Chapter 1

Discovering what economics is and why we should care

Economics is the science that studies how people and societies make decisions that allow them to get the most out of their limited resources.

Economics analyzes the behavior of individuals and firms, as well as social and political institutions, to see how well they convert limited resources into goods and services that best satisfy human wants and needs.

A Little History

Until relatively recently live for humans was, well pretty crappy from a survival stand point:
a.  low life expectancy
b.  high infant mortality
c.  high maternal mortality giving birth
d.  most people experienced diseases and/or starvation
e.  standards of living stayed static

Over the past 200 years or so things have gotten dramatically better for all humans…not equally but better nonetheless.

In truth things for humans began to chance with the beginning of the agricultural revolution about 8,000 years ago.  Though major and fast chances didn’t really begin until the 18th century with the following:
a.  Democracy – policy began to favor merchants and manufacturers…nobles not so much
b.  Limited liability corporation – investors rent responsible for more than what they invested.
c.  Patent rights to protect inventors – know people couldn’t steal (at least legally) another person’s ideas.
d.  Widespread literacy and education – Yeah for learning!

One great thing today is that place with high levels of poverty can more readily adapt things that have worked to help pull others out of poverty.

Science of Scarcity

There just are enough resources (time, $, and energy) to go around thus people have to make choices.

Economists analyze the decisions people make about how to best maximize human happiness in a world of scarcity.

Diminishing returns for every resource to put to one thing it means that recourse cannot go to something else.


Macroeconomics – looking at the economy as a whole
Microeconomics – looking at individual people and businesses


Balancing supply and demand between consumers and producers

1.  individuals assess utility   I can’t get not utility!  This leads to the demand curve
2.  firms try to decide what to produce which leads to the supply curve centered around profit

Competition is good because of:
a.  allocative efficiency – produce goods and services people want
b.  productive efficiency – produce goods and services at the lowest price

Lack of competition can lead to a monopoly  Microsoft, Google, Apple?

Oligopoly?  OPEC?  Only 13 countries

Property rights are important.  Property rights gives a person the exclusive right to how a resource can be use.

What might lead to market failures (situations where markets don’t deliver socially optimal outcomes)?
a.  asymmetric information – knowing more than the other
b.  Public goods – one person using doesn’t mean someone is excluded from its use

The bigger picture

Gross Domestic Product (GDP)  total market value of all final goods and services produced in a country in a given year

Inflation prices go up/value of the currency goes down
Nominal price – price of a good or service at a given point in time
Real price – the price adjusted for inflation

Recession – when total output of goods and services decline
a.  less output means less consumption
b.  less consumptions means fewer jobs

Two things that can help fight recessions (at least sometimes):
a.  Monetary Policy – main plan is changing interest rates
b.  Fiscal Policy – government spending or changing tax rates

Models and Graphs or why can’t stand economics!

An economic model is a mathematical simplifications of reality

The demand curve:
a.  has inverse relationship (one things goes up while the other goes down)
b.  quantity demanded is what people are willing and able to purchase
c.  law of demand means that the inverse relationship between price and quantity holds true for nearly all goods and services