The Economy: Prices and Markets!

- Decentralized decision making process for producers !

- Unplanned!
- Mutual benefits coordinated by prices determine market!
- Demand: actions of consumers!
- Supply: actions of producers!
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Economics: Part of Social Science!
- Positive Statements: can be classified as true or false!
- Normative Statements: cannot be classified as true or false (what ought to be)!
- Can it be tested and proven or is it a value or opinion?!
- Discourage Americans from buying foreign goods by making those goods more expensive:
net effect is to raise prices of both domestic and foreign goods - consumers and foreign
workers worse off and american workers and companies benefit!
- zero-sum game: when one person gains and the other loses!
- The mutual benefits we derive by production and exchange are what drives the economy!
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Explanations and Refutable Propositions!
- Theory: consists of assertions and propositions we consider to be universally true!
- The laws of supply and demand are universally agreed on theories!
- Ad Hoc - theories that explain only one event!
- Refutable Propositions: statements of propositions that in principle could be wrong !
- one of the truest tests of a good theory is that it predicts well!
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The Economic Paradigm!
- scarcity: not enough items humans find desirable to satisfy everyone’s wants!
- Economics is the study of how scarce resources, that have alternative uses, are allocated
amongst competing ends!
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Scarcity and Competition!
- It is impossible to to enact laws that eliminate the underlying scarcity of goods and resources!
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Cost!
- opportunity or alternative cost!
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Demand and Supply!
- Theory of demand: analysis of the choices individuals make with regard to the goods and
services they consume directly for their enjoyment!
- Theory of Supply: choices we make with regard to the goods that we produced or
contemplate for production!
- Demand:!
- Constraints or opportunities!
- Constraints: Income, Price of goods, Time, Technology, Laws and Customs, State
of our health, Education or skills!
- Tastes or preferences !
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! - Negatively Sloped: higher prices associated with smaller quantities!
- Law of Demand: Consumers mitigate the damages of higher price by decreasing the
level of their consumption!
- Supply!
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1. Interactions in an economy are a positive sum game (all parties involved may gain)!
2. Economics is a science. It employs a set of thinking tools that help explain our economic
and social phenomena and also predict the effects of changes in (relevant) constraints on
the social and economic outcomes. !
3. Clicker Question: Is this a theory? “An increase in wheat subsidy will either increase or
decrease wheat output or keep the output constant” — B. No !
4. Clicker Question: In line with economic theory, which of the following statements is true? A
theory — B. contains refutable propositions !
5. The fundamental axiom in economics (concerning resources) is scarcity!
1. Scarcity —> choice (making decision among alternative uses of scarce resources)!
6. Opportunity Cost: The value of the next best alternative foregone!
7. Clicker Question: You purchase a concert ticket for $40. Someone offers you $60 on the
evening of the event but you refuse. What did the concert ticket cose you? (What was the
opportunity cost of going to the concert?) — C. The opportunity cost is $60!
8. Clicker Question: You have a baby-sitting job on Saturday night earning $10 an hour; you
will baby-sit for 4 hours. Your friend asks you to join her at a local bar — where your favorite
local artist is singing — on the same night. You value the enjoyment of attending the
performance by the local artist at $70. The cost of entrance fee and drinks at the bar is $30.
What is the opportunity cost of doing the baby-sitting? — C. $40 ($70 - $30 (cost))!
9. The theory of consumer behavior identifies two sets of influences on our decisions to
purchase various quantities of goods.!
1. Constraints or opportunities!
1. Income!
2. Prices of goods and services!
3. Age!
4. Location!
5. Season!
6. Laws and regulations!
2. Tastes (Preferences) !
10. Tastes are essentially not measurable !
11. How can we find regularities of behavior and theorize about consumers’ choice and “explain”
phenomena and “predict” changes when we cannot even measure taste? We assume
tastes are fixed!
12. As constraints change what is the response by consumers? — B. They change their
behavior in order to mitigate the adverse consequences of the constraints. !
13. Clicker Question: If you observe Americans driving small cars in the late 1970s and large car
in the late 1990s. you would argue: — C. None of the above