introduction to economics d.w. hedrick. instructional method primarily lecture format with...
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Instructional Method
• Primarily Lecture format with discussion, simulations, and video presentations
• Constructive discussion is welcomed
• Grading is based on Aplia Homeworks (20%), five of seven quizzes (20%), three midterms (20% each), and an optional comprehensive final (replaces lowest midterm) – NO MAKEUPS GIVEN
Instructional Method
• Suggestions for the study of economics– Read the book before coming to class– Recopy lectures and reread the book within
several hours of class– Identify what you don’t understand
• Ask questions in class• Use the Aplia and the study guide (optional)• Go to tutors in supplemental instruction (if offered)• Visit the professor during office hours
Definition of Economics
• Mankiw’s definition– How Society manages its scarce resources
• Hedrick’s definition– How society chooses to allocate its scarce resources
among competing demands to best satisfy human wants
• Alternative definitions– Economics is the study of choice.
– Economics is what economist do.
– Wikipedia's perspective
Scarcity and the Fundamental Questions of Economics
• Scarcity : Unlimited wants versus limited resources
• Choices and tradeoffs• Opportunity Costs• All societies must answer the WHFM questions
– What is to be produced?
– How is to be produced?
– For whom will it be produced?
Economics as a Science• The Scientific Method
– Observation →Hypothesis →Testing– Observation: identifying and measuring important variables – orderly loss of
information– Hypothesis: educated guesses about cause and effect with the variables
• Theories• Models: realism or usefulness
– Testing: theories can’t be proven and are supported by repeated failed attempts to disprove them.
• Microeconomics vs. Macroeconomics• The Assumption of Rational Behavior
– Max TNB = TB – TC– Boxes Example– MB=MC rule– People respond to incentives– Limits to the use of rational behavior (e.g. axe murders)
• Microeconomics versus macroeconomics
• Normative vs. positive approaches
• A brief history of economic thinking
• The language of economics
Categories of Basic Principles of Economics
• How people make decisions?
• How people interact?
• How does the economy work overall?
How People Make Decisions
• Principle #1 - People face tradeoffs– Time allocation – an example of tradeoffs– Production Possibilities Frontier– Efficiency versus equity
How People Make Decisions
• Principle #2 - The cost of something is what you have to give up to get it– Opportunity costs come from Von Weiser, a
German economist late 1800s– Opportunity costs are independent of monetary
units– TINSTAAFL– The real costs of going to college
How People Make Decisions
• Principle #3 - Rational people think at the margin– Rational or irrational decision-making– Marginal benefits and costs versus total
benefits and costs– Weighing marginal costs and benefits leads to
maximizing net benefits (total welfare)
How People Make Decisions• Principle #4 –People respond to incentives
– Reactions to changes in marginal benefits and costs
– Increases (decreases) in marginal benefits mean more (less) of an activity
– Increases (decreases) in marginal costs mean less (more) of an activity
– Example of seat belts leading to increased speeds
– Example of SUV (with child car seat) in Issaquah
How People Interact• Principle #5 - Trade can make everybody
better off– Adam Smith author of the “An Inquiry into the
Causes and Consequences of the Wealth of Nations” 1776
– Gains from the division of labor and specialization
– Mercantilists perspectives– Example of why Ellensburgians should trade
with others
How People Interact
• Principle #6 - Markets are usually a good way of organizing economic activity– Feudal times and haciendas in the new world– The power of trade: cooperation versus conflict– Markets: prices and quantities traded, typical
and abstract
How People Interact
• Principle #6 - Markets are usually a good way of organizing economic activity creativity and productivity and resource allocation– “Failure” of centrally planned economies – “set it and forget it” becomes “compete or be
obsolete”
How People Interact
• Principle #7 Governments can sometimes improve market outcomes– Market signals can fail to allocate resources
efficiently or equitably– Public goods, the exclusion principle, the free-
rider problem and non-rival consumption– External costs and benefits– Examples: vaccines, education, pollution
How People Interact
• Principle #7 Governments can sometimes improve market outcomes– Equitable or fair distribution of resources – Efficiency and equity: the pie analogy– Government Failure: is government
intervention always the proper solution?
How the Economy works as a Whole
• Principle # 8 – A country’s standard of living depends upon its ability to produce goods and services – Adam Smith’s “An Inquiry into the Nature and the
Consequences of the Wealth of Nations”– Materialism – more toys mean more welfare– wealth: a necessary or sufficient condition for
happiness (are rich people happier, children with lots of toys)
How the Economy works as a Whole
• Principle # 8 – A country’s standard of living depends upon its ability to produce goods and services – leisure time and productivity– the factors of production: land or natural
resources, labor, capital, entrepreneurship – technology and productivity– the Rule of 72 and growth rates
How the Economy works as a Whole
• Principle #9 – The general level of prices rises when the government prints and distributes too much money– Definition of money, and economic language
How the Economy works as a Whole
• Principle #9 – The general level of prices rises when the government prints and distributes too much money– Examples: “Not worth a continental” and
Argentina– Establish of the Federal Reserve and the
introduction of sustained inflation in the US
How the Economy works as a Whole
• Principle #10 – Society faces a short-run tradeoff between inflation and unemployment– Short-run and the long-run– Demand and supply shocks– Short-run increases (decreases) in output above
(below) long-run potential output lead to adjustments
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