Economics
The the study of how best to allocate scarce resources among competing
uses.
Opportunity Cost
The most desired goods and services that are foregone in order to obtain
something else.
Three Basic Economic Questions
What to produce?
How to produce?
For whom to produce?
What to Produce
Our wants exceed resources.
We have to decide what we want most.
We have to sacrifice less desired activities and goods.
How To Produce
The second economic goal for every society is to find an optimal method of
producing goods and services.
For Whom to Produce
The for whom question focuses on how an economys output is distributed
across members of society
For Whom to Produce
The economic pie can be divided in several ways.
Incentives
Distribution based on need rather than work effort may result in less work
effort and thus less output to distribute.
The size of the pie may get smaller.
The Mechanisms of Choice
There are conflicts and tradeoffs with every choice.
The Political Process
Many basic economic decisions are made through the political process.
The Market Mechanism
The use of market prices and sales to signal desired outputs (or resource
allocations).
The Market Mechanism
Market sales and prices send a signal to producers about what mix of output
consumers want.
Mixed Economies
Economies that use both market and non-market signals to allocate goods and
resources.
Undesirable Choices
Markets dont always produce the right amount of output.
Market Failure
An imperfection in the market mechanism that prevents optimal outcomes.
The Wrong Mix of Output
The market might produce too much of some products and too little of other
products.
The market might fail to make full use of the economys resources
(recessions).
Too Much Pollution
Markets might select the wrong choice of HOW to produce.
May result in various forms of pollution.
Examples include air and water
pollution.
Too Much Poverty
Markets might fail to distribute goods and services in the best possible
way.
Too Much Poverty
People with big paychecks have access to more goods and services than do
people with little paychecks.
Government Failure
Government intervention that fails to improve
economic outcomes.
Government Failure
Just because the market fails doesnt mean that the government will
necessarily offer better answers to the WHAT, HOW, and FOR WHOM questions.
What Economics Is All About
The first goal of economic theory is to help society find better answers to
the three basic questions.
What Economics Is All About
The second goal of economic theory is to predict how changes in government
policy or market institutions will affect economic outcomes.
Macro vs. Micro
Macroeconomics is the study of aggregate economic behavior, of the economy
as a whole.
Macro vs. Micro
Microeconomics is the study of individual behavior in the economy, of the
components of the larger economy.
Politics vs. Economics
Economic theory can make significant contributions to policy formulation.
All policy decisions are ultimately a mix of politics and economic theory.