Overview
This lecture introduces the field of economics by discussing scarcity, defining economics as the study of human behavior, and outlining ten foundational principles that guide economic thinking.
Scarcity and Economics
- Scarcity means society has unlimited wants but limited resources, making it impossible to satisfy all desires.
- Scarcity forces trade-offs, driving the need to make choices.
- Economics is the study of human behavior, particularly how people make decisions under scarcity.
What Economics Studies
- Economics covers more than just money; it examines any decision-making process involving trade-offs.
- Topics like how fast people drive, what people eat, or when a homeowner mows the lawn are all economics.
- Economists analyze both financial and non-financial decisions.
Key Subfields in Economics
- Major divisions: Microeconomics (individuals and businesses) and Macroeconomics (economy-wide phenomena).
- Other subfields: labor economics, international economics, game theory, econometrics, etc.
Ten Basic Principles of Economics
1. People Face Trade-Offs
- To get one thing, you must give up another (e.g., spending time or money).
- Society faces trade-offs like efficiency vs. equity and guns vs. butter.
2. The Cost of Something Is What You Give Up to Get It
- Opportunity cost is the value of the next best alternative foregone.
- Costs include more than money; they can be time, effort, or other goods.
3. People Respond to Incentives
- Incentives (economic, social, moral) influence behavior.
- Not everyone responds to the same incentive in the same way.
4. People Think at the Margin
- Marginal changes are small, incremental adjustments to a plan.
- Decisions are made by comparing marginal benefits (MB) and marginal costs (MC); action is taken if MB > MC.
5. Trade Can Make Everyone Better Off
- Voluntary trade benefits all parties and is not a zero-sum game.
6. Markets Are the Best Way to Organize Economic Activity
- Free markets (within legal constraints) efficiently allocate resources.
- Alternatives include planned economies like socialism or communism.
7. Governments Can Sometimes Improve Market Outcomes
- Government intervention may be needed in cases of market failure, such as externalities.
8. A Country's Standard of Living Depends on Its Ability to Produce
- The higher the ability to produce goods/services others want, the higher the standard of living.
9. Prices Rise When the Government Prints Too Much Money
- Increasing the money supply causes inflation.
10. There Is a Short-Run Trade-Off Between Inflation and Unemployment
- Policymakers face a trade-off between lowering inflation and lowering unemployment in the short run.
Key Terms & Definitions
- Scarcity — limited resources vs. unlimited wants.
- Opportunity Cost — the value of the next best alternative given up.
- Trade-Off — sacrificing one thing to obtain another.
- Marginal Change — a small, incremental adjustment to a plan.
- Marginal Benefit (MB) — the additional benefit from one more unit of action.
- Marginal Cost (MC) — the additional cost from one more unit of action.
- Externality — a cost or benefit imposed on others not involved in the transaction.
- Market Failure — when markets fail to allocate resources efficiently.
Action Items / Next Steps
- Review the ten principles of economics.
- Prepare for upcoming lectures on the benefits of trade and how economists analyze behavior.
- Reflect on examples of opportunity cost and incentives in daily life.