CHAPTER 1: What is Economics?

1. CHAPTER 1:What is Economics?

2. I. IntroductionA Definition of Economics • Economicsis the science of choice — the science that explains the choices that we make and how those choices change as we cope with scarcity. • Society’s wants exceed the resources available to satisfy them. • Rich and poor alike are faced with scarcity.

3. Texts • This course will use this text: • Parkin, Macroeconomics, 5th edition • Parkin has both a Study Guide [recommended] and a CD of exercises • Practice with Study Guide or CD multiple choice questions is the best way to prepare for tests

4. How to use the books • Don’t bring them to class • Do read them -- preferably before and after the class that the chapter is assigned for • Do use the CD and the Study Guide -- it is best to do it with some friends, rather than alone.

5. Email and the Web • If you don’t have an FSU email address, get one as soon as possible. You will get lots of important information about this class by email. It is easy to get email forwarded from your FSU garnet account to your preferred email account. • By the end of the semester, there will be lots of material for the class on the web. See http://mailer.fsu.edu/~jcobbe/eco2013.htm

6. JARGON • Economics uses jargon a lot • Jargon means a special vocabulary • Economics jargon can be confusing because it often gives special meaning to ordinary, every day words, that have a different meaning in normal usage

7. Why jargon? • Jargon allows precision • Jargon allows shorter statements • Jargon permits more efficient communication • It’s standard in economics, so we have to know it to understand economics

8. Quote: Joan Robinson[Professor of Economics at U. of Cambridge] • “You study economics in order to avoid being fooled by economists”

9. Bad aspects of Jargon • Jargon can be used to obfuscate or exclude • Jargon can be confusing to those who are unsure of it • Unnecessary jargon hinders efficient communication rather than helping it

10. Economics as a Foreign Language • ALL economics and economists use jargon to some extent • MOST of economics is common sense • Except for a very few non-intuitive ideas, learning economics amounts to learning how to express what you know in the right jargon, i.e. it is like learning a new language

11. II. The Five Big Economic Questions That Economists Seek to Answer

12. What? • Whatgoods and services are produced and in what quantities? • Do we produce houses or camping vehicles? • Do we produce consumer goods or capital goods? • Do we produce guns or butter?

13. How? • How are goods and services produced? • Do we use humans or machines to produce the goods we want? • What mix of people, machines, natural resources, and intermediates do we use? • I.e. In jargon, what technology do we use?

14. When? • When are goods and services produced? • Do we increase or decrease production? • Do we let inventories accumulate? • I.e. what determines how fully employed our resources -- human, capital, and natural -- are at a particular time?

15. Where? • Where are goods and services produced? • Do we produce the goods in Illinois or in Florida? • Do we produce the good “offshore” as in the Philippines, Haiti, or the Ivory Coast? • I.e. where does each economic activity happen?

16. Who? • Who gets to consume the goods and services that are produced? • Do we sell our goods to the wealthy, or the non-wealthy? • Should special provisions be made for the poor? • I.e. who gets how much of what?

17. III. Big Ideas in Economics

18. IDEA 1 • A choice is a tradeoff — we give up something to get something else — and the highest valued alternative we give up is the opportunity cost of the activity chosen. • Example: The choice of Coming to Class: What were your alternatives? So what’s the cost of coming to class?

19. IDEA 2 • We usually make choices in small steps, or at the margin, and choices are influenced by incentives. • Marginal Benefit vs. Marginal Cost • Incentives are inducements to take particular actions • By looking for changes in marginal cost and marginal benefits, we can predict the way choices will change in response to changes in incentives.

20. Implication ……. • Economics is good at assessing small changes from existing situations • Economics is NOT good at dealing with the consequences of big changes -- it is hard to do a cost-benefit study of a revolution • “Natura non facit saltum” -- Marshall, Economics as ‘natural history’ of people’s behavior.

21. IDEA 3 • Voluntary exchange makes both buyers and sellers better off, and markets are an efficient way to organize exchange. • Buyers receive goods or services • Sellers receive money.

22. IDEA 3 (cont.) • Competitive Markets are efficient because they ensure that resources will be used where they are valued most highly. • E.g., how best allocate -- parking? • Alternatives to Market Economy: • Command Economy • Traditional Economy

23. IDEA 4 • A market does not always work efficiently [for various reasons, studied more in ECO 2023] and sometimes, government action is necessary to overcome market failure and lead to a more efficient use of resources. • Market failure happens when the market does not produce efficient use of resources. • High prices do not indicate market failure.

24. IDEA 5 • For the economy as a whole, expenditure equals incomeequals the value of production [so long as we define them all correctly]. • Think: when you buy a $1.50 coffee, how is $1.50 of income generated?

25. IDEA 6 • Living standards can improve when production per person increases, in the long run. • Increase in output per person means more income per person which can enable people to buy more goods and services. • BUT -- who gets what and how much? Average income increasing does not necessarily mean everybody is better off.

26. IDEA 7 • Prices rise when the quantity of money increases faster than output, if technology and institutions don’t change. • Inflation results from “too much money chasing too few goods”. • In the US, how much money depends on Federal Reserve Policy -- something we will study.

27. “Ceteris Paribus” • Economics often assumes “ceteris paribus,” i.e. “other things equal” • “If technology and institutions unchanged” is an example -- what would happen if we went from paying workers weekly to paying them monthly, without changing the quantity of money?

28. IDEA 8 • Some unemployment is normal and results from employees searching for a suitable job and employers searching for suitable workers -- both take time. • Some unemployment results from fluctuations in expenditure and can be wasteful -- it is inefficient not to use resources that could be used.

29. IV. What Economists Do • What Economists Study • Microeconomics is the study of individual goods and services, people, and businesses and the interaction of people, firms, and governments in markets. • Studies: • Prices and Quantities • Effects of government regulation and taxes • Who gets what, how much • [ECO 2023]

30. What Economists Study • Macroeconomicsis the study of the national economy and the global economy as a whole. • Studies • Average prices and total employment, income, and output, and their growth • Effects of taxes, government spending, and budget deficits on total jobs and incomes • Effects of money and interest rates

31. Two ways of analyzing economic issues • Efficiency -- how do we maximize the total value of all production, ignoring who gets it and who bears the costs? • Equity -- what are the distributional implications, i.e. who benefits and who loses?

32. Need both to be complete • The U.S. tradition is to emphasize the efficiency aspect of economic questions • However, all economic decisions normally have equity implications as well as efficiency ones, and an economic analysis is incomplete without discussion of the equity aspects.

33. How Economists Study Issues • Economists attempt to discover an explanation for how economic systems work -- to predict. • Economists distinguish between Positive Statements and Normative Statements • Positive statements are about how things actually are -- facts could show a positive statement was false if it was false.. • Normative statements are about what ought to be, involve opinion or value judgements -- they cannot be shown to be false.

34. Economics and Politics • Efficiency statements will usually be positive, so although we may disagree about the facts we can use them, try to find ‘truth.’ • Equity statements can be positive, but often quickly become normative, reflecting opinions about who should benefit or bear the cost -- and often these views feed into political disagreements.

35. Methodology • Observation and Measurement • Model Building • Testing

36. Two Fallacies • The Fallacy of Composition -- what is true for one may not be true for all. • Post hoc ergo propter hoc* -- correlation is not causation. • [*’After this, therefore because of this’ -- obviously a fallacy: does the sun rise because the cock crows?]