Introduction
Reading: Chapter 1 of Tucker
Overview:
1. Economic Fundamentals
How would you define economics?
Economics is the study of how to allocate scarce resources, goods, and services among alternative uses.
What does scarcity mean?
Textbook definition: Scarcity is the condition in which human wants are forever greater than the available supply of time, goods, and resources. Because of scarcity, it is impossible to satisfy every desire.
Something that is scarce is valuable to people, and importantly, when the scarce thing is allocated to one use, a valuable alternative use must be given up.
What are some examples of things that are scarce?
What are some examples of things that are not scarce? Is scarcity only an issue for the poor? The materialistic?
Are some forms of scarcity heightened or even artificially manufactured? How/why?
When people make allocation choice in the context of scarcity, that choice involves economics.
Goods and services are scarce because the resources used as inputs to produce them are scarce. The fundamental resources in an economy (also known as factors of production) are subdivided into Land (natural resources), labor, and capital.
Land resource: The natural resource endowment, unimproved by humans. Can be subdivided in many ways, such as renewable and nonrenewable. Examples?
Labor resource: The mental and physical human capacities to contribute toward producing goods and services. Measured in terms of both quantity and quality. One particular type of labor resource is entrepreneurship. What is entrepreneurship? Why is it important?
Capital resource: Physical plant, machinery, and equipment produced by people (and thus not land) and used to produce goods and services. Capital does not directly satisfy human wants.
Confusion: Frequently the business media will use the word capital to refer to stocks, bonds, and other dollar-denominated assets. These are actually called "financial capital." Unlike capital, financial capital is not used to produce things. Financial capital can be thought of as a form of money.
To make an allocation choice in the context of scarcity, people must somehow rank the various alternative uses of the resource, good, or service that is scarce. This involves a system of value. Individuals have values and preferences, and apply them to economic choices countless times each day, and frequently this process is so ingrained that we are not even aware of this ranking process. When society makes choices regarding the allocation of public resources, democratic process involves the aggregation of individual values and preferences.
Note: The implication is that we cannot make economic choices in the absence of values and preferences.
Hazards in the economic way of thinking:
a. Ceteris Paribus: Latin for "all else equal" or unchanged. If more than one factor changes (such as the price of a good and consumer incomes), and as a result consumer behavior changes, then you cannot conclude that only one of these caused the observed change in consumer behavior because ceteris paribus was violated.
b. Association vs. Causation: When two things happen at the same time, we cannot conclude that one caused the other to change, or vice versa. For example, a soccer player notices that whenever she wears a red sweatband the team wins.
2. Brief Overview of Alternative Methods of Allocation
-Markets
-Socialism
-Gift
-Lottery
Other?
3. Positive vs. normative economics
4. Market Failure and Government Failure
-Do any societies use a pure system of market capitalism? Why or why not?
-Fairness and equality
-Imperfect information
-Market power due to monopolies or cartels
-Environmental pollution problems
-Collectively consumed goods and services
Other?
-Have any societies completely eliminated the use of markets? Why or why not?
-Incentives provided by profit and prices.
-Difficulty of planners being able to replicate the allocation decisions made by millions of people interacting in markets.
-In the modern world, most societies have a mixture of markets and government, each with important roles and functions.....
What is the difference between microeconomics and macroeconomics?
Micro: Studies the economic choices made by individuals and firms, the interaction of individuals and firms in markets, and the role and nature of regulation and other forms of government intervention. A key focus here will be on supply/demand interaction.
Macro: Studies economic aggregates such as gross domestic product (total output), inflation, unemployment, and economic growth, along with fluctuations in these (the business cycle), and government policy designed to dampen the business cycle.
What is the current state of the U.S. economy, and what is current macroeconomic policy?
Economic models as simplified metaphors of far more complex interactions in the real world. Can you think of any other examples of situations in which models are simplified versions of a more complex reality?
4. Graphing (appendix to ch. 1)
Distinguish y and x axes. Which is the dependent variable? Independent? What is a positive or direct relationship between x and y? What is an inverse relationship between x and y?