this is the chapter on the ten principles of economics it's actually a pretty easy chapter in fact I'm not going to go through most of it I'm just going to introduce you to the basic concepts of econ by going over the first few principles you are responsible for going over the rest of the principles and there will be an assessment on this but this will be a very short video clip to introduce you to my slides each slide is going to have a cover slide like this naming the chapter the chapter number and then there's technically two different color schemes you'll see sometimes up here you'll see depending on which class you're and if you're in the micro class you'll see it in purple if it's you're in the macroeconomics class you're gonna see it in red and the reason this is in blue and it actually says principles of economics it's because it's one of the first four chapters the first four chapters are the same for both classes the reason that's the case is because we have to introduce you to markets and it doesn't matter if we're talking about microeconomics or for talking about macroeconomics markets or markets so for that reason I have I'm gonna use the same slides for chapters one through four and therefore the same video this next slide will always be a set of questions it's basically a guide to give you an idea as to what's coming it is a good idea to come back to these questions when you're done covering a chapter and also when you want to study for the exam that being said being able to answer these questions and only these questions is nowhere near enough what you'll need to know in order to pass this class so use this as a guide as to what's coming and use this also as a guide as to kind of give you broad strokes about what is being actually covered in this particular chapter well let's start with why we're here what is economics all about oh man where to begin fundamentally economics is about scarcity it is because things are scarce that we have to make choices we face scarcity both in the things that we have whether it be the amount of food that you have or clothing or cars or square footage in your home but also things like time right obviously one that's a little bit more obvious would be money right so things are scarce and because they're scarce we have to make choices right so fundamentally you can see that economics is about choices how either a society or an individual decides to allocate their resources whatever it is their time their money their food their clothing based on their preferences and the fact that things are scarce so once again fundamentally econ is about scarcity someone I think it was Paul Samuelson an economist who keep referring to the dead economist so he's an economist who is now dead and he once described econ as the study of the ordinary business of life and that is what economics is by the time you're done with this class in fact way before you're done with this class you're gonna see economics everywhere everywhere that you turn you're not gonna be able to even help yourself it's gonna be kind of stuck in your brain I wish you could see what I'm doing right now I'm kind of you know tugging at my head and trying to get these ideas out of my head but I can't Hey because economics is a way of thinking it is a way of looking at the world but fundamentally it is because things are scarce that we have to make these choices so because of that we've come up with these descriptions or these broad tools you can call them theories you can call them ways of describing patterns we've come up with these as these general principles to try to introduce folks to the basic structure of the study of economics so again fundamentally about scarcity formal definition in the textbook we have the study of how society manages its scarce resources you'll see quite often that during my lectures I'm not always just pinned down to that one definition or that one formal a definition in the textbook quite often I'll still give you the same definition but I'll formulate it in such a way so that hopefully it makes more sense and maybe sometimes I'll take it from another angle and say okay do you get it here do you see it there trying to make sure that you understand fundamentally with the essence of a concept rather than just memorization of a particular definition all right so economics how people decide what to buy as I was saying how much to work how much to save how much to spend and also firms the firm behavior right so we can talk about individuals individual people you and I okay or we could talk about the firm in fact if you're taking microeconomics we focus a lot on the firm once we start getting to chapter 13 and on it's a lot about what does the firm what is optimal for the firm if the given that the firm have only has X amount of money or given that the firm faces these prices and it wants to produce this much what's the optimal choice to make should it make more units should it make fewer units that sort of thing how many hours to hire how many workers to hire how many machines to buy that sort of thing we kind of already talked about individual human or people's decisions right should you get up in the morning should you not get up in the morning should you hit snooze should you not hit snooze in fact that first decision you make when you make wake up in the morning is an economic decision you have to make a choice do I get up do I not get up and there's a cost and the benefit associated with either action that you take right the benefit of course of staying asleep we're going back to sleep is that sleep is delicious we all agree that sleep is delicious but it comes at a cost right you might have to miss your shower you might have to be late to school or to work on or you may miss an appointment right so yeah you go to sleep but there's a cost associated with that or you get up and the cost of getting up as well there weren't that deliciousness of that sleep so again categorizing it into individual behavior for people or we can think about firms in their decision-making process these two combined here makes up the study of micro economics which we'll talk about in a bit and then if we start adding higher levels of interactions and we start talking about society as a whole then we're getting into the realm of macroeconomics so society making a choice to allocate its resources towards more infrastructure or if we spend more on roads that means there's less money on schools or if we spend more on schools that means there's less money on national defense and it's not just about money by the way it could be just our resources as for example our factors of productions things like labour things that help us produce and I'll formalize these concepts more later in fact they'll be super important if you're taking macroeconomics so things like the amount of are the size of our labor force well if we have a bunch of our workers working towards