Basic Economics Concepts (Chapter 1)

I- Definitions
- Economics (Scarcity & Choice)
- Economic Activity

II- Ten Principles of Economics

III- Three Fundamental Questions

IV- Economic Answers to Interesting Questions

 I- Definitions
• Motivation: How were various disciplines born?
• Medicine,
• Physics,
• Psychology

• Economics: Scarcity and Choice are Central Concepts here

• Definition: Economics is the study of how society

(households and businesses) manages its scarce resources
• Dilemma: Unlimited wants and limited resources
• Distinction between Wants vs. Needs

• Why wants are unlimited?

• Examples

• Why resources are limited?

• What is your most valuable resource? Is it limited?
• Other examples?

• Allocation of this resource & economic decision making

Economic Activity: Any activity involving use of resources
-- Building a shopping mall
-- Taking shower
(Scope is wide)
 Charting Economic Activity:
Resources Production Bads (pollution, waste)

Goods & Services

Consumption Waste

Utility (Satisfaction)
Waste
So, In SUM Economic Activity Involves: Nature
Satisfaction
Example: Lifetime Consumption (animals, trees, vegetation, metal);
Animals do the same? Yes but on a smaller scale 5
 II- Economic Principles
A) How People Make Decisions
1- People face trade-offs
(i) Example: time allocation & your priority list
(ii) Example from medical care (below)
2- The cost of something is what you give up to get it (Opportunity
Cost); Cost of time

Examples:
Air travel
Drive through:
Fast food (70% of McDonald’s sale),
Pharmacy,
Divorce (see slide next page),
Church
Uber Eats
Note: Implicit vs. Explicit Costs

Numerical Examples:
Going to a movie
Explicit Costs:

Implicit Costs:

Going to college (Exercise to be done at home)

Explicit Costs:

Implicit Costs:
The athletes' high implicit cost (time cost) of attending college
Watch the video about Salmon in class
3- Rational people think at the margin
- Crime (speeding, robbery),
- Sunbathing & smoking (seeming puzzle)

I-phone (smart phone usage)

“But most striking of all was the flurry of activation in the insular cortex of
the brain, which is associated with feelings of love and compassion. The
subjects’ brains responded to the sound of their phones as they would
respond to the presence or proximity of a girlfriend, boyfriend or family
member.”
http://www.nytimes.com/2011/10/01/opinion/you-love-your-iphone-literally.html?_r=1
You Love Your iPhone. Literally. 10
By MARTIN LINDSTROM
4- People respond to incentives
Examples:
Course grades,
Seat belts/air bags
Tax laws (T= tY)
Unemployment benefits & unemployment rate
Crime & punishment
(jail environment, see the next slide)
CEO pay restriction for recipients of bail out money prompts
quick repayment!!
Given priority to organ donors increases donation;
Experiments show (NBER WP# 17324)
b) How People Interact
5- Trade can make everyone better off
Countries,
Individuals: teacher-student, helping friend, parents-children

6- Markets are usually a good way to organize economic activities

Oil prices to make D&S match,
Black market tickets,
Meat shortage in groceries during the 2020 Pandemic with many cattle farmers
not being able to sell (meat-packing link was missing)
Shower example; Coffee Example

Watch
https://www.ted.com/talks/aj_jacobs_my_journey_to_thank_all_the_people_responsible_for_my_morning_coffee?
utm_source=newsletter_weekly_2018-11-
17&utm_campaign=newsletter_weekly&utm_medium=email&utm_content=top_left_image
7- Governments can sometimes improve economic outcomes
Monopoly,
Externalities,
Public goods

And ONE more thing:

There is no Free Lunch: Nothing is free (only who pays for it

changes);
Free ----- is “economically incorrect.” Do not be economically
incorrect (like politically incorrect)
 III- Three Fundamental Questions
1) What to Produce?
More of some goods and less of other

2) How to Produce?
More capital or more Labor
Candy machine example,
Automation in fast food,
ATM,
Cross-country comparisons: tractors vs. people or cows
Using Labor or Capital (Machines)?
3- For Whom to Produce?
Who should get what? Who lives in a mansion and who in a house?

In a free enterprise system (market economy) price provides the

answer to these three questions.
Question 1: Price of goods & services
Question 2: Price of resources (capital, labor, land, raw material,
entrepreneurship)
Question 3: Price of both

In a centrally planned economy, central planners (e.g., government)

provide the answer to these three questions.
 IV- Economic Answers to some Interesting Questions
• Buttons on men and women’s clothes
• Setting the railroad width (similar to lecture based teaching in
absence of books, still in place)
• Marriage and Catholic Priests
• High tax on hotels & other for tourists services
• 911 Charges for calling ambulance vs. fire
• British Medical Association and opposition to fat tax
(similar intent by lawyers and medical malpractice caps)
• Wedding ring (collateral & signaling)
• Wealth and Look
• Look & Income (height, weight ,beauty)
According to his research, attractive people are likely to earn an
average of 3% to 4% more than a person with below-average looks.
That adds up to $230,000 more over a lifetime for the typical good-
looking person, Dr. Hamermesh estimates.

• Marriage and Wealth (research shows married folks are wealthier)

• Government scholarship and age
• Holiday gifts ($70B) & (25%) destruction of value as folks prefer
their own stuff to gifts, despite utility from gift giving
Look at a physical gift as a gift certificate with infinite restriction (a
mall, a dept store in there, an item in that store);
What do you prefer? Item on top of your wish list or a pony