ECONOMICS 2008 Ms. Ingberg 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. . . .” -Gary Becker 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: SCARCITY (Arms Race – page 13) -- UNLIMITED HUMAN WANTS AND NEEDS exceed the LIMITED RESOURCES available to provide satisfaction. 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 Choice”) 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 reality. Karen’s Alternatives Decision- Sleep late Wake up early to study Making Grid Benefits Enjoymore sleep Bettergrade on test Have more energy during the Teacher and parental day approval Personal satisfaction Decisions Sleep late Wake up early to study for test Opportunity Extra study time Extra sleep time cost Benefits Bettergrade on test Enjoy more sleep forgone Teacher and parental Have more energy approval during the day Personal satisfaction MICROECONOMICS: examines individual choice concerning one industry, one firm, one product, or one individual. MACROECONOMICS: examines 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. Survival Activity Every society produces. All societies must decide (a) what to produce, (b) how to produce, and (c) how to distribute produce items. 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 reasons)? 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 questions.
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