First Day Lesson: A Review/Overview of EconomicsSource: Introduction to Economics by Marc Lieberman and Robert Hall

What is economics?

1. Economics is a social science. It studies those aspects of human behavior relating to working, producing goods, distributing them, and consuming them.

2. Economics has practical value to people, businesses and government.a. Designed systems for Public Broadcasting System to decide what TV shows to produceb. Developed theories that have reduced risk in financial markets, enabled more people to obtain

insurance against fire and theft, helped protect consumers against defective productsc. Economic principles have influenced decisions about taxes, Social Security, unemployment

insurance, business regulations, international trade, and many other government programs and policies

Economics, Scarcity and Choice

Economics is the study of choice under conditions of scarcity.

Scarcity- a situation in which the amount of something available is insufficient to satisfy the desire for it. Is there anything you don’t have right now that you would like to have? Anything that you have, but that you would like more of? This is the problem of scarcity.

As individuals, we face a scarcity of time and spending power. Given more of either, we could each have more of the goods and services that we desire. There are so many things that we desire right now and the list is endless. But a little reflection suggests that our limited ability to satisfy these desires is based on two basic limitations: scarce time (watching a movie, taking a vacation, calling a friend) and scarce spending power (low income, low assets, low wealth).

Because of the scarcities of time and spending power, each of us is forced to make choices. Economics study the choices we make as individuals and how those choices shape our economy (e.g. the goods that each of us decides to buy ultimately determine which goods business firms will produce, in turn explaining which firms and industries will hire new workers and which will lay them off).

Economists also study the more subtle and indirect effects of individual choice on our society. They will analyze how separate decision of millions of people under conditions of scarcity affects the society as a whole (e.g. Will most people live in the condominiums? Will this congest the heart of the city and cause heavy traffic? Will people be willing to send their children to schools far from the downtown area? Will there be a need for more malls and entertainment centers? )

Scarcity and Society

What is scarcity from society’s point of view? In society’s case, the problem is a scarcity of resources—the things we use to make goods and services that help us achieve our goals.

What are the goals of our society?

We want a high standard of living for our citizens, clean air, safe water, peace and security, good schools, etc.

Why are we not able to achieve this goal satisfactorily? Scarcity of resources.

3 Categories of Resources:

1. Labor- the time human beings spend producing goods and services.2. Capital- the long-lasting tools that people use to produce goods and services along with their labor (e.g.

physical capital such as buildings, machinery, equipment; human capital such as skills and trainings of the labor force)

3. Land- the physical space on which production takes place, and also the natural resources found under it or on it, such as oil, iron, coal and lumber.

Anything produced in the economy comes, ultimately, from some combination of these resources.

Example: In this class you are consuming a service—a college lecture. What went into producing this service? Your instructor is supplying labor. Many types of capital were used as well. The physical capital includes chairs, desks, computer, the classroom, the building, etc. In addition, there was human capital—your instructor’s specialized knowledge and lecturing skills. Finally, there was land—the property on which your classroom building sits.

What about chalk? Is this tool considered as a capital? No, since it is not long lasting. A tool is only considered a capital only if it lasts for a few years or longer. Chalk tends to be used up as the lecture is produces, so it is considered a raw material rather than a capital.

Goods and services are not important to us just as individuals; we also use them to accomplish our social goals (e.g. “Safe streets” needs police protection and this requires resources: police vehicles, police stations, police officers, labor of autoworkers, electricians, sand, iron, copper, machinery like cement mixers, cranes, etc.)

Many of the big questions of our time center on the different ways in which resources can be allocated: an issue on planning and strategies.

Scarcity and Economics

The scarcity of resources—and the choices it forces us to make—is the source of all of the problems we will study in economics:

a. Households have limited incomes, so they must budget carefully the family income among different goods and services.

b. Business firms try to make profit, but they must pay for their inputs, so they must choose carefully what to produce, how much to produce and how to produce it.

c. Local, state, and federal governments must work with limited budgets, so they must carefully choose which goals to pursue (e.g. stronger defense, higher standard of education, higher standard and accessibility of social services)

2 major parts of economics:

1. Microeconomics- concerned with the behavior of individual actors on the economics scene—households, business firms, and governments. It analyzes individual parts of the economy rather than the whole. It looks at the choices made by these actors and how they interact with each other in specific markets (e.g. What will happen to the fare in the next 3 years? How many jobs will be brought by call center industries? How will the local garlic produces be affected by the smuggling of imported garlic from other Asian countries?)

2. Macroeconomics- takes an overall view of the economy. It concentrates on what is happening in the economy as a whole (e.g. instead of focusing on the production of garlic and rice, macroeconomics lumps all goods and services together and looks at the economy’s total output. Instead of focusing on employment in the call center sector, it considers total employment.)

Positive and Normative Economics

There is a distinction in relation to the purpose in analyzing a problem. Positive economics deal with what is—with how the economy works, plain and simple. It’s concern are just the facts (e.g. if we lower income tax rates in the Philippines next year, will the government budget surplus decrease? If so, by how much? What will be its effect on total employment? ). While Normative economics concerns itself with what should be. It is used to make judgments about the economy, identify problems, and prescribe solutions. It’s concern is the making of value judgments (e.g. an economist advises the government to cut spending—an action that will benefit some citizens and harm others).

Why do economists disagree?

The difference of opinion may be positive in nature: The two economists may have sharply divergent views about what would actually happen if a specific policy is applied.

The difference of opinion may also be normative in nature: a differing of values. Economists, like everyone else, have different values. Both economists might agree with the new policy; however they would differ on the reasons (e.g. who would benefit most or who would be harmed). The first economist might put more emphasis on benefits to the overall economy, while the second might put more emphasis on preventing harm to a particular group. Here, the two economists have come to the same positive conclusion, but their different values lead them to different normative conclusions.

Next Lesson: Study pp. 7-14. Answer the following questions for the oral recitation next meeting.

Why study economics?What is the method of economics?What is an economic model?What are the two fundamental assumptions in economics?What are the basic principles of economics?