Introduction to Economics

Introduction to Economics

• Economics studies how societies make optimal choices when faced with scarcity.
• Economic wants regularly exceed a nation's productive capacity.
• Economics is a social science that studies how to allocate scarce resources to satisfy unlimited wants.

The Economic Perspective

• Thinking like an economist involves understanding scarcity, purposeful behavior, and marginal analysis.
• Key features of the economic perspective include scarcity and choice, purposeful behavior, and marginal analysis.
• Scarcity forces individuals and societies to make choices about resource allocation.
• Purposeful behavior suggests that individuals make decisions with a desired outcome in mind.
• Marginal analysis involves comparing the additional benefit of an action with its additional cost.

Scarcity and Choice

• Resources are limited, requiring choices about their use.
• Every choice involves an opportunity cost, which is the value of the next best alternative forgone.
• "There's no free lunch" emphasizes that all choices involve costs.

Purposeful Behavior

• Individuals act in their rational self-interest, seeking to maximize utility.
• Firms aim to maximize profit.
• Desired outcomes dictate behavior.

Marginal Analysis

• Marginal benefit is the additional satisfaction or value gained from an additional unit of activity.
• Marginal cost is the additional expense incurred from that additional unit of activity.
• Marginal means "extra."
• Decisions are made by comparing marginal benefits and marginal costs.
• Produce more if MB > MC
• Produce less if MB < MC
• Produce the optimal amount when MB = MC

Theories, Principles, and Models

• The scientific method involves observation, hypothesis formulation, testing, and modification.
• Economic principles are generalizations about economic behavior.
• The "other-things-equal" assumption (ceteris paribus) simplifies analysis by isolating the impact of one variable.
• Economic principles can be expressed graphically for clarity.

Microeconomics and Macroeconomics

• Microeconomics studies individual decision-making units such as households and firms.
• Macroeconomics examines the economy as a whole, focusing on aggregate measures like GDP and inflation.

Positive and Normative Economics

• Positive economics deals with economic facts and cause-and-effect relationships.
• Normative economics involves subjective judgments about what the economy should be like.

Individual's Economizing Problem

• Individuals have limited income but unlimited wants.
• A budget line illustrates the trade-offs between attainable and unattainable combinations of goods.
• Choices along the budget line involve opportunity costs.
• Consumers aim to make the best choice possible within their budget.
• Changes in income shift the budget line.

Society's Economizing Problem

• Society's resources are scarce and are generally categorized as: land, labor, capital, and entrepreneurial ability.
• Entrepreneurial ability involves taking initiative, making decisions, innovating, and taking risks.

Production Possibilities Model

• Illustrates the trade offs of production choices.
• The production possibilities model assumes: full employment, fixed resources, fixed technology, and production of two goods.

Production Possibilities Table

• Lists the trade offs between the production of pizza (in hundred thousands) vs industrial robots (in thousands) across alternatives A, B, C, D and E.
• Alternative A represents 0 pizzas and 10 industrial robots
• Alternative B represents 1 pizza and 9 industrial robots
• Alternative C represents 2 pizzas and 7 industrial robots
• Alternative D represents 3 pizzas and 4 industrial robots
• Alternative E represents 4 pizzas and 0 industrial robots

Production Possibilities Curve

• The law of increasing opportunity costs makes the PPC concave.
• Points on the curve are attainable, points inside the curve are attainable but demonstrate under utilization
• Points outside the curve are unattainable.

Opportunity Cost Measurement

• Opportunity cost (OC) can be measured as change of industrial robots / change in pizzas
• E.g. From A to B, OC = (9-10) / (1-0) = -1
• E.g. From B to C, OC = (7-9) / (2-1) = -2

Optimal Allocation

• The optimal amount of production is where Marginal Benefit (MB) = Marginal Cost (MC) as displayed on the optimal allocation graph.
• The points intersect at point "e", where the quantity of pizza is 2

Allocative vs Productive Efficiencies

• All points on the PPC are "productive efficiency" points, with a combination of 2 goods, produced with minimum cost
• Only one point on the PPC is 'allocative efficient' where MB=MC demonstrating a combination of a 2 goods that is mostly wanted or highly valued by society.

A Growing Economy

• Results from economic growth through more resources, improved resource quality, or technological advances.
• The Production Alternatives A', B',C',D', E' represent: Pizzas in hundred thousands as 0, 2, 4, 6, 8 and Industrial Robots in thousands as 14, 12, 9, 5, 0 respectively

Present Choices, Future Possibilities

• Compare two hypothetical economies through graphical representation of goods for the feature vs goods for the present

International Trade

• Enables specialization and increases production possibilities.

Pitfalls to Sound Economic Reasoning

• Include biases, loaded terminology, fallacy of composition, post hoc fallacy, and confusing correlation with causation.