Thinking in the Language of Economics

We Have Only One Earth, Don’t Waste It!

Please listen to the audio as you work

through the slides.
Creative Commons Attribution 4.0 License,
Charles Hackner Houston Community
College unless otherwise noted CC BY NC
 A key to success:
Focus on understanding,
not memorizing!

Please listen to the audio as you look through

the slides. It will be like sitting in class, but
without the commute.
Thinking in the Language of Economics
One of the biggest challenges for new Economics students is getting a
grip on the language of Economics.

So lets start with that.

I will help introduce you to some new words and help you understand
what they mean

Learning Objectives
Students should be able to thoroughly and completely explain:
1. The 3 features of the economic way of thinking.
2. The pitfall to sound reasoning.
 Economics Defined

Economics Is:
The social science concerned with the
efficient use of scarce resources to
achieve maximum satisfaction of
economic wants.
 Economics is about Connecting the Dots
Finding relationships between seemingly unrelated information
Sometimes everything
comes up roses!
And sometimes the result is bad!
 Either way,
Your success of failure will depend on
Your ability to connect the dots!

Please keep that in mind

throughout this course.
 How to position Economics
This is our only home, for now!
 How to position Economics

• Economic Systems are part of Global Ecosystems

 What is an Ecosystem?
• An ecosystem is a community of animals and plants interacting
with one another and with their physical environment.
• Ecosystems include physical and chemical components, such as
soils, water, and nutrients that support the organisms living
within them.
• These organisms may range from large animals and plants to
microscopic bacteria. Ecosystems include the interactions among
all organisms in a given habitat.
• People are part of ecosystems.
• The health and wellbeing of human populations
depends upon the services provided by ecosystems and
their components - organisms, soil, water, and
nutrients, etc.
 What are Ecosystem Services?
• Ecosystem Services are the processes by which
the environment produces resources that we
often take for granted such as: clean water,
timber, and habitat for fisheries, and pollination
of native and agricultural plants.
• Whether we find ourselves in the city or a rural
area, the ecosystems in which humans live provide
goods and services that are very familiar to us.
• To what degree do we value those goods and
services?
 What “services” do Ecosystems produce?
List of Ecosystem Services

• Moderate weather extremes and their impacts

• Disperse seeds
• Mitigate drought and floods
• Protect people from the sun’s harmful ultraviolet rays
• Cycle and move nutrients
• Protect stream and river channels and coastal shores from erosion
• Detoxify and decompose wastes
• Control agricultural pests
• Maintain biodiversity
• Generate and preserve soils and renew their fertility
• Contribute to climate stability
• Purify the air and water
• Regulate disease carrying organisms
• Pollinate crops and natural vegetation
 Dots
• These ecosystem services represent only a few
of the Dots that we need to connect
 Global North – Global South Map

                                                              
Global North – Global South Map

Public Domain
 3 key Features
of the economic way of thinking

1. Scarcity and Choice

2. Rational Behavior
3. Marginal Analysis
 Scarce resources – 1950 to 2000
Let’s look at a few key resources and begin to connect the dots

• Water
– Water use tripled between 1950 and 2000
• What is the # 1 use of water?
– The earth’s ability to produce water stayed the same
– Globally, water levels dropping (aquifers)
• What’s an aquifer?
– Fossil
– Rechargeable
 Canada and America, Saudi Arabia

https://www.un-igrac.org/sites/default/files/resources/files/GroundwaterResources%26TBAsMap_WHYMAP.pdf
Saudi Arabia has been self sufficient in grain thanks to use of their aquifer.
Now ending their production of grain due to overuse of the aquifer.
Location of aquifers in Saudi Arabia
 US Aquifer Map

Jesha17 CC BY SA
 Scarce resources – 1950 to 2000
Water
Glaciers melting at a more rapid pace
Himalayan glaciers connect to Asia's nine biggest rivers that pour into China, India,
Pakistan, Bangladesh and Myanmar keeping rivers flowing during dry season.
Connect the Dots!

