Lecture 2: ECN 111 The Basics Scarcity Choice and opportunity cost Defining Economics Policy and...
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Transcript of Lecture 2: ECN 111 The Basics Scarcity Choice and opportunity cost Defining Economics Policy and...
Lecture 2: ECN 111 The Basics
Scarcity Choice and opportunity cost Defining Economics Policy and Economic Science Market Institutions
MACRO HAPPENS
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From Last Time
Course Home Page www.public.asu.edu/~ifdlh/ Econ 111 Macro Happens (MW) Econ 111 Macro Plus (MWF)
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Assignment for the Weekend.
Reading chapters 1 and 2 - begin 3 Experiment with EIA Work on EIA chapters 2and 3 Those in Section xxxxx, names listed
in class, who meet MWF, we will see you in BAxxx at 10:40am on Friday.
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Scarcity
When wants exceed the resources available to satisfy them, there is scarcity.
People have unlimited wants. Resources to satisfy those wants are
limited.
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Scarcity and Poverty
Scarcity is not poverty. The poor and the rich alike face
scarcity. Faced with scarcity, people must
make choices.
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Big Ideas of Economics
The questions give you a sense of what economics is about.
The Big Ideas of Economics describe how economists think about these questions and seek answers to them.
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Big Ideas of Economics
IDEA 1 A choice is a tradeoff — we give up
something to get something else — and the highest valued alternative we give up is the opportunity cost of the activity chosen.
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Big Ideas of Economics
IDEA 2 We make choices in small steps, or at
the margin, and choices are influenced by incentives.
• Marginal Benefit vs. Marginal Cost
• Incentives are inducements to take particular actions
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Big Ideas of Economics
IDEA 3 Voluntary exchange makes both buyers
and sellers better off, and markets are an efficient way to organize exchange.
• Buyers receive goods or services
• Sellers receive money.
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Big Ideas of Economics
IDEA 3 (cont.) Markets are efficient because they
ensure that resources will be used where they are valued most highly.
Alternative to Market Economy• Command Economy
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Big Ideas of Economics
IDEA 4 The market does not always work
efficiently and sometimes, government action is necessary to overcome market failure and lead to a more efficient use of resources.
Market failure is a state in which the market does not use resources efficiently.
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Big Ideas of Economics
IDEA 5 For the economy as a whole,
expenditure equals income equals the value of production.
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Big Ideas of Economics
IDEA 6 Living standards improve when
production per person increases.• This increase in output per person will enable more
people to own goods and services.
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Big Ideas of Economics
IDEA 7 Prices rise when the quantity of money
increases faster than production.• Inflation results from “too much money chasing too
few goods”.
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Big Ideas of Economics
IDEA 8 Unemployment can result from market
failure but some unemployment is productive.
• Unemployment rates vary
• Some unemployment results from employees searching for a suitable job and employers searching for suitable workers.
– This unemployment improves productivity.
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What Economists Do
Economic questions can be divided into two big groups: microeconomics and macroeconomics.
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Microeconomics
Microeconomics is the study of the decisions of people and businesses and the interaction of those decisions in markets.
Goal: to explain the prices and quantities of individual goods and services.
these topics are covered in ECN112
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Macroeconomics
Macroeconomics is the study of the national economy and the global economy and the way that economic aggregates grow and fluctuate.
Goal: to explain average prices and total employment, income, and production.
these topics are covered in ECN111
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Positive Versus Normative Statements
A positive statement can be tested by checking it against facts. e.g. When prices rise the quantity of a good demanded will fall.
A normative statement depends on values and cannot be scientifically tested. e.g. We should redistribute income from the rich to the poor.
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The Task ofEconomic Science
Economic science discovers and catalogs positive statements that are consistent with what we observe.
Normative issues are typically tackled in political and social debate.
Our discussion will be primarily about positive issues. But the role of normative issues will also be addressed.
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Unscrambling Causeand Effect
The nature of economic data makes it difficult to identify what is a cause and what is an effect.
The logical tool all scientists use is ceteris paribus, a Latin term that means “other things being equal.”
By changing one factor at a time, we can investigate its effects clearly.
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Post Hoc Fallacy
Post hoc ergo propter hoc is a Latin phrase meaning “after this, therefore because of this.”
Just because two events happen together does not mean one caused the other.
e.g. are Presidents(or Governors) responsible for Economic performance. What do you think?
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Markets
A market is any arrangement that enables buyers and sellers to get information and to do business with each other.
Goods markets are markets for goods and services.
Factor markets are markets for factors of production.
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Factors of Production
Factors of production are the economy’s productive resources, including: Labor, what is the return Land, what is the return Capital, what is the return Entrepreneurial ability, what is the
return? Who can name an entrepreneur?
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Coordinating Decisions
Conflicting choices by households, firms, and governments are resolved by markets.
This is depicted in the following picture of the economy
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Alternative Coordinating Mechanisms
A command mechanism is a method of determining what, how, when, and where goods and services are produced and who consumes them, using a hierarchical organization structure in which people carry out the instructions given to them.
Is this better than a market economy? What do you think?
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Market Economies
An economy that uses a market coordinating mechanism is called a market economy.
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