let's start by thinking about what economics is and we're gonna start that discussion by thinking about scarcity so if we we think about scarcity the idea behind scarcity is that society has unlimited wants and limited resources so it's impossible for us to produce all of the goods and services that people want to consume and and we'll talk about the fact that that scarcity is going to lead to trade-offs we'll get into that here in just a second but that scarcity also is is what leads to the field of economics so let's talk for a second about what economists do what is the field of economics one of the exercises that I go through with my face-to-face classes is something that I used to I used to when I first started teaching I would send my students on the first day of class before we talked about anything we would meet we talked about the syllabus we talked a little bit about you know what I expected to have the students do in class and what they could expect from me and then we wouldn't really have time to get into the material so I would send them home with this little survey and the survey was just designed to get them to think about some of the stuff that we talked about we're going to talk about in class and then just gather some information about them one of the questions I asked on that first day survey was to try design to try to get them to understand what economics was and so I would give them a list of topics and the question that I would have them answer was this one which of the following subjects do you think economics can help us understand so I wanted them to put a checkmark if if this topic was something that that we would study in an economics class and so some of them were some of them weren't I said here this isn't a trick question economics doesn't help us understand everything so let me just read some of these to you and and you just think about whether or not this is something that you believed we would talk about in an economics class the first one is the business cycle what I do now is on a first day of class I just read these off and I have the class raise their hand so when I say the business cycle well everybody recognizes that yeah that's an economics thing everybody raises their hand when it was a survey everybody would check that the second one what causes unemployment again people typically raise their hand let me just read some of these others the freezing point of milk what causes inflation how the human heart works how fast people drive on the highway how to maximize profit how much people eat at a buffet how much students study for a test the cause of earthquakes how long a homeowner waits to mow their lawn how long students pay attention during an economics lecture how the banking system works why stock prices change how long parents wait before checking on crying baby why criminals sometimes voluntarily confess to the police why gamblers tend to lose money when a baserunner decides to steal a base why fish swim in schools why politicians engage in negative campaigns and there's several more on there and of course what happens is whether its students checking a box on a survey or whether it's students raising their hand in a classroom what happens is hands go up when I say something like how to maximize profit or how the banking system works or why stock prices change everybody's hand goes up but then when I say those ones that are the ones like how long a homeowner waits to mow their lawn hardly anybody would ever raise their hand or how fast people drive on the highway or when a base runner decides to steal a base hardly any hands ever go up and of course if I were to say something like why fish swim in schools yeah and the reason I do this is to illustrate to people that if your hand went up every time I said something like the banking system or I said something like the stock market and your hand didn't go up when I said how long students pay attention during an economics lecture or how fast people drive on the highway then you don't really understand what economics is people typically raise their hand when dollars when when the thing that I've just read has something to do with dollars stock prices banking system stuff like that inflation but they skip the stuff like how much people eat at a buffet how long a homeowner waits to mow their lawn that's economics I mean all of those things that you do raise your hand on the business cycle that's economics too but that other stuff that most people don't raise their hand on a lot of that other stuff I read that's also economics so let's talk about the definition of economics it's at its most basic level it's the study of human behavior study of human behavior that is what economists do they study human behavior so you should once you understand that you should raise your hand on everything that involves somebody making a decision how long a homeowner waits to mow their lawn that is a human behavior how long Barents wait before checking on a crying baby when a baserunner decides to steal a base there's a lot of economics literature devoted to things like that so I guess the real reason that I do that in a class or the real reason that I would do that by sending home a survey is to get students to realize that economics is not about the financial fate of people that's not it we can talk about that an economist understand that and we will spend some time talking about it but economics is so much more than that economics is about human behavior and if I were to ask a thousand people out there on the street where should you go on a college campus to study human behavior a vast majority of them would say well you should go maybe to the sociology or maybe you should go to psychology and those are places where they are studying human behavior but if you want a study human behavior that's the most basic level the Economics Department is where that's going on we typically talk a lot about business types of situations because there are large numbers of dollars on the line so if you understand human behavior then it's natural to talk about human behavior in the context of large dollars large amounts of dollars being transacted but at its most basic level it's the study of human behavior turns out though that it's actually more general than that there's some economics literature where they study the behavior of animals so if