Lecture I. The Language of Economics

I. Introduction

Economics as its own language

You already know more than you realize – here you learn how to express it economically

Each of you acts as rational economic agents on a daily basis

II. Economic Terminology

Economics – the study of choices people make in the presence of scarcity

Scarcity – limited resources but unlimited wants

Types of resources

Land: Water, Air, Oil, Land, and Natural Resources

Labor: Human Capital (Physical and Mental)

Capital: (man-made) Resources produced using land and labor

Entrepreneurial Ability: Knowledge and nerves to take business risks and combine land, labor and capital for production

Commodities or Economic Goods & Services are the combination of resources

These goods are scarce because the resources that produce them are scarce

Scarcity forces us to make choices

The Economy – the institutional structure through which individual coordinate their diverse wants

The economy answers three questions:

1. What to produce? (and how much)

2. How to produce?

3. For whom to produce?

You make economic decisions on a daily bases – in here we want to break those decisions down into parts and look at them more closely

III. Economic Reasoning – making decisions on the basis of costs and benefits

A. Economizing – getting the maximum benefit at the minimum cost

B. Marginal Analysis – Economic thinking is marginal thinking

What does the word marginal mean?

- one additional; adding or subtracting from what already exists

The Economic Decision Rule: if the benefits exceeds the cost do it, if the cost exceeds the benefit, don’t do it

Do things until marginal benefit = marginal cost

C. Opportunity Costs

Definition- the highest valued benefit that must be sacrificed or forgone as a result of choosing an alternative

Types – 1. Monetary

2. Time

Clarification: Opportunity cost is not the sum of all forgone activities, just the best one to you.

THERE ARE NO FREE LUNCHES

Tip: As employees, you will be more successful if you are the one in meetings who remembers and points out the opportunity costs. You will be the insightful one.

IV. Economic Insight

Economic Theory – generalizations about the working of an abstract economy

Price up – quantity demanded down

Economic Models – simple abstract models to study larger more complex concepts

- PPF’s – countries produce more than two commodities, but by simplifying it down to two goods, we can make generalizations that apply to real economies producing multiple produces.

V. Economic Policy Options – actions to influence the course of economic events

Example: Social Security Reform

To be considered: What is the impact?

What is the direct impact of reform on the elderly welfare?

What is the indirect impact on individual preparation of retirement?

Other indirect impacts?

A. Positive vs. Normative Economics – we want to objective rather than subjective

Positive Statement: a testable statement, to be proven or disproved

Higher taxes will increase government revenues

Normative Statement: a statement of opinion, no proving or disproving

Taxes are too high