national defense then that means they can't focus on harvesting our food and building our cars and making our clothing right so we fundamentally are making a choice by allocating our labor towards a production of one particular thing versus another so the ten principles of economics and as I said earlier I'm only going to be covering a few at a time I'm gonna I benched them in two or I punched them yeah get used to my my speaking here my language I categorize them into three broad categories as we said earlier one is going to be how people make decisions then how they interact and then we'll get to the societal level as I said I will I will only cover a few here so number one people face trade-offs right all decisions involve trade-offs and I've already given you an idea of that going to a party the night before your midterm bad idea first of all but what's the trade-off it's gonna leave leave less time for studying and obviously that's not the only trade-off right just the capacity for you to think you're giving some of that up if you're lacking sleep or if you're a little - I don't know hungover the next day right so it is right off right you're thinking capacity takes a hit having more money to buy stuff requires working longer hours right so which leaves less time for leisure this is what we call the labor leisure decision right if you want to you know have lots of fun and you know go vacationing all the time in other words pursue leisure well it comes at a cost it comes at a cost of not working because working you need that time and working is what it allows you to get that money so that you can spend on consumption so fundamentally the labor leisure decision pursuing leisure means you're giving up that money that you can use to buy leisure stuff right so pay for your time that you're taking to go to Hawaii or whatever and if you are and on the other side if you're working a lot because you're like I need more money any more money I need more money or I need to pay my bills maybe it's that well then the trade-off is you're giving up some leisure time right so again this is the labor leisure decision fundamentally saying that because of this trade-off we fundamentally are making a choice between consumption expenditures and leisure hours here's another example you are more than welcome to uh actually let me elaborate on this one a little bit protecting the environment alright so some people say you know protect the environment at any cost right no pollution zero pollution and economists have been saying wait a minute no that doesn't make any sense because if you we don't pollute at all then that means we're not going to produce at all because by producing that necessarily involves polluting right so there's a trade-off there right the more we produce the more we're gonna pollute right we're giving up clean air for example that's the trade-off and the more clean the air we want but clean of the air we want then that means we can't we're giving up some production right so again there is this trade-off where we choose to be by the way I'm not here to describe where what choice we should make a very clean air or no no no no lots and lots of production that's not what I'm here to describe I'm here simply to point out that there is a trade-off between a clean environment and production again people face trade-offs one of principles and you'll see this everywhere taking this class right you don't have your summer off or you don't have the ability to you know do something else during this time Society faces a very important trade-off this is what we call the efficiency versus equality trade-off efficiency if we're talking about efficiency we mean that we're getting the most that we possibly can from our resources and so if we're operating incredibly efficient think of that as being as the economic pie the goodness or the oh the surplus we can get from the use of our resources is as big as it can be I described that the economic as the economic pie if you make it as big as you can possibly make it given your resources then we say that we operating efficiently equality though it's not about having the pie as big as you can have it equality is about the distribution of the slices does everyone have an equal slice right so as we're pursuing the size of the pie getting bigger we're giving up controlling the distribution of it slices and as we start working towards making sure if we wanted to do this making sure the slices of the pie are more evenly distributed then by its very nature we end up giving up some efficiency because as we're gonna see later as we progress through these chapters you're gonna see that when we are allocating resources towards our most efficient use it's not keeping in mind the distribution of the slices so as a society we could choose to have a more equitable distribution of the slices it does come at the expense of efficiency however that is an important thing that it's a choice for the society right we might be able to give up some pie in order for some folks who have a very tiny sliver of pie to get a bigger piece right and it might come at the expense of other folks we'll have lots of pie right and that's a social preference that we have to make a social decision right as a society as a whole by the way I'll take this time right now to point out that you will never get me to give you my opinion as to what we should do I am here to describe these things I'm not here to tell you how something should be done rather instead I'm describing the way the world is rather than how I personally based on my values and my beliefs think the world should be and you're gonna see that throughout this semester the trade off can be seen clearly here in this last bullet point where I'm describing how if you want to redistribute the slices a little more fairly that's gonna remove the incentive for people to work hard right to try to get as much as they can as much economic pie out of the resources that they have right because for some people while both things the people that you are gonna be taking some pie from in order to redistribute to those who have less we're not gonna have as great of an incentive to operate efficiently because hey I'm not gonna get to keep that pie right and then to those that you do redistribute pie to they're gonna have less of an incentive to work for to try to get pie if you're constantly handing them pie right so that's where we're just just the trade-off that I'm describing there that being said there are things that influence people's ability to go after pie that we might need to work on a society right so things such as education levels right if someone is not educated they're gonna be less productive and therefore can't go after as much economic pie as other folks who do have high levels of education or those people who have lots of resources and lots of wealth maybe inherited wealth that they can easily tap into that