you look at say a rat in a cage and you think about how much food that rat eats let's suppose that at the end of the cage there's a device there where the rat presses a lever and if they press the lever once a piece of food falls out and the rat eats it and if they press the lever again another piece of food falls out if we were to look at the amount of food that the rat consumes in a day and then change the price of food for the rat if I were to ask most people out there in the on the street what's gonna happen if we change the price of food most people will say it won't matter the rat won't respond to that because it's just a rat I mean they have nothing to do in this cage all day except press the lever and eat food so they're just gonna eat the same amount of food turns out that's not at all what happens rats respond to prices the same way we do the price of something goes up all other things equal prices something goes up we want to buy less of it if you raise the price of food for the rat it will consume less food raising the price of food looks like just making it press the bar more than one time for a piece of food if you raise the price it will consume less food so some economic literature's devoted to just the study of behavior whether it's a human or whether it's some other animal but obviously in this class we're not going to be think about the eating habits of rats so we're going to be thinking about the study of human behavior but it's at its most basic level that's what we study in an economics class we study how people make decisions in this video we're going to talk about ten basic principles of economics so what these are are principles that you tend to see in any economics class that you might take so so the field of economics is very very broad economics is an old discipline and there are lots and lots of sub disciplines within the general field of economics the kind of big distinction is going to be micro economics versus macro economics in macro you're looking at the big picture how an economy functions in micro you're looking at the small picture how individual behavior or how an individual business might make its decisions but within those two main categories we've got lots of subdivisions and so there are all kinds of different subfields within economics there's labor economics and international economics and public choice theory and game theory and econometrics and a subdivision called Clea metrics which is the overlap between history and economics and and lots and lots of others regardless of whether you're taking a class in this sub discipline or that sub discipline or this sub discipline over here there are some basic principles that tend to pop up in all of them and so what we're going to do here is is talk about those those basic principles the first one and the numbers of these are not important but let's just kind of run through them the first one is that people face trade-offs and so what we mean there that that's one of those things that you might think well that just kind of goes without saying but it doesn't what the idea here is that to get something you want you're always going to have to give up something else you want so we could be thinking about how you choose to spend your household income so you have some income that you've earned from working and then you've got to decide whether you should spend it on pizzas or or textbooks for a class or whether you should spend it going to a movie or all of the other things that you could spend that money on and if you spend money on one thing that's money that can't be spent on something else so there's a trade-off there we could think about so let's just put here maybe your income we could think about your time how do you spend your time there's a trade-off there if you spend one hour studying for a test that's an hour that you can't spend sleeping or going out with your friends or watching TV or whatever you might be doing with your time so there are trade-offs that you face in terms of income time lots of things opportunities it's also the case that society faces trade-offs so if we think about a trade-off that society faces society faces the trade-off between production of consumer goods and services and national defense sometimes we refer to that as the guns versus butter trade-off we like to have both of them we like to have national defense and we like to have consumer goods and services and and it'd be great if we could just have more of everything but we can't any resources that we devote to national defense are resources that can't be devoted to building new roads or scholarships to go to school things like that there's also a trade-off that society faces between efficiency and equity efficiency has to do with the size of the economic pie equity has to do with with how fairly the pie is divided and there's a trade-off there unfortunately it would be great if there was not a trade-off but the reality of it is that if if we put more emphasis on equity if we try to make sure that everybody has an equal slice of the pie then the economic pie gets smaller and the reason for that is that if we're making sure that everybody has the same size pie the size of the slice of the pie then that means we're going to be taking resources from people who earned them and providing them to people who didn't earn them and every economy does that and that's not an argument that we should do none of that but we have to recognize the reality that the more of that we do the less of it the less of everything there is to go around ok so society faces trade-offs just like we individually face trade-offs let's think about the second principle and that is that the cost of something is what you give up to get it the cost of something it's what you give up to get it let's just say what you give up this word cost what you see what you'll learn quickly in this class and in any economics class is that I'm going to use this word cost a little more generally than you've used it in the past so typically the way that you use the word cost or the way that any of us use the word cost when we're interacting with other people is to refer to the number of dollars that you've given up to get something so if you have something let's say you have a cup of coffee and I say hey how much did that cost you you might say well that cost me two dollars you would