* economic growth & scarcity. economics for leaders human prosperity and social cooperation...

Economics for Leaders

Human prosperity and social cooperation develop

spontaneously in societies that protect private property rights

and encourage voluntary trade.


#1: People choose, and individual choices are the source of social outcomes. Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.

#2: Choices impose costs; people receive benefits and incur costs when they make decisions. The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.

#3: People respond to incentives in predictable ways. Choices are influenced by incentives, the rewards that encourage and the punishments that discourage actions. When incentives change, behavior changes in predictable ways.

#4: Institutions are the “rules of the game” that influence choices. Laws, customs, moral principles, superstitions, and cultural values influence people’s choices. These basic institutions controlling behavior set out and establish the incentive structure and the basic design of the economic system.

#5: Understanding based on knowledge and evidence imparts value to opinions. Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it


*The Science of Choice!

*A social science that focuses on the choices people make.

*The choice people and countries make about how to use their resources in the efficient way.


*The choices people make have both present and future consequences

*People make choices based on their perceptions of what is best for them*Choices made by individuals, firms, or gov. officials often have long-run unintended consequences.


*This is not the question!*Scarcity exists everywhere*Scarcity forces us to choose!

*“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want

it.” – Thomas Sowell


*Needs:

*Necessary to remain alive

*You work for these

Wants:•Not needed to survive•Makes our lives better•Comes from extra


*Time is scarce to you!

*You have to choose whether you will sleep away the morning or go to school

You must choose whether to spend your allowance or save your allowanceScarcity prohibits you from saving and spending the same dollar: YOU MUST CHOOSE

If you spend: You must choose what to buy…

If you save it: Will you save it for a college or car?


*Society must choose!

*Will a piece of land be used as a park?

*Or, a housing development?

*Will tax revenue be used for healthcare

*Or, education?


*Opportunity Cost: the most highly valued opportunity given up when you make a choice

*I buy the shoes!

*My opportunity cost of buying the shoes…

* ….. I cannot buy the ipad.

*The opportunity cost is the The opportunity cost is the opportunity lostopportunity lost


*The opportunity cost of spending money is

*The lost opportunity to save the money!


*The opportunity cost of using land for parks is

*Land not available for building houses


*The opportunity cost of tax revenues spent on healthcare is

* the lost opportunity to spend the money on education

Keep in mind that the opportunity cost is the opportunity cost is the most highly valued most highly valued opportunity given up! opportunity given up!


*Your alarm clock goes off!

*You have a # of options:

*Go To school

*Play Modern Warfare all day

*Go to the beach


* Is it playing Modern Warfare and going to the beach?

* NO! *Because of the scarcity problem, you would have only

been able to do one of those options if you weren’t at school.

*You are only giving up the opportunity to do one of them, more specifically the one you were most likely to do!

*Your opportunity cost for choosing school would be the one on which you placed the next highest valueon which you placed the next highest value, playing Modern Warfare!


Every choice requires giving up something (costs)


*Pizza Factory put up a sign for all FBHS students:

*Why wouldn’t that be a free lunch?

*It didn’t cost you anything right?

*Explicit cost=money costs

Pizza and soda: $0.00


*Any situation which forces you to make a choice results in an opportunity cost=implicit cost


*You may spend several hours this evening tweeting, facebooking, and texting friends at no additional monetary cost to your phone plan.

*You may think of this as free, but there is a cost

*What opportunity did you give up?

*Because of scarcity we must choose and choice means that here is an opportunity cost.


*Your choice to eat pizza

*Means that you are giving up the opportunity to dine elsewhere!

*Like:


*Perhaps, your evening spent tweeteing and texting at home was an evening not spent with other friends at a football game or

*God forbid, not playing Modern Warfare!

*The cost of what you give up=implicit costs


*The most important and irretrievable of these costs is time.


*Scarcity

*Choice

*Opportunity Cost


*People make the choice that theythey perceive will offer the most benefit over cost

*People’s choices among considered alternative choices reflect their perceptions of the costs and benefits – to them- of the alternatives they face

*The key to understanding human behavior lies in: identifying incentives.* Incentives are rewards or punishments

that influence people’s actions

*When incentives change, people’s behavior changes in predictable ways.


http://www.flatrock.org.nz/topics/odds_and_oddities/ultimate_in_unfair.htm


*Why Should We Why Should We Care?Care?


