.

Principle 7: Future Consequences

• People usually make decisions while only looking at the short-term effects– Tossing out old tests before the midterm

• Same questions end up on the test

• You forget the answers and get a lower grade

• Economists try to make decisions by looking at all possible consequences – very difficult– Creating the combustible engine -> running out of oil

• Also must beware the “law of unintended consequences”– All decisions come with consequences that could not be predicted

• Redskins pay top QB (McNabb) to come to VA and finish career

• He has worst season of his career, they waste money and have no QB

Exit Ticket

• On a notecard, please write your name

• In your own words (2-3 sentences), describe a situation where you had to make a decision based on costs and benefits. What did you decide and why?

• Turn in notecard before leaving class.