THE STUDY OF ECONOMICS SHOULD START WITH A SENSE OF WONDER.
Pause for a moment and consider a typical day in your life. For breakfast you
might have bread made in a local bakery with flour produced in Minnesota from
wheat grown in Kansas and bacon from pigs raised in Ohio packaged in plastic
made in New Jersey. You spill coffee from Columbia on your shirt made in Texas
from textiles shipped from South Carolina.
After school you drive with a friend in a Japanese car on an interstate
highway system that took 20 years and billions of dollars worth of resources to
build. You stop for gasoline refined in Louisiana from Saudi Arabian crude oil
brought to the United States on a supertanker that took three years to build at a
shipyard in Maine.
At night you call a friend vacationing in Mexico City. The call travels over
fiber-optic cable to a powerful antenna that sends it to a transponder on one of over
1,000 communications satellites orbiting the earth.
You use or consume tens of thousands of things, both tangible and intangible,
every day: buildings, the music of a rock band, the compact disc it is recorded on,
telephone services, staples, paper, toothpaste, tweezers, soap, a digital watch, fire
protection, antacid tablets, banks, electricity, eggs, insurance, football fields,
computers, buses, rugs, health services, sidewalks, and so forth. Somebody made
all these things. Somebody decided to organize men and women and materials to
produce them and distribute them. Thousands of decisions went into their
completion. Somehow they got to you.
(Case, Karl E. and Ray C. Fair, Principles of Economics, 4th edition, 1996)
WHY STUDY ECONOMICS?
Excerpt from an interview with Gary Becker in The Region (June, 2002)
“Economics is an easy subject and a difficult subject at the same time. It is easy
in the sense there are only a few principles that really guide most economic
analysis. It is simple and yet it’s obviously very difficult. I have dealt a lot with
Nobel laureates in physics, chemistry and other fields who have very strong
opinions on economic issues and usually they are terrible. These are obviously
first-class minds, but they have not given economic issues much attention. They
believe that they can casually talk about an economic issue and come up with the
right answer, that one just has to be intelligent. This is obviously not the case.
There are economic principles. If you do not use these principles, you are likely to
come to the wrong answers. . . .
The American public are (is) frightened by economics. When you mention you
are an economist, people say they took an economics course in college and they
were terrible at it. I believe an economist should try to get people to relax over
economics, should express concepts in simple language and show how to deal with
important problems in a fairly simple way. . . .”
Nobel prize-winning economist (1992)
(Becker is credited with broadening the reach of economics into the spheres of crime, the
family, addiction, preference formation, and discrimination, applying the analytic tools of
microeconomics in these fields.)
Quickly jot down three decisions you
made within the last 24 hours. For each
decision, list two choices you decided
against when you made the decision.
Which CD to buy? How many hours to
study? Which movies to see? If you’re
like most people, you constantly face
decisions because you don’t have enough
time and money to do everything. At its
most basic level, economics is the study of
how people make choices when they face a
limited supply of resources. Economics
begins by investigating two basic economic
ideas: scarcity and opportunity costs.
The Economic Way of Thinking
The Basic Economic Problem:
(Arms Race – page 13)
-- UNLIMITED HUMAN WANTS
AND NEEDS exceed the LIMITED
RESOURCES available to provide
ALLOCATION: the process of
choosing which needs will be
satisfied and how much of the
available resources will be used.
ECONOMICS: the social science that
deals with how society allocates its
scarce resources among its unlimited
wants and needs
(“The Science of Cost, Benefit, and
OPPORTUNITY COST: the value of any
alternative that is given up when a choice is made.
OPPORTUNITY BENEFIT: what is gained by
making a particular choice.
BUDGET CONSTRAINT: the mix of goods that
can be purchased with a limited amount of income.
THEORY (or model): a simplified description of
Decision- Sleep late Wake up early to study
Benefits Enjoymore sleep Bettergrade on test
Have more energy during the Teacher and parental
Decisions Sleep late Wake up early to study
Opportunity Extra study time Extra sleep time
Benefits Bettergrade on test Enjoy more sleep
forgone Teacher and parental Have more energy
approval during the day
individual choice concerning one
industry, one firm, one product, or one
social choice and the behavior of the
whole economy at once.
Picture yourself on vacation – up in the southeast Alaskan waterways
canoeing with a group of friends. The month is June, the scenery is
spectacular and the weather is fair. So far, it’s been good times and smooth
sailing, but today you’ve noticed more clouds than usual and a chill in the
air. You and your friends climb into your canoes anyway, thinking that
even if it does rain, you’ll be able to dry off after you travel the day’s
course and make camp. The rain comes as you expected, but it doesn’t
stop as you had hoped. The clouds get darker, the rain begins to pour, and
gusts of wind whip your canoe, making it almost impossible to paddle.
You know you are in real trouble. Suddenly, a huge wave hits you canoe
and, without warning, you capsize and find yourself thrashing about
amidst the white caps. The next thing you know, you are frantically
swimming toward the nearest shore. Gasping for breath and shivering
from the icy Alaskan water, you drag yourself up onto the shore– barely
able to believe you made it and are still alive.
Your problem: you and your friends are stranded on a small deserted
island and don’t know how long you will be there. The nearest settlement
is more than 75 miles away.
Your task: To survive.
Every society produces. All societies must
decide (a) what to produce, (b) how to
produce, and (c) how to distribute produce
What will you make?
How will you make it?
Who will make it?
What natural resources will be used?
What tools will be used?
Will everyone get what is produced?
Will those who produce get the goods?
Will the leader decide who gets what?
Will those who do not produce get any thing?
No society can survive without attending to all
three fundamental economic questions.
Upon what criteria did you base your survival decisions?
Were your choices made randomly (by chance) or purposefully (with
What did you consider before making your final choices?
What seems to be most helpful for explaining the choices you made?
Before decisions are made, a variety of alternatives are proposed and the
costs and benefits of each choice are considered. Cost and benefits of
alternatives influence final choices. A purposeful decision is on in
which alternatives were considered and cost and benefits weighed.
“People can make different choices and still make purposeful decisions.”
“Different choices can result from purposeful choosing.”
THREE BASIC ECONOMIC QUESTIONS:
must be answered by all societies
What to produce?
How to produce?
For whom to produce?
ECONOMIC SYSTEM: the
combination of social and individual
decision making a society uses to
answer the three economic