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Chapter 1

Chapter 1. What is economics? The study of scarcity, incentives, and choices. The branch of knowledge concerned with the production, consumption, and transfer of wealth . ( google ) Wealth The health, happiness, and fortunes of a person or group. ( google ) Economics Models

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Chapter 1

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  1. Chapter 1 • What is economics? • The study of scarcity, incentives, and choices. • The branch of knowledge concerned with the production, consumption, and transfer of wealth. (google) • Wealth • The health, happiness, and fortunes of a person or group. (google) • Economics Models • Simplified characterizations of reality that help to highlight and understand the main concepts • Examples • Optimization (Profit Max., Utility Max.) • Market Equilibrium • Marginal Cost/Marginal Benefit Analysis

  2. What makes people happy?

  3. 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

  4. Demand Price of Good Quantity of Good

  5. Where do these things come from?

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

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

  8. Supply Price of Good Quantity of Good

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

  10. Optimization problems Max. Utility Max. Profit Min. Cost Max. Welfare Min. Cost of Abatement Min. Cost of Control How much should you study for this class?

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

  12. Other fields of economics • Health economics • Financial economics • International trade • Industrial organization • Behavioral economics • What is environmental and natural resource economics? • Environmental Economics • The branch of knowledge concerned with how the production, consumption, and transfer of wealth affects the environment and consequently wealth. • Natural Resource Economics- • The branch of knowledge concerned with how natural resource use affects the production, consumption, and transfer of wealth.

  13. Natural Resource Economics How do markets “fail”? What can we when markets “fail”? How can efficiency in markets be improved?

  14. Natural Resource Economics Negative Externalities - is an action of a product on consumers that imposes a negative side effect on a third party. Examples,

  15. Optimal Policy in Order to Maximize Welfare and Wealth Price of Good Supply Equilibrium Price Demand Quantity of Good Equilibrium Quantity

  16. 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)

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

  18. Why study natural resource and environmental economics? • All the questions in the syllabus • OR • 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

  19. 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

  20. 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 of 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)

  21. Know these for next time- Defining Goods Common Goods – rivalrous, non-excludable Public Goods – non-rivalrous, non-excludable

  22. Know these for next time - Resource Taxonomy • Natural Resource – resources that occur in a natural state and are valuable for economic activity • Exhaustible, Non-renewable resources • Resources that are fixed in amount of the resource which may be used up over time. • Examples include fossil fuels, minerals such as iron, silver, and gold. • Renewable resources • Resources that can be regenerated over time. • Examples, • Depletable – A renewable resource that can be exploited and depleted, such as soil and clean air.

  23. Know these for next time – 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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