Click on this button to go to the introduction to economics homepageclick on this link to view the course syllabusclick on this link to view the course content.  This link is where all of my lecture notes are located.click on this link to view the supplemental readings for each unit in introduction to economicsClick on this link to go to a page that will give students tips for succeeding in the course.click on this link to view a glossary of terms for the introduction to economics course.


 

UNIT 1

INTRODUCTORY TOPICS

 

 

Introduction

The study of economics provides the student with a key to understanding aspects of the world around us.  Each day on television and in the newspapers, major public policy issues are discussed, each one having an economic impact on society.  Other issues affect us personally.  Why am I being laid off from my job?  Why has the price of gas increased so fast? Why do jobs in some degree programs pay more than others? Economics is a social science which attempts to explain how the economic choices we make have an impact on our everyday lives.  Economics is about choices.  In its simplest form, economics studies the allocation of scarce resources in response to unlimited wants.  In other words, economics is the study of how people deal with scarcity.  Take for example, the notion of time.  Time is limited.  Each individual has to ask him/herself  the question, what is the best use of my time?  Should I work or should I play?  Should I be a part-time student or a full-time student?  Decision making involves weighing and balancing the benefits and costs of alternatives.

Over the years I have encountered many people, who having discovered that I teach economics, have made statements such as, "I took economics once before- and hated it!", "It was the most confusing and boring class I have ever taken!" or "All they ever talk about is depressing topics such as unemployment and inflation." Statements such as these have given the field of economics a derogatory nickname, "the dismal science" (although its original meaning has a connection to slavery).  I hope the information below and throughout the rest of the course will help to demonstrate the relevance of economics to understanding the society around them.

The Connection of Economics to Students

this image shows a group of students sitting at a table outside talking to one another.As a student of economics,  you will begin to notice that your approach to thinking about choices and problems will be different than before you enrolled in an economics course.  Below is a brief description of how economics will be useful to you as an individual:

In Your Daily Life.   Economics is about the study of choice.  You will ask yourself questions such as, how should I spend my time on the weekend,  should I pay cash or use a credit card, and finally how to evaluate a financial investment, such as purchasing a house.

As a College Student.   Economics is beneficial to you as a student by helping to ask yourself questions such as, should I attend as a part-time or full-time student,  should I buy textbooks from the bookstore or online, and what field of study to pursue.

In Your Career.   Economics will assist you in making career decisions, such as, should you stay at your current job or seek another,  should you switch careers, or move to another city with better job opportunities.

In Your Political Life.  As you learn more about economics, you will begin to see the connection between economics and politics.  Economics and politics and intertwined.  Every economic decision has political ramifications, and every political decision has economic ramifications.   Economic principles should give you insights into taking positions on issues such as should the minimum wage be increased,  should there be tax breaks for corporations,  or should the United States pursue trade agreements such as NAFTA?

Study/Review Check:  How could I set up a test question with the information above?  I could create a multiple choice question which asks, "All of the following are reasons why economics is important to you EXCEPT:" , or a short answer question that asks, "Describe the various reasons why economics is important to you."

Economic Analysis

Economists see two different ways to view the economic landscape.  The first is microeconomics.  Microeconomics looks at the small picture.  Its focus is on the individual’s relationship to the economy.   It explores the interaction of consumers and producers in markets. A student can use microeconomics to understand how markets, work, to make personal decisions, and to analyze the impact of government decisions. The following are questions that microeconomics would help answer:

1)  How would a higher tax on cigarettes affect consumption by teenagers?

2)  Should I put my savings in a bank account or invest them in the stock market?

3)  Would an increase in the federal minimum wage help the working poor?

Macroeconomics, on the other hand, looks at the big picture.  It concentrates on the economy as a whole.  An student of economics could use macroeconomics to answer such questions as:

1)  Why do some economies grow faster than others?

2)  How can an increase in interest rates affect the housing market?

3)  Should the government pursue trade agreements such as NAFTA?

Study/Review Check:  How could I set up a test question with the information above?  I could create a short answer question that asks, "Describe the differences between microeconomics and macroeconomics.

The study of economics often calls for the analysis of complex issues.  Economists often differ on their analysis of the issues.  How can we then make sense of the varied opinions offered to us?  We can start by sorting unsupported opinions from thoughtful, supported analysis.  In the field of economics there are positive and normative economic statements.  Positive statements rely on facts and describe the economy the way it is.  Normative statements are value judgments.  These statements emphasize what “should” or “ought” to be.  Notice the difference in the two statements below.

this image shows the unemployment rate decreasing to 5.8%

Positive Statement:  The unemployment rate is rising.
Normative Statement:  The unemployment rate is too high.

