“Making the most of our dollars and sense”

Economics ForEveryday Life

Glenn Rivera

April 8, 2023

2

•Money/Banks

•The Federal Reserve

•Businesses

•Wall Street/Stock Market

•All are correct because of one common item; People

•The economy is people – buying, selling, consuming

•Are we in the economy at this moment?

What is the Economy?What is the Economy?

3

OverviewOverview

• Definition of Economics• The Greatest Constraint• Economic Goals• Three Questions Every Economy Must Answer• Economic Assumptions• Role of Government• Benefits of Public Expenditures• Costs of Public Expenditures• How to increase GDP• What can we learn?

4

• Economics is the study of how individuals/societies distribute scarce resources for unlimited wants.

Definition of EconomicsDefinition of Economics

5

Study of…Study of…• Study of… - Implies a discipline

• Economists study consuming behavior - Social Science

• Why are Economists interested in consuming behavior?

• The purpose of an economy is to provide a living for people

• Economics is a philosophy – Capitalism vs. Communism

6

DistributeDistribute• An economy is a distribution/rationing system. It answers the question of,

“Who gets it?” Different economies answer in different ways

• Market Economy (Capitalism) - $ = demand; no $ = 0 demand

• Need does not equal demand

• Demand is the ability and willingness to pay for goods and services

• Most Efficient

• Command Economy (Soviet style Communism)

• An administrative attempt to determine what to make and who gets it.

• Most Inefficient

• Mixed Economy – Mix of Capitalism and Socialism

• All economies today are mixed

• Mix levels determined by values of society

7

• Scarcity – What is Scarcity?• From Webster’s – Deficient in quantity or number compared with the

demand : not plentiful or abundant• What is scarce in a Market Economy?

• Anything that demands a price• Is there anything that we consume that is not scarce?

ScarceScarce

8

• Four Factors of Production• Land – Any natural resource• Labor – People• Capital – The machines, tools, buildings used to produce final

consumer goods and services• Entrepreneurship/The Entrepreneur – The risk taker

Scarce ResourcesScarce Resources

9

Unlimited WantsUnlimited Wants• People have unlimited wants

• More is better – (More of Everything) - The Pig Principle• College graduate story• Applies to all individuals, businesses, Nation States

• WE ARE CONSTRAINED

10

Greatest ConstraintGreatest Constraint• Opportunity Cost - The next best good/service that is

forfeit in order to obtain something else.• Nothing is free. There are only tradeoffs between

alternatives. Blue Jeans Example.• True because of finite resources/income

• We cannot escape this fact – Bill Gates• Individuals and societies must make choices

• Guns/Butter, Roads/Schools, Police/Healthcare, etc.• Societies/People do not act/think this way

• Historically we take it or pretend it does not exist• Oakland CA example

There is no such thing as a free lunch!There is no such thing as a free lunch!

11

• Economics is the study of how individuals/societies distribute scarce resources for unlimited wants.

Definition of EconomicsDefinition of Economics

12

Economic GoalsEconomic Goals• If our resources are scarce, and our wants unlimited, what

should we be?

• Efficient• Productive Efficiency• Allocative Efficiency

13

• Productive Efficiency – Maximum output with resources• Allocative Efficiency – The optimal mix of goods and

services• Private Goods/Services and Public Goods/Services• The wrong mix is bad for society – Allocative Inefficiency

Efficiencies DefinedEfficiencies Defined

14

The Questions Every Economy Must AnswerThe Questions Every Economy Must Answer

• What to Make?

• How to Make it?

• Who Gets it?

15

Determined by Free Market and Government – Mixed Economy• Free market - Price signals tell producers what to produce

• Where there is a demand, there will be a supply• Government – Determined by values of society (welfare)

#1 - What to Make?#1 - What to Make?

16

#2 - How To Make It?#2 - How To Make It?• The cheapest way• The cheapest mix of the factors of production are used to

produce final goods and services• American economy is capital intensive – Capital is cheaper than labor• Mexican economy is labor intensive - Labor is cheaper than capital

17

#3 - Who Gets It?#3 - Who Gets It?

• Determined by Free Market and Government• Free Market - Demand is ability and willingness• Government - Reallocation of Goods & Services via Taxes

• Determined by values of society – Societies’ sense of equality• Free Rider Problem - Occurs with consumption without

payment• Abuse-When pain of cost is removed, over consumption occurs

18

Economic AssumptionsEconomic Assumptions• Why do Economists make assumptions?

