what is economics? the study of human behavior….. how is that different from psychology or...
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What is economics?What is economics?The study of human The study of human
behavior…..behavior…..
How is that different from How is that different from Psychology or Sociology?Psychology or Sociology?
How is that different from How is that different from Psychology or Sociology?Psychology or Sociology?
Economics…the study of human Economics…the study of human behavior and the choices that we behavior and the choices that we
make. make.
Sociology…the study of human Sociology…the study of human behavior when there are no behavior when there are no
choices to make….choices to make….
What is economics?What is economics?The study of human behavior…..The study of human behavior…..
…….in the presence of constraints..in the presence of constraints.
What constrains us?What constrains us?
Constraints:Constraints:
• Society’s normsSociety’s norms
• MoneyMoney
• Parents….Parents….
• TimeTime
Why do we have Why do we have constraints?constraints?• Scarcity — not enough of a good, freely in Scarcity — not enough of a good, freely in
nature, as we would like.nature, as we would like.Where do constraints come Where do constraints come from?from?
Needs Desires-Unlimited Resources--LIMITED
Resources:Resources:
• Anything used to produce other Anything used to produce other goods and services….goods and services….– Human—knowledge, experience, talentHuman—knowledge, experience, talent– Physical—tools, machinery, factoriesPhysical—tools, machinery, factories– Natural—iron ore, oceans, rivers, land Natural—iron ore, oceans, rivers, land
Class Work: 1.1Class Work: 1.1
• Are scarcity and poverty the same Are scarcity and poverty the same thing? Explain using the terms thing? Explain using the terms objectiveobjective or or subjectivesubjective OR OR positivepositive or or normativenormative, your choice., your choice.
Scarcity v. PovertyScarcity v. Poverty• Positive v. Normative EconomicsPositive v. Normative Economics
– Positive—fact, can be testedPositive—fact, can be tested– Normative—opinion, value judgmentNormative—opinion, value judgment
• Objective v. Subjective EconomicsObjective v. Subjective Economics
– Objective—fact, can be testedObjective—fact, can be tested– Subjective—opinion, value judgmentSubjective—opinion, value judgment
Scarcity necessitates:Scarcity necessitates:
• RationingRationing—allocating a scarce —allocating a scarce resource among those who want itresource among those who want it
– Types of rationing:Types of rationing:• First come, first served--inefficientFirst come, first served--inefficient
• Subjective (prettiest, tallest, shortest) --Subjective (prettiest, tallest, shortest) --arbitraryarbitrary
• PRICE!!! -- efficient, non-arbitrary!!PRICE!!! -- efficient, non-arbitrary!!
• CompetitionCompetition — — • By price—promotes income generationBy price—promotes income generation
• Makes us better off…better, cheaper, fasterMakes us better off…better, cheaper, faster
Thus: Scarcity ≠ PovertyThus: Scarcity ≠ Poverty
• Scarcity—objective definitionScarcity—objective definition
• Poverty—subjective definition; Poverty—subjective definition; arbitrary income amountarbitrary income amount
• Is life better today than 100 years Is life better today than 100 years ago?ago?
John Stossel: John Stossel: ReportReport -- is life getting -- is life getting worse?worse?
So, are we better off or worse So, are we better off or worse off now than 50 to 100 years off now than 50 to 100 years ago?ago?
By all OBJECTIVE standards, we By all OBJECTIVE standards, we are better off.are better off.
So, are we better off or worse So, are we better off or worse off?off?
If you were born in:If you were born in: 1900-1900-19201920
1995-1995-19981998
Life Expectancy Life Expectancy (in years)(in years) 4747 7777
Infant mortality Infant mortality (deaths per 1000 live (deaths per 1000 live
births)births)100100 77
Per Capita GDP Per Capita GDP (1998 dollars)(1998 dollars) $4,800$4,800 $31,500$31,500
High School Completion High School Completion (% of adults)(% of adults)
2222 8888
Computer Speed Computer Speed (computations / (computations /
sec)sec)0.02 0.02 (1976)(1976) 700 700 (2000+ (2000+
today)today)
Unemployment RateUnemployment Rate ?? ??
InflationInflation ?? ??
Conclusion:Conclusion:
• We are SO fortunate….We are SO fortunate….– This country and this time of our livesThis country and this time of our lives
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)
1. There is ALWAYS a tradeoff:1. There is ALWAYS a tradeoff:– We call that tradeoff our Opportunity We call that tradeoff our Opportunity
Cost Cost •the highest valued option given up when the highest valued option given up when
you choose one thing over anotheryou choose one thing over another– SpouseSpouse– LunchLunch– Coming to classComing to class
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)
2.2. Individuals choose purposefully, Individuals choose purposefully,
therefore economically…therefore economically…• If you have 3 choices, which do you choose? How to you prioritize them?
