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economics is the study of
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how we deal with scarcity
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scarcity
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human want for goods, services, and resources exceed what is available
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scarcity exists at what levels of our society?
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all - from the individual to the world as a whole
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"the father of economics" (and classical economic theory)
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Adam Smith
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what did Adam Smith describe?
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how markets could function without centralized control
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what book did Adam Smith write to describe the Division of Labor concept an how it facilitates economic advantage
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"The Wealth of Nations" - 1776
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what two/twin pillars of free-market economics did Adam Smith define?
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- Economic Man
- Efficient Markets
- Efficient Markets
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Economic Man
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- self-serving: doing what is in his own best interest that also benefits society
- not to be confused with greed
- not to be confused with greed
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examples of greed being accepted as a component of free-market economics
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- Ivan Boesky
- Jeffery Skilling
multiple bank CEO's
- Jeffery Skilling
multiple bank CEO's
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microeconomics
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the study of how individuals and groups deal with scarcity --> single factors
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economics is a ______ science
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social
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why is economics regarded as a social science?
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it uses scientific methods to build theories that can help explain the behavior of individuals, groups, and organizations
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conventional wisdom
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the body of ideas or explanations generally accepted as true by the public or by experts in a field plays a major role in macro
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market economy
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- market forces determine the availability of goods
- high level of freedom
- low level of personal protections
- high level of freedom
- low level of personal protections
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command economy
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- government determines the availability of goods
- low level of freedom
- higher likelihood of safety net
- low level of freedom
- higher likelihood of safety net
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property rights
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freedom to use your own property as you see fit
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freedom from corruption
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corruption erodes economic freedom by introducing insecurity and uncertainty into economic relationships
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fiscal freedom
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a measure of the tax burden imposed by government
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government spending or expenditure
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includes all government consumption, investment, and transfer payments
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business freedom
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an overall indicator of the efficiency of government regulation of business
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the labor of freedom component
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a quantitative measure that considers various aspects of the legal and regulatory framework of a country's labor market
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monetary freedom
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combines a measure of price stability with an assessment of price controls
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trade freedom
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a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services
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investment freedom
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in an economically free country, there would be no constraints on the flow of investment capital
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financial freedom
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a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector
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US ranking
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- "mostly free"
- ranked 11th behind both Canada and the UK
- ranked 11th behind both Canada and the UK
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US strength
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- regulatory efficiency
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US weakness
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- limited government
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normative analysis
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subjective, contestable statement that describes what should be done
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normative analysis example
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"everyone should have access to healthcare"
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positive analysis
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objective, testable statement that describes what happens and why it happens
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positive analysis example
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"universal healthcare would result in improved productivity"
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economic modeling
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economists use the terms model and theory interchangably
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how do models help us?
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they enable us to focus on those factors considered important to our argument and deal in the abstract
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3 components of economic modeling
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- hypothesis
- assumptions
- variables
- assumptions
- variables
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the hypothesis within economic modeling
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the prediction --> if-then statement of what we are trying to prove
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assumptions within economic modeling
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relevant facts that support the hypothesis
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variables within economic modeling
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2 types:
- exogenous
- endogenous
- exogenous
- endogenous
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correlation v casusation
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the fact that two events are related does not, in itself, mean that one causes the other
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correlation
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two events occur together
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causation
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one event causes the other
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the fallacy of composition
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what is true for the individual is always true for the group
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example of the fallacy of composition
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"if one spectator stands up at a football game he can get a better view. if all spectators stand the advantage is diminished."
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why are diagrams important to economic education?
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- enable us to consolidate data --> quickly pick out changes and trends
- increase level of abstraction to enable us to focus on what is important (to us)
- increase level of abstraction to enable us to focus on what is important (to us)
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typical graph in economics
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compares one or more dependent (endogenous) variables to one or more independent (exogenous) variables
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circular graph in economics
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shows flows
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line and bar graphs in economics
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shows the relationship between two or more variables
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variables on a graph
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typically:
- independent --> x axis
- dependent --> y and sometimes z axis
- independent --> x axis
- dependent --> y and sometimes z axis
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pie chart and stacked bar graphs in economics
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generally illustrate proportions
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