recognize that I'm using the word cost to refer to the number of dollars that you've given up to get it I'm going to use the word more generally I'm going to use the word cost to refer to whatever you give up to get it it could be that you had to give up two dollars plus the effort to walk over to the place to actually get it so I'm going to use this word cost more generally actually economists typically used the phrase opportunity cost to remind ourselves that it's more than just the dollars that you have to give up the dollar certainly are part of the cost of something we'll talk more about that here a little bit but there's there's other things that you're giving up and we have to include whatever it is that you've given up so if we think about opportunity cost let's think about the opportunity cost of of say going to class if we were to talk about the opportunity cost of going to class then there's no dollars transacted in going to class when you walk into a classroom the professor doesn't require any dollars when you walk in and the tuition that's that's been paid we're talking about just going to that particular class walking in that classroom and sitting down to listen for however long you need to sit there to listen to the professor talk about the material there's no dollars transacted there if we think about the opportunity cost of going to class what you're actually giving up is the time that it takes you to go to class to sit there and to get back to your apartment or your dorm room so it's tempting at first to think that the opportunity cost is that you're giving up your time but we have to be careful about that because it's not the number of minutes that is actually going to be the cost it's whatever you would have done in those minutes it's whatever your next best alternative use of your time would be so it could be that if you weren't going to class you would spend that time sleeping so by going to class what you're giving up is sleeping or it could be that your next best use of time maybe you would be playing video and so if you weren't a class that's what you're giving up or it could be that maybe your parents are in town and they're getting ready to leave today and they call you up in the morning and they say hey we'd like to take you out to lunch and you say oh you know what I've got class at 11 o'clock I can't go out to lunch with you because I've got to go to class and so clearly that would be a bigger thing that you're giving up then just sleeping so it's not the number of minutes it's not the time it's whatever your next best alternative is next best alternative so I'm going to just kind of put a line through time because again it's not the number of minutes let's think about something else let's say buying something so if we were to think about the opportunity cost of purchasing something let's suppose you buy a pizza suppose that it you call up the pizza place and they say oh it's ten dollars and so you pay with your credit card and and then they deliver the pizza let's think about the cost the opportunity cost associated with that in this case there is a dollar component because you will have paid ten dollars so it's tempting to say that the opportunity cost that part of it is ten dollars but we have to remind ourselves that it's whatever you would have spent the ten dollars on that's what you really give up it's not the ten dollars itself it's the other goods and services that you could have bought with the ten dollars so there's that there's the other goods and services that you have to give up and then there's a little bit of effort right you had to make a phone call and maybe when they knocked on your door with the pizza you had to get up off the couch and go get it and so you had to exert some effort that's part of the cost but the big thing here is that you gave up other goods and services because you you use some of your purchasing power for that pizza so you can see here that when we're talking about the cost of something we're going to be including the fact that you have to pay dollars that is part of the cost with a lot of different things but there are lots of different behaviors that you engage in like going to class where there's not a dollar transaction but there's still a cost and it's it's whatever your next best alternative is let's talk about for just a second one common problem that I see students make one mistake is that sometimes let's say we go back to this going to class sometimes it's tempting for students to say well if I didn't go to class then I could be watching TV and I could be another thing I could be doing is playing video games or I could be hanging out with my friends or I could be I don't know going for a walk and you can list an infinite number of things that you could be doing if you weren't going to class and so sometimes students say well the what I'm giving up is infinite there's an infinite number of things that I could be doing we're always going to think about just your next best alternative okay so the cost of something is what you give up and that leads us to this kind of a basic idea in economics that you've probably heard before and that is that there's no such thing as a free lunch there there is nothing that is truly free everything has a cost if you divide defining the cost as just the dollars then sometimes you might be able to say this is free because I didn't have to give up dollars but we're not going to be defining it as just dollars it's whatever you give up to get it and in that case there is no such thing as a free lunch there is always going to be a cost associated with everything let's talk about principle number three principle number three is going to be that people respond to incentives people respond to incentives the reason that we're going to be thinking about this you might think when you first see that that well that's another one that goes without saying people respond to incentives yeah well turns out that's actually really easy to forget the reason we're gonna think about people responding to incentives is because we're interested in understanding human behavior and so when we think about how to understand human behavior incentives are going to be at the root of all behavior it's not going to be easy to sometimes to see the incentives that change so you may not be able to understand why somebody engaged in