What is economics?
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Transcript of What is economics?
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WHAT IS ECONOMICS?
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Economics is….. the social science that studies the
production, distribution, and consumption of goods and services
An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area
an economy delivers the goods
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The Economy of the United States:
US has a market economy production and consumption are the
result of decentralized decisions by many firms and individuals
opposite is a command economy – where there is a centralized authority making decisions about production and consumption (Soviet Union)
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Adam Smith, The Wealth of Nations
individuals, in pursuing their own interests, ended up serving the interests of society as a whole
invisible hand – refers to the way a market economy manages to harness the power of self-interest for the good of society
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Microeconomics: Microeconomics
individuals pursuing their own interests often do promote the interests of society as a whole
Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole
Fluctuations series of ups and downs which are a feature of
modern economies the economy just does not always run smoothly
recessions – economic downturns
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Macroeconomics: concerned with the overall ups and
downs of the economy
economic growth is the “growing” ability of the economy to produce goods and services
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THE ECONOMIC PERSPECTIVE
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The Economic Perspective: Economic perspective is the
economic way of thinking
There are four economic principles that underlie the economics of a individual choice
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1. Resources are scarce A resource is anything that can be used to
produce something else Countries resources: land, labor (the time
of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers)
Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it ex. natural resources, limited quantity of
human resources, even clean air and water
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2. The real cost of something is what you must give up to get it opportunity cost – what you
must give up in order to get it
every choice you make means forgoing some other alternative
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3. “How much?” is a decision at the margin usually the question Is not “whether” but
“how much” this is a question whose answer hinges on
the costs and benefits of dong a bit more or bit less
decision usually involves a trade-off – a comparison of the costs and benefits
marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis
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4. People usually exploit opportunities to make themselves better off it is a good bet that people will
exploit opportunities to make themselves better off
incentives – anything that offers rewards to people who change their behavior
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THE ECONOMIC WAY OF THINKING
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1. Everything has a cost “there is no such thing as a free
lunch”
Everything action costs someone time, effort or lost opportunities to do something else
Opportunity costs
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2. People choose for good reasons
Everyone faces choices and everyone should chose the alternative that gives them the most advantageous combination of costs and benefits
Normative economics –economic analysis that makes predictions about the way the economy should work
Positive economics – economic analysis that describes the way the economy actually works
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3. Incentives matter Economics is all about incentives Supply and demand analysis if
about incentives Theory of the firm and factor
markets are about incentives Government decision making is
about incentives When incentives change, people’s
behavior changes in predictable ways
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4. People create economic systems to influence choices and incentives Cooperation among people is governed
by written and unwritten rules that are the core of an economic system
As rules change, incentives and behavior change
The success of market systems and the failures of communism are rooted in incentives
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5. People gain from voluntary trade
Economics is about trade People trade when they believe
the trade makes them better off, if there are no benefits, they won’t trade
People, not countries, trade Market system is about trade Economics is about trade
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6. Economic thinking is marginal thinking
Marginal choices involves the effects of additions and subtractions from current conditions
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7. The value of a good or service is affected by people’s choices Goods and services do not have
intrinsic value – value is determined by the preferences of buyers and sellers
Price of a good or service is set by supply and demand
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8. Economic actions create secondary effects
Good economics involves analyzing secondary effects
Example: Rent controls make apartments more
affordable to some consumers Controls make it less profitable to
build and maintain apartments Secondary effect is a shortage of
apartments and houses for rent
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9. The test of a theory is its ability to predict correctly
If the theory correctly predicts the consequences of actions it is a good theory
Nothing is “good in theory but bad in practice”
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WHAT IS ECONOMICS?
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Economics is….. the social science that studies the
production, distribution, and consumption of goods and services
An economy consists of the economic system of a country or other area, the land, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area
![Page 25: What is economics?](https://reader035.fdocuments.us/reader035/viewer/2022062305/56816737550346895ddbe846/html5/thumbnails/25.jpg)
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The Economy of the United States:
US has a market economy production and consumption are the
result of decentralized decisions by many firms and individuals
individual consumers make what they think will be most profitable
each consumer buys what he or she chooses
opposite is a command economy
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Adam Smith, The Wealth of Nations
individuals, in pursuing their own interests, ended up serving the interests of society as a whole
invisible hand –
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Microeconomics: Microeconomics
individuals pursuing their own interests often do promote the interests of society as a whole
Problems though --- Market Failure is when the individual pursuit of self-interest leads to bad results for society as a whole
Fluctuations series of ups and downs which are a feature of
modern economies the economy just does not always run
smoothly
![Page 28: What is economics?](https://reader035.fdocuments.us/reader035/viewer/2022062305/56816737550346895ddbe846/html5/thumbnails/28.jpg)
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Macroeconomics: concerned with the overall ups and
downs of the economy
economic growth is the “growing” ability of the economy to produce goods and services
![Page 29: What is economics?](https://reader035.fdocuments.us/reader035/viewer/2022062305/56816737550346895ddbe846/html5/thumbnails/29.jpg)
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THE ECONOMIC PERSPECTIVE
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The Economic Perspective:
Economic perspective is the economic way of thinking
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1. Resources are scarce A resource is anything that can be
used to produce something else Countries resources: land, labor (the
time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers)
Scarce – there is not enough of the resource available to satisfy all the various ways a society wants to use it
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2. The real cost of something is what you must give up to get it
opportunity cost –
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3. “How much?” is a decision at the margin usually the question is not “whether”
but “how much” decision usually involves a trade-off –
a comparison of the costs and benefits
marginal decisions – decisions about whether to do a bit more or a bit less of an activity and the study of such decisions is known as marginal analysis
![Page 34: What is economics?](https://reader035.fdocuments.us/reader035/viewer/2022062305/56816737550346895ddbe846/html5/thumbnails/34.jpg)
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4. People usually exploit opportunities to make themselves better off
incentives – anything that offers rewards to people who change their behavior
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THE ECONOMIC WAY OF THINKING
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1. Everything has a cost “there is no such thing as a free
lunch”
Everything action costs someone time, effort or lost opportunities to do something else
![Page 37: What is economics?](https://reader035.fdocuments.us/reader035/viewer/2022062305/56816737550346895ddbe846/html5/thumbnails/37.jpg)
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2. People choose for good reasons
Normative economics –economic analysis that makes predictions about the way the economy should work
Positive economics – economic analysis that describes the way the economy actually works
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3. Incentives matter
Economics is all about incentives
When incentives change, people’s behavior changes in predictable ways
![Page 39: What is economics?](https://reader035.fdocuments.us/reader035/viewer/2022062305/56816737550346895ddbe846/html5/thumbnails/39.jpg)
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4. People create economic systems to influence choices and incentives
Cooperation among people is governed by written and unwritten rules that are the core of an economic system
As rules change, incentives and behavior change
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5. People gain from voluntary trade
Economics is about trade
People, not countries, trade
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6. Economic thinking is marginal thinking
Marginal choices involves the effects of additions and subtractions from current conditions
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7. The value of a good or service is affected by people’s choices Goods and services do not have
intrinsic value – value is determined by the preferences of buyers and sellers
Price of a good or service is set by supply and demand
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8. Economic actions create secondary effects
Good economics involves analyzing secondary effects
Example:
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9. The test of a theory is its ability to predict correctly
If the theory correctly predicts the consequences of actions it is a good theory
Nothing is “good in theory but bad in practice”