Transcript Decisions & Effects - Long Beach School for Adults

Ch 1: What Economics
Is About
James R. Russell, Ph.D., Professor of Economics & Management, Oral Roberts University
©2005 Thomson Business & Professional Publishing, A Division of Thomson Learning
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Economic Definitions


Scarcity is the condition in which our
wants are greater than the limited
resources available to satisfy them.
Economics is the science of scarcity; or
how individuals and societies deal with
the fact that wants are greater than
the limited resources available to
satisfy those wants.
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Economic Categories


Positive and
Normative
Economics
Microeconomics
and
Macroeconomics
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Economic Categories


Positive
Economics: the
study of “what is.”
Normative
Economics: the
study of “what
should be.”
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Microeconomics and
Macroeconomics

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Microeconomics: the
branch of economics that
deals with human behavior
and choices as they relate to
relatively small units.
Macroeconomics: the
branch of economics that
deals with human behavior
and choices as they relate to
highly aggregate markets or
the entire economy.
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Self-Test
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Scarcity if the condition of finite resources.
True or false? Explain your answer.
How are the Friedman and Robbins
definitions of economics similar?
What is the difference between positive
and normative economics? What is the
difference between macroeconomics and
microeconomics?
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Key Concepts in Economics


Utility/Disutility
Goods/Bads
– Tangible
– Intangible
Factors of Production
 Land (natural resources)
 Labor
 Capital
 Entrepreneurship
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Key Concepts in Economics
Need for a Rationing Device
 Implied by Scarcity
 Price
 First-Come-First Served
 Beauty
Scarcity and Competition
 Competition exists because of scarcity.
 Whatever the rationing device, people
will compete for it.
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Thinking in Terms of
Opportunity Cost
The most highly valued opportunity
or alternative forfeited when a
choice is made.
 The higher the opportunity cost of
doing something, the less likely it
will be done.

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Exhibit 1: Scarcity and Related Concepts
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There Is No Such Thing
As A Free Lunch
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Opportunity costs are incurred when
choices are made.
“Free” education, medical care,
housing, bridges, and parks may be
considered free by some.
None are actually free.
The resources could have been used in
other ways.
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Thinking In Terms Of …

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Costs and Benefits
Decisions Made At The Margin
Efficiency
– Marginal Benefits & Marginal Costs
– Marginal Benefits = Marginal Costs
– Maximizes Net Benefits
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Exhibit 2: Efficiency
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Thinking In Terms Of …
Unintended Effects
 Equilibrium
 Ceteris Paribus Assumption:
all other things constant.

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Unintended Effects
Number Of Accidents Fatalities Per
Accident
Total Number of
Fatalities
200,000
200,000
20,000
16,000
0.10
0.08
Versus
Number Of Accidents Fatalities Per
Accident
Total Number of
Fatalities
200,000
250,000
20,000
20,000
0.10
0.08
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Thinking In Terms Of …



The Difference between
Association and Causation
The Difference between the
Group and the Individual
Fallacy of Composition:
erroneous view that what is
good or true for the individual
is necessarily good or true for
the group.
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Self-Test
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How does competition arise out of scarcity?
Give an example of how a change in
opportunity cost can effect behavior.
There are costs and benefits of studying. If
you continue to study as long as the marginal
benefits of studying are greater than the
marginal costs and stop studying when the
two are equal, will your action be consistent
with having maximized the net benefits of
studying? Explain your answer.
Give an example to illustrate how a politician
can mislead the electorate by implying
association is causation.
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Self-Test
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Give an example to illustrate how a
politician can mislead the electorate by
implying association is causation.
Your economics instructor says, “If the
price of going to the movies goes down,
people will go the movies more often.”
A student in class says, “Not if the
quality of the movies goes down.” Who
is right?
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Economists & Theories


Theory: an abstract
representation of the real
world designed with the
intent of better
understanding the world.
emphasizes those
variables that are
believed to be the main
variables that explain an
activity or event.
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Building and Testing A
Theory
1.
2.
3.
4.
Decide on what you
want to explain or
predict.
Identify important
variables
State assumptions of
the theory
State the Hypothesis
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Building and Testing A
Theory
5.
6.
7.
Test the theory by comparing its
predictions against real-world events.
If the evidence supports the theory,
continue to examine the theory.
If the evidence rejects the theory,
either revise the theory or amend the
old theory in terms of variables,
assumptions or hypothesis.
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Exhibit 3: Building and Testing a
Theory
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How Do We Judge
Theories?
According to Milton Friedman:
 None are descriptively realistic.
 Are they sufficiently good
approximations for the purpose in
hand?
 Do they yield sufficiently accurate
predictions?
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Self-Test
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What is the purpose of building a
theory?
How might a theory of the economy
differ from a description of the
economy?
Why is it important to test a theory?
Why not accept a theory if it “sounds
right” ?
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Coming Up (Ch. 2): Economic
Activities: Producing and Trading
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