CC0 https://www.nsf.gov/news/mmg/media/images/himalayan_glaciers_h.jpg
 Scarce resources – 1950 to 2000

•Demand for seafood increased fivefold (1950 to 2000)

– The sustainable yield of ocean fisheries stayed the same
• Connect the dots between consumer demand,
seafood suppliers, and sustainable yield thresholds
and draw a conclusion.

•Burning fossil fuels raised Carbon Dioxide emissions

fourfold
– Earth’s natural capacity to absorb CO2 stayed the same
• How does the earth process CO2?
• Connect the dots and draw a conclusion.
 Scarce resources – 1950 to 2000

• Agricultural land diminishing – desertification,

over farming
– What do these terms mean and how do they impact
• Population growth rates
• Economic growth rates
• The health and wellbeing of people living in those areas
• People living on the other side of the world?
 Scarce resources – 1950 to 2000

• World grain production not increasing as in the past

• World population increasing

• Connect those two dots and draw a conclusion.

 Global Population Density
The number of people living per unit of an area (e.g. per square km);
The darker the color, the greater the population density.
What conclusions do you draw from this information?

Population density countries 2017 world map, people per sq km.svg

Ms. Sarah Welch CC SA 4.0 International License

 Scarce resources – 1950 to 2000

• World demand for food tripled.

• A good source for more information is:
www.pecad.fas.usda.gov
 Did you know?
• China is the largest producer and consumer of
cotton.

• India is the second largest producer of cotton.

• Pakistan, another major cotton producer.

How does this relate to what you have just learned?

What connections do you see?
 Features of the economic way of thinking

• SCARCITY & CHOICE

• Resources are limited
• Our wants are unlimited
• Therefore our choices are limited
• No free lunch
• All production involves the use of scarce
resources and thus the sacrifice of alternative
goods.
• Opportunity cost!
• What you have to give up to get what you want
• What is the opportunity cost of taking a class?
• What is the opportunity cost of smoking?
 Features of the economic way of thinking

• RATIONAL BEHAVIOR
• Human behavior reflects rational self interest
• Assumption: We act in our own best interests.
• We really need to question this!
• Do we really act in our own best interests?
• How does that impact economic theory?
• We want to increase or maximize our UTILITY
• Utility = satisfaction or pleasure
• Given our unique set of preferences (ranking)
• Applies to individuals, firms, governments
• We weigh the costs and benefits of our decisions.
• We do our own cost – benefit analysis
 More about Utility
• Diminishing marginal utility
– Utility
– Marginal utility – the increment to total utility that
results from the consumption of one more unit of a
good or service
– Diminishing marginal utility (what does it mean?)
• Satisfaction obtained from Consumption
• Three characteristics of utility
– Utility differs from usefulness
– Utility is subjective
– Utility is difficult to quantify
 More about Utility
• Total utility
– Total satisfaction derived from a specific
quantity of a good or service
• Marginal utility
– Extra satisfaction derived from an
additional unit of a good or service
• Law of diminishing marginal utility
– Explains downward sloping demand
curve – more on this later.
 Utility Graphically
Total Utility
30
(1) (2) (3)

Total Utility (Utile)

Tacos Total Marginal
Consumed Utility, Utility, TU
Per Meal Utils Utils 20

0 0 ] 10 10

1 10 ] 8
2 18
] 0 1 2 3 4 5 6
Units Consumed Per Meal
7
] 6 Marginal Utility
Marginal Utility (Utils)

3 24 ]
4 10
4 28 ] 8

] 2 6
4
5 30 2
0 0
6 30 -2 MU
-2
7 28 1 2 3 4 5 6 7
Units Consumed Per Meal
 Theory of Consumer Behavior
• Key dimensions of the consumer problem
1. Rational behavior
2. Preferences
3. Budget constraint
4. Prices (do prices reflect the true costs
of production?) If not, what are the
impacts?
5. What happens when income changes?
• It depends! Make sure you understand
the two cases.
7-38
 Pipelines Across America

Unites States Department of Energy this image is in the public domain.