The first statement can be verified.  One could look at the unemployment rate from the previous month to check for accuracy.   The second statement is an opinion.  

 

Study/Review Check:  How could I set up a test question with the information above?  I could create a multiple choice question which asks, "All of the following are positive economic statements EXCEPT:" , or a short answer question that asks, "Describe the differences between positive and normative economics."

Research in Economics

Positive and normative economic statements help steer the direction of research in the field of economics.  Economists develop theories to explain economic behavior.   Theory and research go hand in hand.  Economists, like other social scientists, rely on the research model. The following steps compose the research model:


1. Selecting a topic
2. Defining the problem
3. Reviewing the literature
4. Formulating a hypothesis- predicts a relationship between and among variables.
5. Choose a research method
6. Collect the data- a need for validity and reliability
7. Analyze the results

 

This image shows a group of economists at an economics research conference.The research model assists economists in developing economic theories.  A theory is created by a process of testing research.  Good research involves observation and measurement.  Economists will keep track of a wide variety of economic data such as prices, wages, and hours worked.   Economics is a young discipline.  Although many useful theories have been discovered over the past two centuries, there are still many areas where economists are looking for answers.

In conducting good research, economists will want to isolate the factor of interest and investigate its effects.  By changing only one factor, and keeping the rest constant, economists are better able to arrive at accurate conclusions.  This process is known as "ceteris paribus", a Latin term which means, "other things being equal".   Holding other factors equal is crucial in determining which factor is responsible for creating change.   The concept of ceteris paribus can be found in how some economic concepts are explained through the use of graphs.

Study/Review Check:  How could I set up a test question with the information above?  I could create a short answer question that asks, "Describe the concept of ceteris paribus."

Economic Models

Economic models are explanations of how the economy or part of the economy works.   Economic models take complicated occurrences in the real world, and simplify them.  Economic models are always based on assumed conditions that are simpler than those of the real world.   Economic models differ from those in the hard sciences such as physics, because they deal with unpredictable human behavior.  Economic models can be described with text, tables, or graphs.  Examples of economic models would be the laws of supply and demand, which we will explore in more detail in unit three.

 

 

The Problem of Scarcity

This image shows an old Mickey Mantle baseball card, worth $24,000, that demonstrates the concept of scarcity.Scarcity involves making choices.  Scarcity means individuals, businesses and governments have to deal with the problem of unlimited wants, but limited resources. Every economic system, from capitalism to socialism, has to deal with the problem of scarcity.  Which goods and services are scarce in a society is determined by the geography, culture, and political system of that society. The concept of scarcity is the foundation for the field of economics.  The value of baseball cards are determined in large part by their scarcity.  The Mickey Mantle baseball card to the left is worth $24,000 as of February 2012.

Individuals, businesses and government all need to concerned with scarcity.  A college student with  a few hundred dollars to spend can opt to spend that money on a variety of items, from a stereo system to a computer.  Or the student can choose not to spend the money at all.  Whatever choice is made, there will be advantages and disadvantages associated with it.

Businesses are also faced with making choices.  If a business has surplus funds available, it needs to decide if it should hire an additional worker or instead purchase a new computer system.  Governments too, need to make choices.  If a government has a surplus, it can choose to either build new roads or to provide additional health care coverage to its senior citizens.

1.  Framework of Economics

Essential Economic Questions

Because of scarcity, all economic choices can be summarized in big questions about the goods and services a society should produce.  These questions are:  (1) What to produce? (2) how to produce, and (3) for whom to produce?  Each of these questions will be explored in greater detail below.

What to Produce?   

The first question every society faces is what to produce.  Should a society build more roads or schools?  Because of scarcity, society can not build everything it wants. Choices have to be made.  Once a society determines what to produce it then needs to decide how much should be produced.  In a market economy the "what" question is answered in large part by the demand of consumers.

How to Produce?

The next question a society needs to decide after what to produce is how to produce the desired goods and services.   Each society must combine available technology with scarce resources to produce desired goods and services.  The education and skill levels of the citizens of a society will determine what methods can be used to produce goods and services.  For example, does a nation possess the technology and skills to pick grapes with a mechanized harvester, or does it have to pick the grapes by hand?

For Whom to Produce?

The final question each society needs to ask is for whom to produce.  Who is to receive and consume the goods and services produced?  Some workers have higher incomes than others.  This means more goods and services in a society will be consumed by these wealthy individuals, and less by the poor.  Different groups will benefit from the different ways that we choose to spend our money. 