a particular type of behavior but you can rest assured that all behavior is a response to incentives let's talk about some different types of incentives we can think about what we're going to call economic incentives an economic incentive is typically what we mean if we're talking about say dollars or points in a class so if I were to give a test the reason I put points on it is because I want to give you an incentive to try to earn those points to get a good grade in the class and so if you are studying in an attempt to do well on the test so that you can earn more points that's easy to understand why you're responding to that incentive or if there's some dollars on the line if I were to offer you a certain number of dollars to do some work for me and you did it it would be easy to understand why you did that work because of the dollar incentive that I gave to you so economic incentives a lot of times really easy to see and it's easy to understand why people respond to those but there are other types of incentives that are not that easy to see so if we think about another type we can talk about social incentives social incentives are created by society so these are things like the desire for acceptance or the avoidance of ridicule so if you think about it a lot of the behavior that we all engage in is driven by our desire to be accepted by people that we respect and our desire to avoid being ridiculed by people that we respect and whether or not that's good or bad we could talk about that all day that's not what we're interested in if we want to understand behavior there are a number of social incentives that we're all responding to more of our behaviors driven by social incentives then it's driven by economic incentives and then we could also think about moral incentives a lot of your behavior is driven by your sense of what's right and what's wrong and so these two types of incentives are much harder to see than economic incentives so what we can rest assured that behavior is driven by incentives but that doesn't make it easy to understand all behavior because there are incentives that are very challenging for us to observe in the real world it's also the case and this is important that that not everyone responds to the same incentive in the same way so I might give an incentive an economic incentive maybe in the form of points on a test I might give all my students in a class the exact same economic incentive and then what I observe is all of them will react somewhat differently to that incentive some students will study really hard and try to scramble for every point they can get and then other students for whatever reason maybe other students have other time commitments that just keeps them from studying as much or maybe they just aren't that interested in studying that much or maybe they don't even realize they need to study that much but I will observe some students not work very hard and therefore not earn very many points on the test and not end up doing that well in the class and and yet I've I've provided the exact same incentive to all of the students so not everyone responds to the same incentive the same way let's talk about the fact that it's very easy to forget that people respond to incentives the way that I typically illustrate this is to talk about our consumption of oil let me give you some numbers here if we were to look at the amount of oil that we've got I'm gonna give you a very big number 531 with nine zeros after it that's the number of barrels of crude oil in reserve and this is a real number it's not a number that I just made up it's it's a real number what it means for oil to be in reserve is that we know where it's at most of that would be in the ground but we know that we can get it out of there it's not in your best interest typically if you have oil in the ground to pull it all out of there because then once you pull it out you've actually got to pay to store it and it turns out that it's already being stored in the ground so 531 what is that billion barrels of crude oil in reserve in the world we could also think about world annual usage it's going to be a smaller number but still pretty big world annual usage of crude oil looks like that 16 and a half billion barrels per year so that's what we've got in reserve let's just pretend like that's all there is there's oil we haven't found yet but let's pretend like that's the maximum amount we've got and then this is the amount we use every year if you look at how numbers like that get used by politicians and by activists what you see is that what they'll do is they'll take this number and they'll divide it by that number and then they'll come up with a number of years that we've got before we run out of oil and that would be something probably in the 30s all right 531 divided by 16 and 1/2 something in the 30s we've got if we use those numbers that way about 30 years worth of oil what if I were to tell you that that's a completely wrong way to use those numbers what if I were to tell you that the right answer to the question when will we run out of oil the right answer is never we will never ever run out of oil I can say that with 100% confidence anybody that tells you otherwise either has never taken an economics class doesn't understand that people respond to incentives or I guess they could be lying to you but we're never going to run out of oil let's talk about why though how do I know for sure that that we won't well I know because I know people respond to incentives let me give you a different example let's suppose that instead of oil let's suppose that I I call you up and it's your birthday and I say hey I've got a birthday present for you the birthday present is this giant room full of peanuts it's a big room it's very deep there's a door at the top and you walk in and there it's just full of peanuts and it's all yours and just for convenience let's pretend like there's five hundred and thirty 1 billion peanuts in the room and that peanut room is yours and if you are a person who is allergic to peanuts then the peanut room is probably uh Turley terrifying for you I understand that and I've thought about maybe changing it to some other type of room like a banana room or something but that's just gross so it's easier if you just pretend like you're not allergic to peanuts for right now so I give you this peanut room