Basic Economic Principles:
Is life getting better or worse? The media makes it seem like life is getting worse, but economics is different. Economists look at objective measures: life expectancy, health, income, education, entertainment. Look at these objective measures and most people would agree life is getting better. For instance, crime is actually very low compared to other decades but many kids are afraid of being kidnapped. Technology is so much better and much cheaper than they used to be. Medicine is much better: back in the day you would get drunk and have your leg sawed off and now we have MRIs and all kinds of things. Entertainment: game systems like Atari vs. PS3 and Xbox 360. People forget how good life actually is, and the media portrays life as getting worse. Economics is the science of how individuals make choices under scarcity Science: developing and testing objective theories
Individuals: a person or a group of people – someone in the media or wherever says “France is mad at Germany” …the question in the eyes of an economist is “who in France is mad at who in Germany?” Choice: the act of selecting among alternatives
Scarcity: the concept that there is less of something freely available from nature than people would like.
* Ex. Time, money, cars, etc. Just about everything in the world is scarce. It is hard to think of something that is not scarce, like air…but even though there is enough air to go around, but it might not be clean, so clean air is scarce. Since everything in the world is basically scarce, everything falls under economics. 1. Scarcity is not the same thing as poverty. What is considered poor in America now is probably not considered poor in some nations in Africa today. What is considered poor today was probably not considered poor back in the day. 2. Scarcity necessitates rationing. Who gets it?
a. Rationing – allocating scarce goods to those who want them. If you know the right people, maybe you can get your hands on some scarce goods. Or a first come, first serve basis. b. In a market economy, price is used to ration goods. This causes people to be productive in order to earn money to buy the goods they want. 3. Scarcity leads to competitive behavior…and competition is good! This is like Darwin’s evolution theory. 4. When will we run out of oil?
World Oil reserves (previously predicted) World oil use Math years till depletion
Year 60 billion
…Maybe we will never run out of oil, but the price may rise so high that we will find alternative resources.
Resources: anything you use to produce something else
1. Human resources (human capital) – speed endurance ingenuity education 2. Physical resources (physical capital) – hammer pencil 3. Natural resources – gold oil iron ore (not natural capital because capital is man-made resources) We can combine resources to produce something else 1. Teacher 2. Building Capital: human-made resources used to produce other goods and services – like going to class and learning, you develop your human capital. Einstein’s intelligence is an example of human capital, Michael Phelps’s swimming speed, Lance Armstrong’s endurance. -------------------------------------------------
TWELVE KEY ELEMENTS OF ECONOMICS - Things are not always as they appear.
1. Incentives Matter - Choice is influenced in a predictable way by changing incentives. When benefits of a choice or action change, people change their behavior. * Ex. Money game – when the value of the money increases more people try to get up and grab it at the front of the room. This is predictable…. However sometimes we predict things wrong and incentives backfire: * Ex. Killer seatbelts – when people knew they were safer (# of fatalities per accident...
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