Study/Review Check:  How could I set up a test question with the information above?  I could create a multiple choice question which asks, "All of the following are essential economic questions EXCEPT:"

Marginal Analysis

All of us make many decisions each day that require looking at the costs and benefits that we incur because of those decisions.  The field of economics relies heavily on marginal analysis to explain economic concepts.    This essential concept is discussed in greater detail below.

What is marginal analysis?  Marginal analysis involves considering the effects of small changes (additions or subtractions)  to a current situation. For example, students have scarce leisure time.  If an hour becomes available the student needs to ask him/herself how that hour should best be spent.  Should the student spend that hour reading a book on economics, or sleeping, or hanging out with friends?  If a greater benefit is believed to come from reading an economics book than by sleeping an extra hour, then the student will choose reading the book.   This would be a marginal analysis decision. 

Efficiently using our resources to maximize our benefits is an essential economics concern.  For example, a business owner might debate if bringing on an additional worker would be beneficial to the company.  An additional worker would cost $15 per hour.  But that additional worker would increase profits by $20 per hour.   The business owner would hire the new worker because of the increase in  value of $5 per hour.  

Opportunity Costs

In an earlier discussion about scarcity, the claim was made that economics is about making choices because of the problem of scarcity.  In economic terms, these choices are referred to as opportunity costs. The discussion below will explore in more detail the concept of opportunity cost.


The best definition for opportunity costs is that it refers to the next best alternative given up in order to obtain a good or service.  If this definition doesn't make sense to you, then the term "trade off" can be substituted in its place. Opportunity cost decisions exist because of scarcity.  Scarcity forces us into making choices.  The well known phrase, "There is no such thing as a free lunch", is an economic way of describing the concept of opportunity cost.

The following example should illustrate the concept.  You are a college student working a part-time job.  Your place of employment asks you to work an additional two hours.  You were planning on watching television with some friends before you were asked to work longer.  What do you do?  There is a measurable cost for each decision.  If you decide to work you miss seeing the television show as well as the good company of your friends.  On the other hand, if you decide to watch television and not work, you are giving up the possibility of making extra money.  Suppose you are paid $10 per hour.  The opportunity cost of watching television with your friends could then be measured at $20.  The $20 would represent the next best alternative that was given up.

Individuals, businesses, and government all make opportunity cost decisions.  At the individual level, the choices a person makes can affect their personal economic situation.  At the business level, the choices made can affect the profitability of the business.  At the government level, choices have political ramifications.

Study/Review Check:  How could I set up a test question with the information above?  I could create a short answer question that asks, "Describe the concept of opportunity costs."

Production Possibility Curves

In an earlier discussion we talked about how an economy's scarce resources limits its options.  The field of economics provides us a model to help us understand the choices that each economy must make.  The Production Possibilities Curve is a model that shows the various combinations of two goods the economy is capable of producing, given the factors of production and the technology it has available.


The Production Possibilities Curve is designed to illustrate the concept of opportunity cost.  Each point on the curve illustrates the trade off that must be made.  It is important to note that the production possibilities curve does not tell a society the combination of goods and services it should produceIt only demonstrates what happens when a society moves from one level of production to another.  Points outside the curve are unobtainable.  For example, in the graph below, point "G" in unobtainable.   An economy would have to have more resources or better technology to obtain them.  Points inside the curve represent unemployment or underutilization of resources.  For the graph below, point "F" would represent unemployment. Economic growth for an economy, such as an advancement in technology or an increase in supply of resources,  is represented by an upward and right shift of the curve.  This is demonstrated in the second graph below. The opportunity cost, or trade off,  is demonstrated when you move from one point to another.  For the example below, if you move from point "B" to point "C", the opportunity cost in chairs, is approximately 20 chairs.

this image shows a productio possibilities curve with shows various points (A through E) along the curve that are obtainable, point G outside the curve which is unobtainable, and point F inside the curve which represent inefficiency.

 

Economic growth for an economy, such as an advancement in technology or an increase in supply of resources,  is represented by an upward and right shift of the curve. Economic growth is demonstrated in the graph below by the blue curve.

This image is a production possibilities curve, that demonstrates economic growth.  There is the original curve, and then a second, new curve that is above and to the right of the original.

 

For the concept of production possibility curves to work, four assumptions have to be in place.  These assumptions have to be in place in order to force a society to make choices.  The four assumptions are: 

1)  There is a limited supply of resources.  This means that existing resources (machinery, supplies, etc...) can only be transferred from the production of one good to the production of another good.

2) The technology is also limited.  Existing technology is held fixed with no new innovations or inventions taking place.

3) The economy is running efficiently.  Everyone who wants a job has one and all other resources are being used.

4) There exists only a "two-good" world. There are no other choices.

If any on these conditions were not present, a society would not be forced to make a choice between two levels of production.

Study/Review Check:  How could I set up a test question with the information above?  I could create a multiple choice question which asks, "All of the following are assumptions of the production possibilities curve EXCEPT:" , or a short answer question that asks, "Describe what points inside and outside of the production possibilities curve represent."

Factors of Production

Factors of production refer to the resources used to produce goods and services in a society.  Economists divide these resources into the four categories described below.


As was mentioned above, the factors of production are usually divided into four categories.  

This is an image of an open landscape that demonstrates land as one of the four factors of production. Land  refers to all natural resources.  Such things as the physical land itself, water, soil, timber are all examples of land.  The economic return on land is called rent.  For example, a person could own land and rent it to a farmer who could use it to grow crops.  A second resource is labor. 

 

This is an image of a young lady working at a sewing machine, demonstrating labor as one of the four factors of production.Labor refers to the human effort to produce goods and services.  The economic return on labor is called wages.  Anyone who has worked for a business and collected a paycheck for the work done, understands wages.  A third factor of production is capital. 

 

This is an image of a variety of tools, demonstrating capital as one of the four factors of production.Capital is anything that is produced in order to increase productivity in the future.  Tools, machines and factories can be used to produce other goods.  The field of economics differs from the field of finance and does not consider money to be capital.  The economic return on capital is called interest. 

 

 

This is an image of a manger meeting with employees, demonstrating entrepreneurship as one of the four factors of production.Finally, the fourth factor of production is called entrepreneurship.  Entrepreneurship refers to the management skills, or the personal initiative used to combine resources in productive ways.  Entrepreneurship involves the taking of risks.  The economic return on entrepreneurship is profits.

 

Study/Review Check:  How could I set up a test question with the information above?  I could create a multiple choice question which asks, "Which of the following is the economic return on land::" , or a short answer question that asks, "Describe the various factors of production."

Understanding Graphs

Every discipline has its own tools that it uses to help understand difficult concepts. Economics is no exception.  Economists use graphs to further clarify concepts and to show relationships in a way that can be more easily understood.  Graphs are simply a tool used to illustrate numeric data in economics and many other sciences. The information below should help the student to better understand how graphs are used in economics.

In economics, graphs that present economic concepts are often drawn as line graphs, bar charts, and pie charts.  Some of the more frequently used economic models are presented using curves.  The production possibilities curve, demand curves, and supply curves are such examples.  When working with curves, it is important to pay attention to the labels on the axes and to the content.  Curves that slope upward to the right show a direct or positive relationship.  When one variable increases, the other variable also increases.  For example, durable goods purchases increase as income increases.  The Lorenz Curve, which you will learn about in unit 6, is one such example.  Curves that slope downward and to the right show an inverse or negative relationship.  When one variable increases, the other decreases and vice versa.  For example, the law of demand shows an inverse relationship between price and quantity demanded. 

To summarize, a graph is a pictorial representation of the relationship between two or more variables.

1.  Use of Graphs

2.  Introduction to Graphs in Economics

Behavioral Economics

To many, economics is considered a social science. That means it is a discipline that helps us to understand human behavior. It is a relatively new field of economics that puts it a bit at odds with traditional economics. Why would it be at odds with traditional economics? Traditional economics sees people as calculating, unemotional maximizers.  The standard economic model of human behavior includes three unrealistic traits which are:

1) unbounded rationality

2)  unbounded willpower and

3)  unbounded selfishness

All three of the above behavioral economics modifies. 

Behavioral economics considers human decision making to be more complex.  People have limitations in knowledge and cognitive ability, and rationality may be considered bounded by such constraints. Behavioral economics which borrows heavily from the field of psychology is the study of how thinking and emotions affect individual economic decisions and the behavior of markets.  Let's see how behavioral economics affects the three traits stated above.

1.  Behavioral Economics: the Marketplace of Perceptions

2.  Behavior Economics Explained in a youtube video

1.  Unbound rationality. Departures from rationality emerge both in judgments (beliefs) and in choices. The ways in which judgment diverges from rationality are extensive. Some illustrative examples include overconfidence, optimism, and extrapolation.  An example would be  a mid-1990s study of New York City taxicab drivers (Camerer et al. 1997). These drivers pay a fixed fee to rent their cabs for twelve hours and then keep all their revenues. They must decide how long to drive each day. The profit-maximizing strategy is to work longer hours on good days—rainy days or days with a big convention in town—and to quit early on bad days. Suppose, however, that cabbies set a target earnings level for each day and treat shortfalls relative to that target as a loss. Then they will end up quitting early on good days and working longer on bad days. The authors of the study found that this is precisely what they do.

2.  Unbounded willpower. Classical economics assumes people have complete self-control. Humans, even when we know what is best, sometimes lack self-control. Most of us, at some point, have eaten, drunk, or spent too much, and exercised, saved, or worked too little. Though people have these self-control problems, they are at least somewhat aware of them: they join diet plans and buy cigarettes by the pack (because having an entire carton around is too tempting). They also pay more withholding taxes than they need to in order to assure themselves a refund. 

3.  Unbounded selfishness. Classical economists believe people are boundedly selfish. Although economic theory does not rule out altruism, as a practical matter economists stress self-interest as people’s primary motive. For example, the free-rider problems widely discussed in economics are predicted to occur because individuals cannot be expected to contribute to the public good unless their private welfare is thus improved. But people do, in fact, often act selflessly.  Millions of people donate to charities. Similar selfless behavior has been observed in controlled laboratory experiments. People often cooperate in Prisoners' Dilemma games and turn down unfair offers in “ultimatum” games.

A concept found to both classical and  behavioral economics is the role of incentives and disincentives. If you recall from your Intro to Psychology classes, that people respond predictably to positive and negative incentives (remember B.F. Skinner and Behaviorism?) Rewards are positive incentives that make people better off. Penalties are negative incentives that make people worse off. How much of economic behavior can be explained through incentives and disincentives?  For example, how might you explain China's attempt to reduce its population through its "One Child" policy through incentives and disincentives?  How might the three factors listed above influence China's birth rate? How can we use behavioral economics to understand organ and blood donation?

1.  The Economic Breakdown Song

2.  Should Economics be Decertified as a Science?

3.  It's the Economists Stupid!

4.  How the Federal Reserve Bought the Economics Profession

5.  Anti-Economics Quotes

6.  How Economists Have Ties to the Financial Sector (video)

7.  Occupy Economics Departments

8.  Presidential Council of Economic Advisors

9.  Small Town Cops and Policing for Profit

 

Criticism of the Field of Economics

As economies around the world struggle to meet the needs of citizens, many people have become critical of the field of economics.  Many people accuse the discipline of having been hijacked by the business and corporate communities.  Others have complained that economists have been wrong so much that we should stop listening to them.  Has economics becoming a discipline that allows the rich and powerful in society to hide behind charts, graphs, and algebraic equations?  No other discipline dominates political theory and practice as much as economics.

Recently the field of economics has said that the purpose of economics is to focus on growing an economy so as to produce more wealth.  But is that the only or best answer? Perhaps the goal of an economy should be increasing the welfare of the majority of its citizens, instead of on wealth creation. Most of economics focuses on what the economy "does" , but spends very little time on what its goal "is" our "ought" to be.  Perhaps this is where a change of thinking is needed in the field of economics. Below is a quote I came across on the internet that looks at how economic professors may play a role in promoting a misunderstanding of economics:

The main trick used by professors of economics is to draw their pupils into a make-believe world and then convince them that [this] is a good approximation to the real world, enough so that the [reality] in which we live can be studied effectively by analyzing the fantasy world.”

Prickly City

 

1.  The Insider's Economic Dictionary

   Books Relevant to This Unit

Below are a list of books that exhibit economic concepts learned in this unit.

1.  Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt

2.  Predator Nation: Corporate Criminals, Political Corruption, and the Hijacking of America by Charles Ferguson

3.  Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism by Yves Smith

4.  Economists and the Powerful: Convenient Theories, Distorted Facts, and Ample Rewards by Norbert Haring and Niall Douglas

 

 

Bibliography

 

Parkin, Michael
     2000  Economics (5th Edition)  New York:   Addison- Wesley

Slavin, Stephen L.
     1999   Economics  (5th Edition)   New York:   Irwin McGraw-Hill

Taylor, John B.

      2001 Economics.  Boston: Houghton Mifflin Company

Tregarthen, Timothy.

      2000 Economics (2nd Edition) New York:  Worth Publishers

Tucker, Irvin B.   
     1995  Survey of Economics   New York:  West Publishing Company

 

Copyright ©2007, 2012 Glenn Hoffarth All Rights Reserved