So this is chapter one, the beginning of our economics journey. And essentially, as the title suggests, we are getting started. So let's start.
As I practice, as we go through all of these chapters, all of these slides, I'm not going to waste time talking about this picture and the title. It's a wasted slide. Okay, so let's talk about first what we're going to do in this chapter. First thing we're going to basically do is define what economics is and why economics as a discipline is important to study, why many of you who are either business students or pre-business students or somewhat interested in business are required to take this class, but also to... by many of you might be in this class because you're taking it for general educational requirements.
And so what I hope to do in this chapter as well is kind of give you a preview to how an economist like myself interacts with the world, how they view how the world works. And what's going to become apparent is that it's something much more than just supply and demand. So, you know, if someone has taken economics before you told them, hey, I'm taking economics this semester, chances are they probably said, oh, supply and demand, or something along those lines. Or they only remember supply and demand. But one, I hope that's not the only thing you remember.
But two, it is something much more than that. And so that's what we'll talk about towards the end of this chapter. So let's start by talking about what economics is.
So. Quite simply, if I had to define it myself, what I'd say is that economics is essentially the science of scarcity. Sorry, it's me writing on a tablet pad here. So economics is really the science of scarcity. So then the question is, what is scarcity?
The idea of what scarcity is, is that we have essentially unlimited wants and needs, but we only have limited resources in which to satisfy those needs. So somehow we're faced with a, we're going to be faced with some needs and wants having, being unmet. That is the scarcity.
When some needs and wants go unmet, we then have to make choices. economics is essentially the study of how we make those choices, what we decide to do and why we decide to do it that way. So with that said, now, again, as you'll get the hang of this here as I'm going through the slides, I'm not going to read the slides.
I presume you can read the slides. This is just me talking about the slides. either focusing on the most important aspects of the slide or expanding on it if I don't think this slide did enough to help you understand the narrative of what's being said here. So there we go, right?
Our definition then of economics, they add a lot more words here. As I said, they can be really simplified as just the science of scarcity. But if we want to add a lot more to it, we can say that we're looking at how choices are made as individuals deal with scarcity, how we can encourage or incentivize individuals to make certain choices, and then what happens in society as we coordinate all of those decisions being made. Economics is divided into two major areas, microeconomics, which is the older of the two, and macroeconomics. So this is a microeconomics course.
What that means is that we're going to spend the majority of our time talking about how individuals and businesses and industries make choices and the role that the government plays in how these decisions are made. So microeconomics as a discipline dates back to 1800s. Economics as a discipline, I mean some people would say oh it starts with Adam Smith so they would say like 1776. Some people would say oh economics it's as old as the Greeks because Greeks, ancient Greeks you know 2000 some years ago also had. what they would call home economics or how decisions are made within the household.
But microeconomics was first. But then towards the end of the 1800s and certainly by the time of the Great Depression, there was a realization that the discipline of microeconomics wasn't enough to help understand all that was going on in the economy. They kept especially during the Great So economists started to look at the world around them and they got really focused in the early 1900s on business cycles. The idea that the economy fluctuates over time. Things get good, then things get bad, then things get good, then things get bad.
There were all these theories ranging from like it was related to the sunspots to all these various things. But the idea still in the early 1900s was inspired by microeconomics, which was that in the end, if you just leave the market to do what it needs to do, the market will fix itself. Everything always goes back to equilibrium, a concept we'll talk about here in chapter three.
That was all fine until the Great Depression, when the economy clearly did not go back to equilibrium. And so that's when you then got John Maynard Keynes. You may have heard that name, John Maynard Keynes, who basically gave birth to the discipline of macroeconomics.
Fun fact, Adam Smith was born on June the 5th. John Maynard Keynes was born on June the 5th. And me, shiting. was also born on June the 5th. All three of us, Geminis.
Yes, I was born to be an economist. Macroeconomics, that's our, that would be the course that you would take after this course. And in that course, we look at things like GDP, inflation, unemployment. economic growth, that's all macroeconomic topics. So if we look at what Economic Center fundamentally is doing, is it's looking at two big things.
The first being this idea that every society that exists needs to make needs to answer three economic questions. What is going to be produced? How is it going to be produced? And who is it going to be produced for? So that's the first thing that every society must answer.
Then the second part to that is, how do we understand how individuals being selfish also promote the general interest of others? There's something I can say. Let me say something about each of these. First, let's go to the next slide here so we can look at the first one here. Different societies answer these three questions differently, but the three major approaches to answering these.
is that in some societies, sorry, sorry, it's really zoomed in here. Thank you. In some societies, we use a market to answer these three questions.