can fund this education that can make it easy to you know get a child a babysitter or can make it easy for them to buy their textbooks for example or to buy a car to get them from their home to their job then of course it's gonna be a lot easier for them to go to after some economic pie right so while this trade-off does exist it is important to know that there are social forces out there were social mechanisms and situations in which the ability for individuals to go after pie economic pie after surplus or after efficiency economic goodness um that they could be limited because of the circumstances that they're in alright principle to the cost of something is what you get out get a give up to get it absolutely the true cost of something is what you give up to get it we call this the opportunity cost and the opportunity cost is basically anything that is given up in order to obtain something else and we don't just mean something in monetary terms so for example the opportunity cost of you being here right now taking this class is what did it cost number one tuition you had to pay for that you had to pay for your textbooks and maybe you had to buy some notebooks and some pins to go to school so that's what we call an explicit cost a cost that involved a payment of money you don't really need to know that unless this is the micro class and we'll talk about that way down the line like in Chapter thirteen but it could be something monetary that's part of the opportunity cost but in addition to that there's something else you gave up for being here right now for sitting through this lecture you're giving up the value of your time right maybe instead you could be working and making some money so yeah you didn't have to pay your wage but you gave up a wage right let's say you gave up ten twelve dollars fifteen dollars an hour so you're giving something up in order to be here so the true cost would involve both the tuition and the textbooks and the pencils and the notebook costs and maybe a bus pass but also not so much for the online class the bus passes but also that next most valuable thing you would be doing the value of that whether it be working or maybe the value you would place on surfing or the value you would place on being instead with your kid because some of you might instead be with your child but you can't be with them because right now you have to sit in front of the screen and watch this video so the true cost of something we call that the opportunity cost and that is a very important principle fundamentally all of economics will always be coming back down to these principles no matter which econ class you're taking whether this is your last one your first and only and last one or whether you go on as a business major as an econ major to take more economics when you get into those more advanced classes they get really challenging at times it's important to remind yourself that fundaments they come down those concepts come back down to these ten principles that were covering here in this particular chapter so some examples the one I discovered I'm going to the movies right it's not just the price of the ticket but the value of the time you spend in the theater and or hanging out with let me go back it's like hanging out with you know your friends right hanging out with your friends that certainly involves an opportunity cost or being with someone right that means you're not with somebody else and by being with them I mean when you choose a partner in life right well there's a cost to that an opportunity cost is you could have instead been with someone else and you might I don't know if you're laughing right now or not cuz I can't see you but it's true it's even relationships these concepts apply to relationships and quite often I can't help myself but I'll be relating some of these concepts to relationships so you may be entering this class thinking oh it's economics it's gonna be boring and all we're gonna talk about is probably taxes and prices and money and we're actually not it's a lot more than that in fact these simple little concepts that I just mentioned are so tiny like you imagine making a big circle with your hands right now and then use your little pinky to like point out a little dot that is Texas that is money that is the stock market tiny tiny little parts of this big ol discipline that we call economics all right principle three rational people think at the margin so the margin is actually gonna be your best friend especially in a microeconomics class what we mean by margin is you're at the edge you're at that like kind of like the frontier that next thing you're gonna do so for example a marginal amount of say pizza let's say you've eaten you've eaten two slices of pizza and you're considered considering eating a third slice that third slice is the marginal slice you're at the margin considering another thing right so incremental there's a good synonym for marginal or additional right an additional slice of pizza or an additional hour of sleep right so that's a marginal amount okay and so rational people think at the margin and we should be thinking systematically and purposefully to do the best that we can to achieve our objectives right whatever our objectives are we should be making decisions at the margin and at the margin what that means is that you're gonna be considering the marginal benefit to the marginal costs so that example that I'm describing when I say when I said earlier about sleep and you wake up in the morning your alarm rings and you're deciding whether or not to get up it's a marginal decision you're making a decision at the margin should I sleep an additional 15 minutes or if it was your iPhone I think it gives you 9 minute increments which is hilarious but anyway it's a different story uh and so hitting sleep right for 15 more minutes you're evaluating is the marginal benefit worth the marginal costs right the cost of these additional 15 minutes oh shoot I'm gonna be late to work but the benefit is damn sleep is delicious all right so then those people decide to go to sleep if they find that or hit snooze if they determine that the marginal benefit that deliciousness of those additional 15 minutes is worth being late by 15 minutes to work right so or to school for some of us someone like me my alarm rings and I get up in a heartbeat I'm a morning person in fact my alarm doesn't even need to ring I just need a little bit amount of sleep so to me while sleep is delicious I don't need as much sleep as most people so for me after I get about five six hours of sleep yeah five or six it's easy for me to get up on my alarm rings right for me I'm like boom benefit is not worth the cost I'm getting up why not because the cost is huge necessarily but because for me in particular the benefit of additional sleep beyond that is very very small right so again rational decisions are made at the margin you shouldn't be