A. Human wants are unlimited, but the means to satisfy those wants are limited.
B. The social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human materials wants.
II. The Economic Perspective
A. Scarcity and choice
1. Resources can only be used for one purpose at a time.
2. Time is the most valuable resource: it is limited and desirable
3. Scarcity requires that choices be made.
B. Opportunity Cost.
1. Choices require trade-offs
2. The cost of any good, service, or activity is the value of what must be given up to obtain it: opportunity cost.
3. TINSTAAFL: There Is No Such Thing As A Free Lunch.
B. Profit-Seeking Behavior
1. All individuals make Cost-Benefit Analysis to maximize their gains in any decision.
2. Different incentives, preferences, and circumstances lead to different choices.
2. Profit is not necessarily monetary; primarily it is utility or satisfaction.
C. Rational Behavior
1. Rational self-interest entails making decisions to achieve maximum fulfillment of goals.
3. Long-term thinking implies giving up something now for more later: Investments.
D. Marginal Thinking
1. Most decisions concern a change in current conditions; therefore the economic perspective is largely focused on the next step.
2. Each option considered weighs the marginal benefit against the marginal cost.
3. Whether the decision is personal or one made by business or government, the principle is the same.
4. The marginal cost of an action should not exceed its marginal benefits.
5. Risk from imperfect information.
E. Trade Creates Wealth
1. Both parties in any voluntary transaction gain.; no zero-sum transactions.
III. Economic Methodology
A. Economists use the scientific method to establish theories, laws, and principles.
1. The scientific method consists of:
a. The observation of facts (real data)
b. The formulations of explanations of cause and effect relationships (hypotheses) based upon the facts
c. The testing of the hypotheses.
d. The acceptance, reject, or modification of the hypotheses.
B. Positive Versus Normative Analysis
1. Example of a discussion of
minimum-wage laws: Polly says, “Minimum-wage laws cause unemployment.”
Norma says, “The government should raise the minimum wage.
2. Definition of positive
statements: claims that attempt to describe the world as it is.
3. Definition of normative
statements: claims that attempt to prescribe how the world should be.
4.Positive statements can be evaluated by examining data, while normative statements involve personal viewpoints.
5. Positive views about how the world works affect normative views about which policies are desirable.
6. Much of economics is positive; it tries to explain how the economy works. But those who use economics often have goals that are normative. They want to understand how to improve the economy.
C. Fallacies
1. Bias
2. Definition
3. Composition
4. Causation
IV. Economic Resources
A. Land - Gifts
B. Capital - Tools
C. Labor - Sweat
D. Enterprise - Risk
V. Economic Models
A. Economists use economic models to explain the world around us.
B. Most economic models are composed of diagrams and equations.
C. The goal of a model is to
simplify reality in order to increase our understanding. This is where the
use of assumptions is helpful.
D. Our First Model: The Production Possibilities Frontier
1. Definition of production possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
Example: an economy that produces two goods, cars and computers:
a. If all resources are devoted to producing cars, the economy would produce 1,000 cars and zero computers.
b. If all resources are devoted to producing computers, the economy would produce 3,000 computers and zero cars.
c. More likely, the resources will be divided between the two industries. The feasible combinations of output are shown on the production possibilities frontier
2. Because resources are scarce, not every combination of computers and cars is possible. Production at a point outside of the curve (such as C) is not possible given the economy’s current level of resources and technology.
3. Production is efficient at points on the curve (such as A and B). This implies that the economy is getting all it can from the scarce resources it has available. There is no way to produce more of one good without producing less of another.
4. Production at a point inside the curve (such as D) is inefficient.
a. This means that the economy is producing less than it can from the resources it has available.
b. If the source of the inefficiency is eliminated, the economy can increase its production of both goods.
5. The production possibilities frontier reveals Principle #1: People face tradeoffs.
a. Suppose the economy is currently producing 600 cars and 2,200 computers.
6. Principle #2 is also shown on the production possibilities frontier: The cost of something is what you give up to get it (opportunity cost).
a. The opportunity cost of increasing the production of cars from 600 to 700 is 200 computers.
b. Thus, the opportunity cost of each car is two computers.
7. The opportunity cost of a car depends on the number of cars and computers currently produced by the economy.
a. The opportunity cost of a car is high when the economy is producing many cars and few computers.
b. The opportunity cost of a car is low when the economy is producing few cars and many computers.
8. Increasing Costs
a. Economists generally believe that production possibilities frontiers often have this bowed-out shape because some resources are better suited to the production of cars than computers (and vice versa).
9. The production possibilities frontier can shift with changes in resources, technology, or trade. Economic growth can be illustrated by an outward shift of the production possibilities frontier
VI.
Economic Organization
A. Methods of Economic
Organization
1. Market organization:
A method or organization that allows unregulated prices and the decentralized
decisions of private property owners to resolve the basic economic problems.
a. Sometimes market
organization is called capitalism.
2. A Command economy is
the method of organization that relies on public-sector decision making to
resolve basic issues.
a.
An
economic system in which the government owns the income-producing assets and
directly determines what goods they produce is called socialism.
b.
In a
democratic process, decision-makers have to consider how their actions will
influence their election prospects. Otherwise, their tenure will be short.