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Chapter 1

Chapter 1. What is economics? The study of scarcity, incentives, and choices . Economics Models Simplified characterizations of reality that help to highlight and understand the main concepts Examples Market Equilibrium Marginal Cost/Marginal Benefit Analysis

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Chapter 1

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  1. Chapter 1 • What is economics? • The study of scarcity, incentives, and choices. • Economics Models • Simplified characterizations of reality that help to highlight and understand the main concepts • Examples • Market Equilibrium • Marginal Cost/Marginal Benefit Analysis • Optimization (Profit Max., Utility Max.)

  2. Profit Max. - Producer Price of Good Y Marginal Cost Average Cost P* Shut Down Price Quantity of Good Y Q*

  3. Profit Max. - Producer Price of Good Y Marginal Cost/Supply Average Cost Shut Down Price Quantity of Good Y

  4. Supply Price of Good Quantity of Good

  5. Utility Maximization - Consumer Quantity of Good Y Equilibrium Quantity of Good Y Indifference Curves Budget Constraint Quantity of Good X Equilibrium Quantity of Good X

  6. Demand Price of Good Quantity of Good

  7. Market Equilibrium Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

  8. Marginal Cost/ Marginal Benefit Marginal Cost/ Marginal Benefit Marginal Cost Equilibrium Marginal Benefit Time spent studying 1 hr 2 hr Equilibrium Time spent studying

  9. Other fields of economics • Health economics • Financial economics • International trade • Industrial organization • Behavioral economics • What is environmental and natural resource economics? • The study of scarcity, incentives, and choices as it relates to the environment and natural resources.

  10. Natural Resource Economics When do markets “fail”? Why do markets “fail”? How can efficiency in markets be improved?

  11. Natural Resource Economics Negative Externalities - is an action of a product on consumers that imposes a negative side effect on a third party. Examples, What can the government do about market failure? How can government policy “fail”?

  12. Natural Resource Economics • What is the optimal use of a resource? • Applications • Fisheries (optimal catch-rate) • Forests (optimal harvest) • Renewable vs. Depletable (defining) • Depletable Resources (optimal extraction) • When to transition from depletable to renewable • Recycling vs. Waste Disposal (optimal waste) • Water (optimal use)

  13. Environmental Economics How to we value the environment? What is “value”? How we measure our value of the environment?

  14. Why study natural resource economics? • The Self-Extinction Premise • A society can germinate the seeds to it’s own destruction. • Examples • Easter Island – Reliance and overuse of trees led to downfall • Mayan civilization – Pop. Growth > Food Supply

  15. Opposing Viewpoints • Malthusian view – Pop. Growth can’t keep up with our use of… • Oil, fish, forests, fresh water, clean air • Resources are scarce, but we will find substitutes or innovation will lead to more efficient use of the resource – “necessity is the mother of invention

  16. Ways to address this premise • Use economic models to understand • scarcity of natural resources, • the incentives of the people using and needing that resource, • the choices individuals. • The models can inform public policies regarding the environment. • Supply, Demand, and the Market (Price Controls, Quotas) • Cost/Benefit Analysis (social vs. private) • Dynamic Optimization (Optimal Allocation of Resource use over time: Dams, Fisheries, Forests)

  17. Defining Goods Common Goods – rivalrous, non-excludable Public Goods – non-rivalrous, non-excludable

  18. Resource Taxonomy • Natural Resource – resources that occur in a natural state and are valuable for economic activity • Exhaustible, depletable, non-renewable resources • Resources that are fixed in amount of the resource which may be used up over time. • Examples, • Renewable resources • Resources that can be regenerated over time. • Examples,

  19. Flow vs. Stock • Resource Stock • Resources that are fixed in amount • Resource Flows • Resources that do not exist as a stock, • are not regenerative, • provide a never ending flow of services. • Examples,

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