five hundred and thirty one billion peanuts the only requirement is you can't take anything out of the room so if you eat a peanut the shelves got to stay in the room so let's suppose you love peanuts and you call up all of your friends and your friends love peanuts too and so you say hey come over doctor Azevedo just gave me this peanut room come on over and let's eat some peanuts so your friends go over there and and you guys start eating peanuts and and think about the cost of eating a peanut on day one you're you can you can reach anywhere you want and there's a new peanut you don't even have to have your eyes open you can anywhere and there's a new peanut and all you've got to do is crack it open eat it and let's suppose that that you're smart so you guys all decide that you're gonna throw your peanut shells over in one corner because you don't want them on top of your good peanuts so you're throwing your shells over in one corner if you think about the cost to you of eating a peanut on that first day it's practically zero it's whatever effort you have to exert to pick it up and and and open it up and eat it so peanuts are as close to free as they're ever going to be on that first day and so let's suppose I run into you after maybe a month and I say hey how's that peanut room going for you and let's suppose that you and your friends in that first month I've eaten 16 and a half billion peanuts pretend like you never get sick of peanuts okay if we were to use these numbers the same way that we used him with oil just a second ago then what you would do is you would think to yourself well I've got five hundred and thirty 1 billion peanuts in the first month my friends and I ate 16 and a half billion peanuts so we've got about 30 months worth of peanuts but that would be ignoring that people respond to incentives so let's talk about what's going to happen as you continue to eat more and more peanuts so you eat more and more peanuts eventually those shells that you've been throwing back here in this corner of the room are going to start to slide down spill over onto your new peanuts and it's not going to take very long before you're going to have a layer of peanut shells on top of your good peanuts so now think about what's happening to the cost of eating a peanut peanuts are no longer very close to free now if you want to consume a peanut you've got to go into the peanut room dig through a layer of shells some of which might have been in your friends mouth and are kind of gross so now you've got to dig through a layer of shells to get down to the good peanuts and maybe maybe then you you throw some of those good peanuts up on the top but the point is that the cost of consuming peanuts is going up and you don't have to have an economic class to know what happens to the amount of something you want to consume as it gets more expensive as things get more expensive we want to consume less of them and so the number of peanuts that you consume is not going to stay constant as the cost of consuming peanuts goes up we consume fewer peanuts so this number is going to be falling and eventually what would happen is remember that you can still drive to Walmart and buy a bag of peanuts for something probably around two dollars and fifty cents so eventually what would happen is you would get so many shells on top of your good peanuts they're just no longer worth it to dig down to the good peanuts if you call up your friends and you say hey come on over and let's eat some peanuts your friends are eventually going to say look if we go over and get into the peanut room it's going to take us 30 minutes and a lot of effort to dig down through 10 feet of gross shells to get to the good peanuts you know what I'm just going to drive to Walmart and buy a bag of peanuts so eventually what would happen is the cost of consuming peanuts would rise enough that you just choose not to consume any more peanuts from the peanut room so when are you gonna run out of peanuts in the peanut room when will you consume the last good peanut in the peanut room never you never would eventually it would get so expensive to try to hunt down for those good peanuts you just voluntarily choose to consume an alternative that's what will happen with oil when will we consume the last barrel ball well never eventually what would happen is the oil will get expensive enough that we will just voluntarily switch to some other alternative source of energy and when we switch it won't be because of of education that we've provided young people it won't be because of of some overall environmental awareness it will be because the alternative has become cheaper so people respond to incentives you have to keep that in mind when you start thinking about numbers like this it is not appropriate at all to divide that number by that one and come up with a projection of how much oil we've got so let's talk about principle number four and that is that people think at the margin people think at the margin just talk about what that means so a marginal change let me give you a couple definitions a marginal change is an incremental change to a plan of action you can kind of think of the margin as the edge of decision-making and that probably doesn't make sense at first you probably may not be able to understand what I mean by that but once you think about a couple of examples it'll probably become clearer so people think at the margin what that means is you have a plan of action but you respond to the incentives as they change it's very rare to have a plan of action and then to dog idli stick to that plan regardless of what happens to you that almost never happens what happens is you have a plan of action and then you start to execute that plan and then the incentives you you pay attention to those incentives as they change and then your plan mate may switch right in the middle so let's think about studying let's think about studying and how that is a great example of what it means to think at the margin so let's suppose that you've got a test that you need to study for and you know that you need to spend some time this evening studying and so you it comes time to start studying let's think about how you make the decision of how much time to study do any of you sit there and say you know what I'm going to study for exactly 82 minutes and 17 seconds you don't ever do that