• Economic world is too big, too complex• Markets/People are inherently unpredictable

19

Self InterestSelf Interest

• All human activity is motivated by self interest• “It is not from the benevolence of the butcher, the brewer, or the baker

that we expect our dinner, but from their regard of their own interest.” Adam Smith - The Wealth of Nations (1776).

• Greed is Good• Greed defined – No moral connotation; greed drives efficient markets• Greed is Good - Spurs competition among firms

• Promotes efficiency which lowers cost• Promotes innovation for newer products• Promotes quality products

• Greed is good from the buyers perspective too.• Rotten apple example

20

RationalRational

Humans are always rational• It is rational to be a pig. More is better.• It is rational to make the most out of your purchases.

21

Role of GovernmentRole of Government

• Should Government be involved?• Adam Smith – “Laissez Faire” Leave it Alone

• Rule of Law – Enforce the rights of the people• Criminal Law – Police/Courts/Jail• Corporate Law – Needed for Business

• Equity - Distribution of Resources• Public Schools/Roads/Health Care• Social Stability

• Economic Growth/Stability• Monetary/Fiscal Policy

• International Trade/Globalization• Regulation of Common Areas

22

• Stimulate/Stabilize the Economy During Recession• Unemployment Benefits – Less likely to beg, borrow, steal• Fiscal Policy – Government Spending• Monetary Policy – Increase/Decrease of the money supply

• Technological Spin-Offs (military spending)• Medicine• Metallurgy - Aerospace Industry• Cell Phone Technology

• Human Capital Investments – Investment in education/training of Workforce and the Returns to that Investment• Public Education/Grants/Loans• Investment in education and training of government workforce

• Example - Here

Benefits of Public ExpendituresBenefits of Public Expenditures

23

• Current National Debt $11.2T* as of 30 April 09• Taxes/Government expenditures divert resources from private

investment• When consumers/businesses have less money they save less, spend

less and invest less• Inefficient Bureaucracies

• No bottom line (profit) to measure productivity• Few incentives to increase productivity/spend efficiently

• Financed with Debt• Debt must be serviced (paid $451.2 Billion in 2008**)• Inflation from increased demand

• Market economy rations with higher prices

Costs of Public ExpendituresCosts of Public Expenditures

*http://www.treasurydirect.gov/NP/BPDLogin?application=np**Source Treasury Direct www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

24

• What can you do with $451,154,049,951?

Costs of Public Expenditures ContCosts of Public Expenditures Cont

25

• If an average home costs $250,000 then• $451.2B/250K = 1,804,616 homes

• If the average cost of 4 year degree is $200,000• $451.2B/$200K = 2,255,770 4 year degrees

• or $11.2T/155.2M = $72.2K• Huge Opportunity Cost

• If we want more, what can we do?• Increase GDP

Costs of Public Expenditures ContCosts of Public Expenditures Cont

*Source CIA World Fact Book -https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

26

Gross Domestic Product (GDP)Gross Domestic Product (GDP)• GDP is the final market value of all goods and services

produced within a nation’s borders in a years time.

27

U.S. GDP 1929 to 2008U.S. GDP 1929 to 2008

How Do We Get More?

28

• Save Money/Invest Money• Makes money more available which reduces interest rates

• Increases capital investment and personal expenditures

• Spend Money• Spending = demand = price signal• Puts people to work and leads to more demand

• Increase Technology And Use It• Allows us to produce more efficiently

• Increase Productive Efficiency• Improve processes/Work smarter, not harder

• Have we been doing this?

How to increase Gross Domestic How to increase Gross Domestic Product (GDP)?Product (GDP)?

29

U.S. Productivity 1992-2008U.S. Productivity 1992-2008

Source: Bureau of Labor Statistics, Productivity and Cost

•1992 = 100%•2008 = 139%•2.4% Average Annual Increase

30

ConclusionConclusion• What can we learn from this as stewards of Government

resources?• We need some government spending• Understand opportunity cost – No Free Lunch• Look for Productive Efficiency – Work smarter, not harder• Be prepared to adapt to a changing economic/business environment

Some knowledge of basic economics is necessary for stewardship of

Government resources

“Making the most of our dollars and sense”

Questions