Let's emphasize the third and fourth course objective from your text page 1:
3. Explain eight ideas that define the economic way of thinking.
4. Describe how economists go about their work.
3. Outline
III. Big Ideas of Economics
A. A choice is a tradeoff, and the
highest valued alternative given up is the opportunity cost of the activity chosen.
1. The opportunity cost of a choice is the highest alternative foregone, not
all the alternatives foregone.
B. Choices are made in small steps, at the margin; these choices are influenced
by incentives.
1. Marginal analysis, which compares the marginal cost of an activity (the
added cost from making a small change) to the activity’s marginal benefit (the
additional benefit from the small change), is how people make decisions. If the marginal
benefit exceeds the marginal cost, the activity is undertaken; if it short of the marginal
cost, the activity is not undertaken.
2. Changes in the opportunity cost (the marginal cost), or in the marginal
benefit of an activity, change the incentives and change the decision made.
C. Voluntary exchange makes both buyers and sellers better off, and markets are
an efficient way to organize exchange.
1. People engage in voluntary exchange only if they expect the exchange to make
them better off, so everyone gains from voluntary exchange.
2. Most exchange in our economy takes place in markets.
3. Markets are efficient because they send resources to the place where they
are most highly valued.
D. The market does not always work efficiently so sometimes government action
is necessary to overcome market failure and lead to a more efficient use of resources.
1. Market failure is not when prices rise (or are high) or prices fall (or are
low).
2. Market failure may occur when one firm controls the market and restricts the
quantity it produces; when producers fail to take into account all the costs of
production; or when the good being produced can be consumed by everyone without paying for
it.
E. For the economy as a whole, expenditure equals income equals the value of
production.
1. Spending money on a product generates income for the producers of the
product.
F. Living standards improve when production per person increases.
1. When productivity — production per person — increases, living
standards increase because people can buy more products.
G. Prices rise when the quantity of money increases faster than production
does.
1. Inflation is the process of rising prices.
2. Inflation results from "too much money chasing too few goods."
H. Unemployment can result from market failure, but some unemployment is
productive.
1. Some unemployment is normal and helpful as people search for good jobs and
firms search for good employees.
2. Some unemployment is wasteful because it results from swings in total
production.
IV. What Economists Do
A. Economics is divided into two areas:
microeconomics and macroeconomics.
1. Microeconomics studies the decisions of
individual households and firms, the way individual markets work, and how individual
regulations and taxes affect markets.
2. Macroeconomics examines national and global economies. It looks at the determination
of the overall level of economic activity, such as the amount of total employment, and
also studies how government actions affect the aggregate economy.
B. Economic science attempts to understand the
economic world. The distinction between "what is" and "what ought to
be" is important.
1. Positive statements describe how the world
actually is; they can be tested and possibly refuted. Positive statements tell "what
is."
2. Normative statements tell how the world should be; they depend on value
judgments and cannot be tested. Normative statements tell "what ought to be."
C. In their pursuit of economic science,
economists observe and measure economic variables and then build and test models designed
to help explain the observed facts.
A. Demo - "Spiffendry Castle's lawns and
gardens" problem (Adam Smith's Scottish home).
Your instructor may show that resources properly
harnessed accomplish required work faster than individuals working separately could do so.
The demo needs two volunteers, or at least a "John" and a
"Mary" who have differing abilities to accomplish lawn-mowing and
garden-weeding. John and Mary represent each of us, because nature has usually given
each person unique talents - no two people are likely to perform even simple tasks in the
same way. By following comparative advantage, the scarce resource time can be
conserved, and two persons complete the work faster than both can working
separately.
B. Thinking about your first essay? Why not
watch a video about Adam Smith, philosopher of 300 years ago who influenced the American
Revolution.
C. Visit the PHCC Library second floor and watch Economics U$A Video #1 Resources and Scarcity.
Make a list of the buttons available to students on the
opening menu.
8.
Summary
Big ideas
1. The most valued alternative
foregone when making a choice is called the opportunity cost of what you got.
2. The incentive structure within society greatly influences choice.
3. Voluntary exchange enriches both buyer and seller.
4. Markets may fail to allocate resources efficiently if:
(i) markets are dominated by a single seller;
(ii) consumers cannot be excluded from a public good;
(iii) sellers can impose costs of pollution on third parties.
5. Within the whole of society, expenditures equal incomes earned which equals
the value of production.
6. Living standards rise in proportion to increases in productivity.
7. Inflation results from rates of growth of money in excess of rates of
growth of production.
8. Not all unemployment is harmful. Some folks are simply searching for
better jobs.
What Economists Do
1. Macro looks at national and
international choices involving money, interest rates, budgets, inflation, unemployment,
growth and trade. Micro looks at personal choices and business choices
involving profit maximization and rates of production.
2. Econ as a science elucidates positive statements about that which is, and
can be factually checked. Econ occasionally includes normative viewpoints
about that which should or ought to be, but which cannot be tested.
3. Econ methodically keeps track of the magnitudes by which natural and human
resources are paid, hours worked, prices and quantities, taxes, spending, money supply,
interest rates, and levels of production and trade.
4. Econ builds and tests models that can be used to predict economic behavior.
5. To isolate the effects of a single variable, econ studies the variables
relationship to other variables, one at a time, invoking the Latin phrase, Ceteris Paribus
(other things held constant).
9.
Preview
Be reminded you are in an economics, not a
math course when you tackle Chapter 2 - Making and Using
Graphs.
The diagrams you are about to study make understanding economics easier.
So "eat your spinach" and not only
will you grow big and strong, you will become strengthened in your ability to digest
economics.
Not only is Chapter 2 a tool builder, it is
a reference chapter to which you can return in the future.
10.
Two-Minute-Feedback
1. In one minute, write down the idea
or activity from the first chapter or class meeting you found most interesting.
2. In one more minute, write down the
idea, question, problem, or issue you struggled most with, and on which you wish we had
spent more time.