right you you the only time you would even come close to doing something like that is if you know you need to study a whole lot and you've only got a small amount of time you've only got 30 minutes then chances are you're probably going to study for the full 30 minutes but even that might change we'll talk about that here in a second instead what we do is we have a plan of action to study and what we do is we sit down and we start studying and let's suppose that we're sitting there studying and we're not giving up very much let's suppose the opportunity cost of studying is very low none of our friends are doing anything and and so we're not giving up very much and let's suppose that we are are learning a lot about the material that we're studying let's think about those incentives what we're giving up and what we're getting turns out that a decision-maker takes an action if and only if the marginal benefit of the action is bigger than the marginal cost so I'm going to abbreviate marginal benefit MB and marginal cost MC you take an action if and only if the marginal benefit is bigger than the marginal cost now let's talk about what the marginal benefit is the marginal benefit is just the change in benefit the word marginal in economics you can always substitute the phrase change in and understand better what it means the marginal benefit is the additional benefit that you get from continuing to take the action the marginal cost is the additional cost that you incur if you continue to take the action so a decision-maker takes an action if and only if the marginal benefit is bigger than the marginal cost that's really really really important now that's like a 2-star important maybe even three stars take an action if and only if the marginal benefit is bigger than the marginal cost now let's think about what that means in terms of study the marginal benefit of continuing to study is going to be the additional not knowledge that you gain from studying the change in benefit okay the marginal cost is going to be the additional cost that you incur so if you continue to study you're going to be giving up whatever your next best alternative is but remember we've said that that your friends aren't doing anything and the marginal cost is low so if the marginal cost is down here and the marginal benefit is right up here then you continue to study and then let's suppose that there's a knock on the door and it's one of your friends and and it's a friend that you like and they say hey you know what we're gonna go out and we're gonna do something you want to go with us now the incentives have changed and people are going to respond to that change in incentives that doesn't mean you quit studying what we have to think about is what's changed well the benefit of continuing to study at the margin hasn't changed but the cost has and if these are friends that you like the marginal cost has gone up does that mean you quit study well it depends on how much the marginal cost has gone up if it goes up but it's still smaller than the marginal benefit then you continue to study but if it goes up and now it's bigger than the marginal benefit well then you might say you know what I'm gonna close my book I'm gonna go out with you guys so what's important is to focus on the marginal benefit and the marginal cost it doesn't matter how big one by itself is or how small it is what matters is the relative size let's change it a little bit let's suppose that you're sitting there studying and you're not giving up very much at all so the marginal cost is relatively low and let's suppose that you are really really learning the material well you're having breakthroughs that are unlike anything you've ever experienced before so the marginal benefit is huge tremendously big and so when that friend knocks it doesn't matter what they're doing you're you're gonna continue to study because you're starting to the clouds are parting in your brain and you're starting to understand things like you never before is there any circumstance under which you would ever interrupt that where the marginal benefit is tremendously high is there any circumstance under which you would stop that and the answer is of course of course it doesn't matter if the marginal benefit is just sky-high if all of a sudden the marginal cost is even higher then you quit so if you're sitting there studying and and the clouds are parting and then all of a sudden somebody walks in through the door and sticks points a gun at you and says either stop studying or you're gonna die then clearly the marginal cost of continuing to study is now huge right you die so the key here is not how big marginal benefit is or how big marginal cost is it's how big they are relative to each other they could both be way up here they can both be way down here but what matters is how do they compare to each other so that's what it means to think at the margin okay you're thinking about the marginal benefit the additional benefit the additional cost and you're going to respond to those the the comparison of those you're going to respond to those and incrementally adjust your plan of action let's think about the next principle we'll call it number five and that is that trade can make everyone better off trade can make everyone better off we can think about this in terms of trade between two people or we can think about this in terms of trade between two countries let's start by saying that noticing that it doesn't say that trade always makes everyone better off that's not what what it says what it says is that trade can make everyone better often will actually spend a whole future video talking about this very principle why do people voluntarily engage with trade with each other let's think for a second about international trade it's not uncommon for people to be skeptical of international trade because they think that the world is a zero-sum game and a zero-sum game is a game where if I win you have to lose so poker is a zero-sum game if we all walk into the room with $100 and I walk out with 300 dollars then that means some other people had to walk out with less than they walked in with that's a zero-sum game any gains by me are losses by somebody else turns out that trade is not that way voluntary trade between people or between countries is not a zero-sum game it's what we would call a positive sum game