 Theory of Consumer Behavior
• Consumer’s goal:
– Find the utility maximizing combination
of goods
• Utility maximizing rule
– Allocate all income, so that
– Last dollar spent on each good yields
the same marginal utility
– Make decisions based on Marginal
utility per dollar
7-40
 Features of the economic way of thinking
• Marginal analysis – marginal meaning “extra”
Marginal Benefits & Marginal Costs

Most decisions involve changes from the present situation.

Marginal costs exist because the decision to produce more of

some product means the sacrifice of other products.

Marginal Benefit – the benefit derived from consumption of one

more unit.

Marginal Cost – the cost associated with the production of one

more unit.
3 features of the economic way of thinking

1. Scarcity and choice

2. Rational behavior
3. Marginal analysis
 Why Should You Study Economics?
•Economics for Citizenship / voting
•Political / social problems have economics aspects.
•How much war on terror is enough?
•The war on drugs, poverty, etc. when will they be over?

•Professional & Personal Applications

•Help students improve their analytical skills which are in
great demand in the workplace.
•Improve Economic decisions of business people.
•Use of new technology, Recessions, Inflation,
Unemployment, personal employment decisions, etc.
 Economic Methodology

Scientific Method - used by economists and other social scientists,

physical and life scientists

1. Observe the facts,

2. Formulate hypothesis - an explanation of cause & effect
3. Test the hypothesis,
4. Accept, reject, or modify the hypothesis
5. Continue to test
leading to Theory, Law or Principle: well tested and accepted theory.

Models – simplified representation of how things work.

 Economic Methodology
• Theoretical economics involves establishing economic
theories by gathering, systematically arranging, and
generalizing from facts.
• Good economic theories are tested for validity against
facts.
• Economists use these theories – the most reliable of
which are called laws or principles to explain and
analyze the economy.
• Policy economics entails using the economic laws and
principles to formulate economic policies.
Relationship between facts, theories, and policies

Policy Economics

Theoretical Economics
Theories

Facts
 Economic Methodology
•Analytical Economics – the ascertaining of cause and effect,
within the economic system.

Other Issues:
•Terminology – considerable overlap reflecting a gradation in the
generalizations. Investment

•Generalizations – to simplify the complex

Theories, Principles, Laws are generalizations

•Other-Things-Equal – ceteris paribus (other things constant)

•Abstractions - simplifications from reality

•Graphical Expression – graph intensive

 Economic Policy Approach
Measurable STATE THE GOAL
And Achieve 5% unemployment rate in 2 yrs.
Observable

Evaluate
Alternatives POLICY OPTIONS
And select Fiscal policy or Monetary policy
Best one

IMPLEMENT &
EVALUATE
 Economic Goals

What are our

National goals and
objectives?
 Economic Goals
• Economic Growth – obtain a higher standard T
of living R
• Full Employment – provide suitable jobs for A
those willing and able to work D
• Economic Efficiency – achieving maximum E
fulfillment of wants while using available O
productive resources. F
• Price-Level Stability – avoid inflation and F
deflation S
• Economic Freedom – freedom in economic ?
activities.
 Economic Goals
•Equitable Distribution of Income – No T
group of citizens face poverty while most R
others enjoy abundance A
D
•Economic Security – provide for those less E
able, the chronically ill, disabled, laid off, O
aged, or otherwise unable to earn minimal F
levels of income F
S
•Balance of Trade – seek an overall balance ?
with the rest of the world
Microeconomics looks at specific
economic units
Positive Economics
Absolute Facts

Normative Economics
What Ought to be
 Pitfalls to sound reasoning

1. Bringing your own Biases to the analysis –

government less efficient than business

2. Loaded (emotionally biased) Terminology –

obscene profits, mindless bureaucrats

3. Definitions – Investment (stocks and bonds

vs. purchase of newly created real capital
assets)
 Pitfalls to sound
reasoning

4. Fallacy of Composition – true for one = true for all

5. Causation Fallacies
Post Hoc Fallacy – B follows A, therefore A causes B

6. Correlation or connection vs. Causation –

education and income
economics policy economics
economic perspective tradeoffs
utility macroeconomics
marginal analysis aggregate
scientific method microeconomics
theoretical economics positive economics
principles normative economics
generalizations fallacy of composition
other-things-equal “after this, therefore
assumption because of this” fallacy