considering everything that you've already done before that stage so for example if you're deciding if you're in college and I know some of you are in dual enrollment and this mam it definitely applies to you as well but to you for many of you they're they're forcing you to go to school right though the government and your parents right you have to finish high school once you get to college if for those of you that are in college you know it's not as much of not as much pressure to go which is what makes it difficult in part but choosing to take you know another semesters worth of classes that should be a marginal decision is the benefit in another semester worth the cost of another semester remember when I say cost in this class I'm always talking about opportunity cost not just the monetary cost right and so if you're deciding to take on another class or another semester or maybe even another degree you shouldn't consider what's already happened the classes you've already taken in fact this applies for you high schoolers as well because that is the past the past is the past you can't undo it you can't recover it you can't get that money back you can't relive those benefits either the past is the past there's a saying in Spanish that goes yellow pasado pasado which means pasado pasado means past is the past and I love it there's even a song to that saying the past is the past you can't undo it you can't recover it so that should not come into the decision-making process the decision if you're gonna be rational should be at the margin is the benefit of the additional the marginal amount of education you're about to pick up worth the cost the additional cost the marginal cost of the amount of education you're about to pick up if so then do it if not then don't do it right obviously you're sitting here in this class right now then you have decided to take it then that must mean that you've decided that the marginal benefit exceeds the marginal cost here's another example and I love this example because once again it has nothing to do with dollar signs or banking her taxes what people normally think of when they think of economics relationships back to relationships so for example let's say that you're in a relationship and you're considering breaking up with someone yes this is you're gonna see why I'm not a family or marriage therapist here and the decision whether or not to leave someone if you're rational it you shouldn't be considering while hey I've already been with this person for 10 years those 10 years are gone they're sunk that's what we call a sunk cost it's sunk you cannot recover those costs you also can't relive those benefits other than in your memory but in reality you can't so that is gone you shouldn't consider that you should consider is it worth it to be with this person another year another month another day if you're at the day decision level yeah that's a different story go to a therapist but if you're deciding whether to um stay you know it should be is it worth it from now you know for the next time period is it worth it is the benefit does it exceed the cost right not oh hey I've been with this person for 10 years so I shouldn't leave him or her no that's gone right is it still worth it today at the margin is it worth it so again rational people think at the margin we're gonna see a lot of this in microeconomics and some way especially at the beginning of the macro material and the last principle that I'll cover remember you're responsible for all of them is people respond to incentives you being here right now you're responding to some incentive why are you taking this class all right is it because you want to get a degree is it because you want to signal to the labor market that hey I've got a degree so mate that makes you more employable - that why you're here that's probably why you're here I'd bet that 99% if not a hundred percent of you well actually no fewer than you especially during this summer we're here for that some of you are in the dual enrollment program and you're here it's a long range goal that is the ultimate goal but you're here because you want to advance in the curriculum and graduate high school with college credit and then that way when you do go to college you've already have some college classes under your belt right but again fundamentally does go back to that previous one right where you're doing it because you're trying pick up an education as an inset it's an incentive because you want to go into the labor market and be better prepared right so people respond to incentives right we're responding to incentives incentives all of the time right so an incentive something that induces a person to act if I were to offer you some money right now and I said hey here's ten bucks come with me let's go do something I need you to walk away from say playing video games and you might or might not say yeah it's worth it or it's not worth it maybe this incentive isn't big enough for you to get up to go walk away from your video games and then come help me dig a ditch right but if I offer fifteen dollars if I ask you hey here's $20 come with me for an hour at some point you're gonna walk away from those video games and go help me dig a ditch right why because you'll respond to incentives right given that that incentive is enough to get you to get up anyway so this is a very important thing I love this particular example here that how the price of gas actually influences people's behavior in terms of what type of car that they want to drive the size of the car a perfect example would be in Europe in Europe gasoline is much more expensive than it is in the United States their taxes are super high because most of European nations decide to impose high taxes on gasoline so because of that it's really expensive to drive you end up seeing a lot of more small cars down in Europe than you do in the United States I don't know if you've ever been there but if you do ever end up going there pay attention to the average size of vehicles they're pretty small and some people might say oh well that Europeans are so environmentally friendly and that's why they drive small cars as an economist I'm like no wait a minute actually no it is not because they necessarily care more about the environment it's because gas is so expensive because the taxes are so high right so again an example of people responding to incentives all right make sure you go through all of the principles and make sure you understand them if you're in the micro class those last macro concepts like unemployment the trade-off between unemployment and inflation don't worry too much about those if you're sorry if you're in a micro class if you're in macro at this stage just kind of understand those concepts but eventually you know in broad strokes and just generally but eventually we'll get into those in much more depth yeah alright folks I'll see you in Chapter two