that means that we can all walk away and have gained from it so trade can make everyone better off an easy way to think about why this has to be true is to think about what would happen if you didn't trade with with other people so let's suppose that you decide you know what I'm gonna trade less if you traded less then that means that you're not going to be buying stuff from other countries let's suppose that you you buy only stuff made in the u.s. you buy American well then that's you won't have reasons for wanting to do that but that's going to close off several options to you for buying goods and services from people in other countries if buying American is good then how about if you just buy Missouri well think about all of the things you won't be able to buy because they're not produced here or if if by Mazar is good then by Warrensburg clearly you start to realize that if i only buy the less i trade with people the more stuff i have to produce myself because it's not being produced in my limited circle that i'm going to trade with and so clearly the more stuff you have to do for yourself the less time that leads for other things so trade can make everyone better off the absence of trade makes people worse off we'll talk about that again in an upcoming video let's talk about principle number six number six is that markets are the best way to organize economic activity markets are the best way to organize economic activity now what we mean by this I'm gonna insert the word free here free markets are the best way to organize economic activity we have to be careful about what we mean by this phrase free markets we're not saying when I say the phrase free market I don't mean a situation where sellers can do whatever they want sometimes people define a free market as the complete absence of any regulation on sellers and that's not at all how economists mean that phrase what we mean is that sellers are free to sell what they want within the bounds of the law and consumers are free to buy what they want within the bounds of the law so you can't you can't lie to customers about the quality of your product and you can't lie to them about other characteristics of the product and as a consumer you can't buy things that are deemed illegal we're not going to get into whether or not things should be legal or illegal we're gonna say that within the bounds of the law you're able to consume what you want and produce what you want that's a free market and this principle is that free markets are the best way to organize economic activity the other alternatives the alternative to a free market is a planned marker excuse me a planned economy planned economy that's the other alternative so we could think about planned economies like socialism or communism so what this principle says is that free markets capitalism it's the best way to organize economic activity it is a better way to organize economic activity than communism or socialism communism and socialism for what we're going to do in this class the key characteristic of those two ways of organizing economic activity is that the means of production is owned by the government so if you look at sociology or excuse me if you look at communism or socialism both of those are situations where the government controls the means of production the businesses what's being produced it's a basic principle of economics that capitalism beats that that doesn't mean capitalism is perfect so this next principle that we have to think about we'll call it number seven is that sometimes the government can improve the free-market outcome so sometimes let's just say government can sometimes improve the free-market outcome that happens when there is what we call a market failure so free markets are great we'll talk more about that and in other parts of this class if you take a principles of microeconomics class you spend a lot of time talking about why free markets are good but sometimes there are situations where the free market doesn't work quite as well it still works better than planned economies so that this is not an argument for that certainly not but there are times when we have things that we call an externality an externality is when one person's behavior imposes a cost on somebody else so it's a type of market failure in those cases sometimes the government can improve the market or the free market outcome let's talk about the last few principles number eight has to do with a country's standard of living so a country's standard of living depends on its ability to produce other things to produce things other people want to buy a standard of living depends on its ability to produce things other people want to buy it's a lot of writing country standard of living depends on its ability to produce things other people want to buy it's also true for an individual your standard of living in the future will depend on your ability to produce goods or services that other people want to buy from you that's why it's important to have skills that other people are willing to pay for we'll talk about how that works in a market talk about principle number nine and ten number nine and ten I'm just going to say that's too much writing principle number nine is that prices rise when the government prints too much money so let's just put let's just write money here when the government prints too much money drives prices up causes inflation we'll spend time talking about that so that's kind of a basic principle of macroeconomics the tenth one is let's just put here there's a trade-off between inflation and unemployment in the short run and that may not mean much right now to you it doesn't need to but we'll spend some time talking about that in the short run the government may want to decrease inflation and it will want to decrease unemployment but the problem is that there's a trade-off if you decrease one it's going to drive the other up so we have to decide which one do we not like the most because that's the one we might want to decrease so these are the ten principles what we'll do in our next videos we'll think about some some basic things that we're going to be thinking about in a principles of macro class or principles of micro class we'll kind of think about what economists do how they do it and then we'll move on to start talking about this principle that trade can make everyone better off