Introduction to EconomicsProfessor HedrickSS 424

Instructional MethodPrimarily Lecture format with discussion, simulations, and video presentationsConstructive discussion is welcomedGrading is based on five mini-exams and Aplia Homeworks. NO MAKEUPS GIVENProfessor available during office hours and by appointmentSuggestions for the study of economics

What is Economics?Scarcity a basic human dilemmaLimited resources vs. unlimited wantsThe human condition requires making choicesDefinitions of EconomicsMankiws definitionis the study of how society manages its scarce resourcesHedricks definitionis how society chooses to allocate its scarce resources among competing demands to improve human welfareAlternative definitions what economists do. is the study of choice.

Fundamental Questions of Economics - Scarcity requires all societies to answer the following questions:What is to be produced?How is to be produced?For whom will it be producedWHFM Questions

How Do Economists Study Human Behavior?Economics as a ScienceThe scientific methodObservationTheoryDataTestingRational BehaviorWeighing benefits and costs and maximizing total net benefitsMarginal vs. Total ThinkingEconomic Theory and ModelsSimplification by assumptionCeteris Paribus Holding other factors constantPrediction vs. realismMicroeconomic versus Macroeconomics

Bias towards use of natural rather than controlled experimentsThe specialized language of economics (e.g. He has lots of money.)Money medium of exchangeWealth accumulated financial and non-financial assetsIncome the purchasing power earned during a given period

Why do Economists Study Human Behavior?Scientists versus policy makersPositive EconomicsDescriptive - what the world is like.Objective- value judgments need not be madePositive statements can theoretically be tested by appealing to the facts Normative EconomicsPrescriptive - what the world ought to be likeSubjective value judgments must be madeNormative statements cannot be tested appealing to facts.

Categories of Basic Principles of EconomicsHow do people make decisions?How do people interact?How does the economy work overall?

How Do People Make Decisions?Principle #1 - People face tradeoffsTime allocation an example of tradeoffsEfficiency versus equityProduction Possibilities Frontier

Principle #2 - The cost of something is what you have to give up to get itOpportunity costs come from Von Weiser, a German economist late 1800sOpportunity costs are independent of monetary unitsTINSTAAFLThe real costs of going to college

Principle #3 - Rational people think at the marginRational or irrational decision-makingMarginal benefits and costs versus total benefits and costsWeighing marginal costs and benefits leads to maximizing net benefits (total welfare)The boxes example

.Principle #4 People respond to incentivesReactions to changes in marginal benefits and costsIncreases (decreases) in marginal benefits mean more (less) of an activityIncreases (decreases) in marginal costs mean less (more) of an activityExample of seat belts leading to increased speedsExample of SUV (with child car seat) in Issaquah

How Do People Interact?Principle #5 - Trade can make everybody better offAdam Smith author of the An Inquiry into the Causes and Consequences of the Wealth of Nations 1776Gains from the division of labor and specializationMercantilists perspectivesExample of why Ellensburg

Principle #6 - Markets are usually a good way of organizing economic activityfeudal times where feudal states were self-supporting, also haciendas in the new worldthe benefits of trade are so powerful that people began to trademarkets for economists are more abstract than the notion of a middle eastern bazaar or a flea market and simply determine the prices and quantities traded of different goods and servicesthe failure of centrally planned economies and the movement towards markets for the WHFM questions

MarketsPrinciples 1-5 combine with markets to turn the pursuit of self-interest into promoting the interests of societyAdam Smith and the invisible hand creativity and productivity are stimulated by the pursuit of self-interest into improving resource allocationsset it and forget it becomes compete or be obsoletein some cases markets fail to allocate resources effectively so,

Principle #7 Governments can sometimes improve interaction that occurs in marketsthere are circumstances when market signals fail to allocate resources efficiently or equitablyPublic Goods, Externalities and Income DistributionSome goods or services that people desire will not be produced by markets (e.g. lighthouses).Some goods or services will either be underproduced (vaccines) or overproduced (pollution) because markets fails to register certain benefits or costs.

markets may also fail to provide an equitable or fair distribution of resources government intervention with its ability to coerce (the opposite of voluntary) can regulate, tax and subsidize to change market outcomesefficiency and equity: the pie analogyif government intervention always the proper solution?

How Does the Economy Work as a Whole?Principle # 8 A countrys standard of living depends upon its ability to produce goods and services Adam Smiths An Inquiry into the Nature and the Consequences of the Wealth of NationsMaterialism more toys mean more welfarewealth: a necessary or sufficient condition for happiness (are rich people happier, children with lots of toys)leisure time and productivity

the factors of production: land or natural resources, labor, capital, entrepreneurship technology and productivitythe rule of 72 for growth rates

Principle #9 The general level of prices rises when the government prints and distributes too much moneydefinition of money, the concept of snow to Inuits, and economic languageinflation is an increase in the general or average level of prices in an economynot worth a continental and recent example in Argentinathe establish of the Federal Reserve and the introduction of sustained inflation in the US

Principle #10 Society faces a short-run tradeoff between inflation and unemploymentShort-run and the long-rundemand and supply shocksshort-run increases (decreases) in output above (below) long-run potential output lead to adjustments countercyclical stabilization versus pro-cyclical destabilization political business cycles