•Highest utility, lowest cost
•Most BANG for our Buck!
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)3. 3. Incentives matterIncentives matter:: do I want you todo I want you to
come to class? How do you know? come to class? How do you know? Parking in handicapped Parking in handicapped spaces…how spaces…how dodo you know? you know?
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)4.4. Economic thinking is marginal thinkingEconomic thinking is marginal thinking
People make decisions at the margin.People make decisions at the margin.
““My poor mother….she had to choose My poor mother….she had to choose between eating and buying her between eating and buying her prescription drugs last month!!” prescription drugs last month!!” Lloyd Benson, running Lloyd Benson, running for VP of US for VP of US
Fundamental lack of understanding of Fundamental lack of understanding of the difference between the difference between totaltotal costs costs and benefits vs. and benefits vs. marginalmarginal costs and costs and benefits.benefits.
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)
5.5. Information is a costly good.Information is a costly good.
Rational IgnoranceRational Ignorance — remaining — remaining ignorant about something where ignorant about something where the cost of obtaining the knowledge the cost of obtaining the knowledge is greater than the benefit of is greater than the benefit of learning it. learning it.
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)
• Remember the secondary effectsRemember the secondary effects——– AFDC payments that increased the AFDC payments that increased the
divorce ratedivorce rate– Rent controls that destroy the inner cityRent controls that destroy the inner city– Increases in the money supply that give Increases in the money supply that give
people more income but eventually people more income but eventually result in higher inflationresult in higher inflation
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)• The value of a good or service is The value of a good or service is
subjectivesubjective– What is something worth? Whatever What is something worth? Whatever
someone is willing to pay for it. someone is willing to pay for it. – You may value green space more than a You may value green space more than a
paved parking lot or you may value the paved parking lot or you may value the parking lot more. parking lot more.
– Economics tries not to make value Economics tries not to make value judgmentsjudgments but instead looks at the but instead looks at the measurable effects of, say, paving a measurable effects of, say, paving a parking lot.parking lot.
The Economic Way of The Economic Way of ThinkingThinking(8 Guideposts to Economic Thinking)(8 Guideposts to Economic Thinking)• The test of a theory is its ability to The test of a theory is its ability to
predict.predict.
Is economics a science? Can you Is economics a science? Can you form hypotheses, test them and draw form hypotheses, test them and draw conclusions? Yes, then economic conclusions? Yes, then economic thinking is scientific thinking.thinking is scientific thinking.
Pitfalls to avoid in Pitfalls to avoid in economic thinkingeconomic thinking
• Violating the Violating the ceteris paribusceteris paribus condition condition-- ceteris paribus-- ceteris paribus — all else equal, — all else equal, other things constantother things constant
-- if you forget this, it can lead to erroneous conclusions.
-- You know that income is growing in the US but you notice that people are buying fewer radios. How can that be? MP3 players
-- If 2 things are changing at once, predicting is much more difficult.
Pitfalls to avoid in Pitfalls to avoid in economic thinkingeconomic thinking
• Just because something seems like a good Just because something seems like a good idea doesn’t mean it is (idea doesn’t mean it is (good intentions do good intentions do not guarantee good outcomesnot guarantee good outcomes). ).
-- rent controls
-- FAA regs to require all children to wear safety belts (requiring their own seat)
Pitfalls to avoid in Pitfalls to avoid in economic thinkingeconomic thinking
• Association is not causationAssociation is not causation – –
----every time it rains I see folks with every time it rains I see folks with umbrellas. Conclusion:umbrellas. Conclusion: umbrellas umbrellas cause rain.cause rain.
Pitfalls to avoid in Pitfalls to avoid in economic thinkingeconomic thinking
• The Fallacy of CompositionThe Fallacy of Composition – just – just because something is good for one, because something is good for one, does not make it good for alldoes not make it good for all– One farmer has a bumper crop and his One farmer has a bumper crop and his
income rises. ALL farmers have a income rises. ALL farmers have a bumper crop….bumper crop….
– I I leave work early to beat the rush. leave work early to beat the rush. EVERYONE leaves work early…..EVERYONE leaves work early…..
Give me another Give me another example of violating the example of violating the ““association is not association is not causationcausation” pitfall.” pitfall.
Class Work: 1.2Class Work: 1.2