•Economic questions arise bc we want more than we can get. •Inability to satisfy want: scarcity
•Incentives: rewards that encourage action or penalties that discourage action. •Economics studies the allocation of scarce recourses among people •Alfred marshell (1842-1924) shaped macro economics
•Joan robinson: “ the main reason to study econ is to avoid being fooled by it
Two main parts:
A) Microeconomics: studying the choice of individual decision makers. And how they interact in markets B) macroeconomics: how the overall economy performs.
2 big questions
1.What, how and for whom do goods and services get produced? 2.When do choices made in self interest align with the social interest?
•what: goods and services are objects that people value and are produced to satisfy human wants •how: factors of production. A) Land: natural recourses. B) labour: work time & effort. “quality of labour” (human capital). C) capital: tools, equipment, machines, computers, buildings.. D) entrepreneurship: human resource hat organizes the above. •For whom: who gets good: services depends on the incomes people earn. oLand=rent
•We make choices in self interest
oChoices you think are best for you
•Choices that are best for society are said to be in the “social interest” oUses resources efficiently
oDistributes goods “fairly”
When does self-interest align with social interest? (important) •Environmental issues
•Bad corporate responsibility
The “Economic” way of thinking
Choice under scarcity => trade offs
Opportunity cost: the highest valued alternative that you give up to get something.
Choices at the “margin”
•We look at the tradeoffs “at the margin”
Marginal benefit (MB): benefit from an incremental increase in an activity. Marginal cost (MC): opportunity cost from an incremental increase in an activity.
People respond to incentives
MB>MC=> do more of an activity
MB does less of an activity
•2 big question
owhat, how, for whom
oself interest vs social interest
•thinking at the “margin”
Water vs. diamonds
Water: essential but almost costless
Diamonds: not essential but very costly
What is value?
What gives things value?
Labour theory of value:
the value of a commodity is proportional to the amount of labour that goes into it. Abandoned: ex. Cement lifejacket
Economists think about value differently:
1.the value of something is what you’re willing to give up to get it. 2.Economists think about marginal value instead of total value.
Water is plentiful= marginal value low
Diamonds are scarce= marginal value high
Positive and normative statements
Positive: statements of facts about observable data
Normative: statements about what ought to be. Value judgments
Ex. 20% of teens smoke…
•Are you more likely to smoke if your parents do?
•Does living location affect likelihood of smoking?
•Are smoking rates different across education levels?
•Self reported reasons for smoking
•Do prices affect smoking rates?
•Kids shouldn’t smoke
Cause and effect:
Just because two things happen together doesn’t mean that one causes the other. Ex: ice cream sales & deaths by drowning
•Both related to temperature
Economists try to unscramble cause and effect by building models.
Model: a purposeful simplification of the real world.
Ex: paper airplane
Learn about: aerodynamics, wind structure…
Cant learn about: thrust, fuel capacity, engines…
Maps are models:
Doesn’t show curves or turns
Graphs: Reveal relationships between variables
3 main types: