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- 1. Lecture 1: Basic Economics >> First Principles The Way Economists Think…Valuable Logic Regardless of Field or Profession ©2009 ! Worth Publishers 1 of 29
- 2. Macroeconomics: Aggregates Example: Labor Market Aggregates Unemployment Rate = # Unemployed / # L b F U l d Labor Force U.S. = 9.7% Sept. 2009 = 9.6% Aug 2010 Highest since 1940! 2 of 29
- 3. Comparing This Recession to Previous Ones: Job Changes Horizontal axis shows months. Vertical axis shows the ratio of that months month’s nonfarm payrolls to the nonfarm payrolls at the start of recession. 3 of 29
- 4. After the last recession ended - determined recently to be June 2009 - employment in the United States fell at a faster pace than after earlier recessions. And this recessions recovery looks similar to the periods of little job creation after the 1990-91 and 2001 recessions. 4 of 29
- 5. Demonstrators in San Francisco this month. The United States economy has lost more jobs than it has added since the recovery began in June a year ago. 5 of 29
- 6. Overview: 3 Sets of Principles " I. A set of principles for understanding the economics of how individuals make choices " II. A set of principles for understanding how individual choices interact " III A set of principles f understanding economy- III. t f i i l for d t di wide interactions 6 of 29
- 7. Overview 1: Individual Choice Deciding what to do, necessarily implies a decision about what NOT to do…doing nothing is also a decision! 7 of 29
- 8. Resources Are Scarce # A resource is anything that can be used to produce something else. else # Ex.: Land, labor, capital, natural resources # Resources are scarce – the quantity available isn’t large enough to satisfy all productive uses. # Ex.: Petroleum, lumber, hours in the day for labor 8 of 29
- 9. The Real Cost of Something Is What You Must Give Up to Get It # The real cost of an item is its opportunity cost: what you must give up in order to get it. # Opportunity cost is crucial to understanding individual choice: # Ex.: The cost of attending the yoga class is what you must give up to be in the classroom # Sleep? Watching TV? Work? Taking an economics class? # All costs are ultimately opportunity costs. li l i 9 of 29
- 10. Opportunity Cost I WOULD RATHER BE SURFING # In fact, everybody thinks about opportunity cost. # The bumper stickers that say “I would rather be … (surfing, golfing, swimming, etc…) (surfing golfing swimming etc )” are referring to the “opportunity cost.” # It is all about what you have to forgo to obtain your choice. 10 of 29
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- 12. WHAT YOU WILL LEARN IN THIS CHAPTER 12 of 29
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- 14. “How Much?” Is a Decision at the Margin # You make a trade-off when you compare the costs with the benefits of doing something. # Decisions about whether to do a bit more or a bit less of an activity are marginal decisions. l f ti it i ld i i 14 of 29
- 15. Marginal Analysis # Making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an g activity versus doing a little bit less. # The study of such decisions is known as marginal analysis. # Ex.: Hiring one more worker, studying one more hour, eating one more cookie, buying one more CD, etc. 15 of 29
- 16. People Usually Take Advantage of Opportunities to Make Themselves Better Off # An incentive is anything that offers rewards to people who change their behavior. # Ex.: Price of gasoline rises $ people buy more fuel- efficient cars. ffi i t # There are more well paid jobs available for college well-paid graduates with accounting degrees $ more students major in accounting. # People respond to these incentives. incentives 16 of 29
- 17. FOR INQUIRING MINDS Hard W k f L H d Work for Low Pay? P ? # Major National Accounting Firms make many new hires each year, pay them well but expect 80 hour work weeks for year several years. # Why? # To motivate their new employees, there is a big bonus if you do well– you can be made a partner, with strong financial gain and long-term employment This is a big motivator, with long term employment. motivator new employees working very hard and very long hours for several years with this goal in mind. # Did it work? # Yes. This is a version of a pay-for-performance scheme. Accounting firms have no trouble recruiting first-rate people first rate and they understand that it entails long hours… 17 of 29
- 18. Interaction: How Economies Work Interaction of choices—my choices affect your choices, and vice versa—is a feature of most economic situations. situations Over- view 2 18 of 29
- 19. There Are Gains From Trade # In a market economy, individuals engage in trade: They provide goods and services to others and receive goods and services in return. # There are gains from trade: people can get more of what they want through trade than they could if they tried to be self-sufficient. 19 of 29
- 20. There Are Gains From Trade This increase in output is due to specialization: each person specializes in the task that he or she is good at performing. %Adam Smith: Wealth of Nations described pin factory in 1776 %Basic theory of gains from trade: domestic or international %The economy, as a whole, can produce more when each person specializes in a task and trades with others; e.g. two eg people where each specializes (warrior, farmer) than if they spilt their time in each producing both goods %E.g. plumbers, carpenters, architects, macro versus micro economists…subsistence economies, economists subsistence economies very little specialization and trade…rich economies, highly specialized throughout history 20 of 29
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- 22. Markets Move Toward Equilibrium # An economic situation is in equilibrium when no individual would be better off doing something different. diff t # Any ti A time there is a change, th economy will th i h the ill move to a new equilibrium. # Ex.: What happens when a new checkout line opens at a busy supermarket? # Ex. What happens when one lane is moving faster than another? # Ex. What happened when LA Olympics were predicted to cause grid-lock on the freeways? 22 of 29
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- 24. Resources Should Be Used As Efficiently As Possible to Achieve Society’s Goals # An economy is efficient if it takes all opportunities to make some people better off without making other people worse off. (called Pareto optimal) # Should economic policy makers always strive to achieve economic efficiency? # Equity means that everyone gets his or her “fair” share. Since people can disagree about what’s h Si l di b t h t’ “fair,” equity isn’t as well-defined a concept as efficiency. efficiency 24 of 29
- 25. Efficiency vs. Equity # Ex.: Handicapped-designated parking spaces in a busy parking lot Sometimes, but not always, a conflict between: # equity, making life “fairer” for handicapped people, and # efficiency, making sure that all opportunities to make people better off have been fully exploited by never l tti parking spaces go unused. letting ki d # How far should policy makers go in promoting equity over efficiency? it ffi i ? 25 of 29
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- 27. Markets Usually Lead to Efficiency # The i Th incentives built i i b il into a market economy k already ensure that resources are usually put to good use…Adam Smith’s “invisible hand where use Adam Smith s invisible hand” everyone pursuing self interest gives efficient outco e outcome # Opportunities to make p p better off are not pp people wasted. # Exceptions: market failure, the individual pursuit of self-interest found in markets makes society worse offff $ the market outcome is inefficient. 27 of 29
- 28. When Markets Don’t Achieve Efficiency, Government Intervention Can Improve Society’s Welfare # Why do markets fail? # Individual actions have side effects not taken into account by the market (externalities). # One party prevents mutually beneficial trades from occurring in the attempt to capture a greater share of resources for itself. # Some goods cannot be efficiently managed by markets. # Ex.: Freeways in L.A., pollution emissions from factories, 28 of 29
- 29. Economy-Wide Interactions Principles that underlie economy-wide interactions: Overview 3 29 of 29