SCARCITY: the FACT that resources are limited and human wants and needs are unlimited

Not enough to go around!


*Scarcity necessitates choices: not all of our desires can be satisfied. People make these choices based on their perceptions of the expected costs and benefits of the alternatives.


Fact: Resources ARE limitedLand (natural resources)

Labor (human effort)

Capital (buildings, machines, & technology)

Entrepreneurship (willingness to risk)

Time

Fact: Human desires are boundless


*Available resources are limitedLand (57,506,000 sq mi. & not even all habitable!)Labor (6,7 bil. souls x 24 hrs a day)Capital (less than ∞, trust me)Entrepreneurship (not everybody is Bill Gates)

*Human desires are boundless


*It’s not just you out there


Scarcity Forces You to

CHOOSE

Something Is Scarce?

SCARCITY CHOICE


*Although we cannot have it all…

…we still can have SOME of it.

What shall we have?

How much of it?

How shall we produce it?

Who will get it?

Scarcity implies the need to make CHOICES!


*Some choices are wiser than others

*Some deal better with that problem of scarcity.


*Why are some countries rich and others poor?

*Why have some countries experienced economic growth and others have not? (What factors lead to economic growth?

*What can be done to promote economic growth and reduce poverty?


*Economic growth raises standards of living, even in the continuing face of scarcity


~1750

Population Growth and Important World Events


World GDP per capitaSource: http://econ161.berkeley.edu/tceh/2000/world_gdp/estimating_world_gdp.html

178138133

6539

679

98

0

1000

2000

3000

4000

5000

6000

0 200 400 600 800 1000 1200 1400 1600 1800 2000

Year

19

90

do

lla

rs

Notice the same hockey stick in per capita GDP as we saw in world population: this graph really shows that things have changed quite a bit even for the average Joe Schmoe on the street: you cannot get a 37-fold increase without the poor sharing in it in some way or other. Clearly, you can only extract wealth that has already been created and if the average world citizen in 1600 had 150 dollars and there were not even a billion of them, then surely there is no way to get to $6500 per person with 6+ billion just by looting. The numbers would not add up.


improves the lives of the poor by making the pie bigger

Bigger “slices” mean higher standards of living


*Increasing productivity means that Increasing productivity means that greatergreater output is produced from a given set of output is produced from a given set of resources in a given period of time. resources in a given period of time.


*The formal and informal “rules of The formal and informal “rules of the game” that shape incentives and the game” that shape incentives and outline expected and acceptable outline expected and acceptable forms of behavior in social forms of behavior in social interaction.interaction.

Institutions in your life:

Institutions


Dating ?


1.) Open markets1.) Open markets

2.) Property rights2.) Property rights

3.) The rule of law3.) The rule of law4.) Entrepreneurship and innovation4.) Entrepreneurship and innovation


*The reward or penalties that influence people’s choices and behavior.

*People respond predictably to positive and negative incentives

*Rewards are positive incentives that make people better off

*Penalties are negative incentives that make people worse off.


*The cost of a choice is the value of the next-best alternative foregone, measurable in time or money or some alternative activity given up.


*The value of the next best or forgone alternative.


Our only choice is the next choiceOur only choice is the next choice

Marginal = additional, next, a little Marginal = additional, next, a little more or a little lessmore or a little less


Marginal Benefit = benefit of the next

Action, Choice, Unit of production


Rational choice = choosing the alternative that has the greatest excess of benefits

over costs.

If ALL choices are rational, then the challenge is to understand the decision-

maker’s perception of costs and benefits.

Another way of putting it…


1.) Scarcity forces us to choose among alternatives

2.) Economic growth gives us more to choose from and raises standards of living by:

* reducing infant mortality,

* Increasing life expectancy,

* reducing hunger,

* improving environmental quality, and

* reducing the incidence of debilitating diseases.


3.) Some institutions and institutional arrangements encourage economic growth and some do not. What are the institutions that foster growth and economic development? 4.) The institutions that foster growth and economic development include:

Open marketsProperty rights the rule of lawEntrepreneurship and innovation

* economic growth & scarcity. economics for leaders human prosperity and social cooperation...

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