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Introduction to Economics

D.W. Hedrick

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 dont 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
Mankiws definition
How Society manages its scarce resources

Hedricks 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 cant 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

MankiwsTen Principles of
Economic Thinking

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 freerider 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 countrys standard of living
depends upon its ability to produce goods and
services
Adam Smiths 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 countrys 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

How the Economy works as a


Whole
Principle #10 Society faces a short-run
tradeoff between inflation and
unemployment
Counter-cyclical stabilization versus procyclical destabilization
Political business cycles