So how would that look? If we were using a market to answer these questions, what would happen is we would say, what goods get produced? Well, it's whatever people decide that they want.
You know, the market decides what people want. If people want to buy neon green shirts, well, dude, then neon green shirts are going to be made. How many are we going to make? As many people as will buy them.
How are the goods going to be produced? Again, the market would decide this. And then we would say that generally speaking, businesses would produce the goods however they need to, to be able to maximize profit.
Who are the goods produced for? They're produced for whoever's got the money to buy it. So see, in this kind of society, the market or some would say just pure capitalists decide how things are.
produced, what is produced, how it's produced, and who it's produced for. On the opposite end of that spectrum would be a society where a government decides these things. So as opposed to a market, which is kind of a pure capitalist system, the government could answer these three questions. So we would sometimes refer to this as socialism. And what we would have here is a situation where the government decides what's going to be produced.
They decide how the goods are going to be produced, and they allocate those goods to the citizens. These are two very extreme approaches. Markets tend to be very efficient, but they don't tend to be very equitable.
What do we mean by that? In a market, the waste is at a minimum. Things are very efficient, but not everyone's going to get everything because not everyone has money.
In a centrally planned society, a government-run economy, like, again, a socialist or communist country, things are more equitably distributed. But because you don't have this profit motive, because you don't have... prices existing, you lose a lot of efficiency. So it turns out that most societies are not organized according to these two ways. Instead, almost all economies in the world...
Jeez, sorry. I'm sorry I just erased it but you understand where we're going here market government and the third being either we call blended or mixed you get the idea blended or mixed what that means is that essentially we combine elements of both the market and the government certainly the united states almost all countries in the world are blended in some way here in the united states we primarily rely on a market yet we can think of things like national defense we can think of things like the fire department we can think of things like public schools where the government gets involved and organizes that kind of work. Now, the other kind of pressing issue is how do we know that people are going to behave not only good for themselves, but also for the rest of society.
So what this makes me think of here, so we see in, you know, if you've ever seen the movie A Beautiful Mind, there's this scene where John Nash, the mathematician, who does quite a bit of economics work, where he... has to come up with a dissertation topic. And the topic that he comes up with is this Adam Smith notion. So Adam Smith in 1776 in Wealth of Nations basically had the theory that people all act in their own individual self-interest, but by acting in their self-interest, they help the society as a whole. by basically being greedy, by being selfish.
And John Nash in Beautiful Mind questioned that. Let's see here. I mean, I don't think you'll hear the audio here, but let's see here. I'm not sure if you're going to hear the audio here. I hope you will, but you may not.
I don't know if you're going to listen to two minutes or something. I'm not sure. Okay, I don't think you're going to hear it, but if you go onto YouTube and you look up this video, what you'll see is, again, John Nash both describing the Adam Smith theory, which I just said, which is that individuals acting in their own self-interest end up benefiting society as a whole, and that John Nash then altered that by saying that we needed to think of this in terms of game theory, which is a very microeconomic topic. And essentially, what you get with both game theory, as well as just classical microeconomics, is again, this idea that, you know, people acting selfishly, acting in their own self-interest, collectively end up we end up collectively with a society that benefits. So we can look at this in a few different ways.
So the one is globalization. With globalization, what we can see here is that that individual companies and countries are all trying to make money. And so they all then specialize in the production of certain things. But as they do that, they end up helping the world as a whole, because then what that allows is that other countries can then focus on other things that they're good at.
So we see this here. that Nike shoes are made in Malaysia, Toyota makes cars in the United States. Each of these companies are doing what's in their own best interest, but we end up with cheaper shoes and cheaper cars.
We have the information revolution, which sounds like a very old term, but... Essentially, we had private businesses building out software and building out hardware for computers, and they did it so that they could make money. But then the idea is that we're all collectively better off because we all seem closer to one another.
Then we have something like climate change. So climate change is a little bit different here because the problem with climate change is that we could end up in a situation where individuals aren't paying their costs when they pollute and they could end up hurting society. And then the other way where we see kind of either exceptions to this or something where we have to give greater thought to this is with government budget deficits and debt.
Obviously, each of us are only going to live a certain amount of time. As we get older, we might not care if the threat is that they're going to raise taxes in the future because we're going to be dead. So the idea here is, you know, maybe old people, you know, when they have their say in how, you know, in how things are done, maybe we should give it.
too much thought because they could end up leaving us in a situation where we're more heavily embedded to a future generation. And that's what we see here. I said it much longer and probably a little bit more confusedly than this, but The idea is that if old people are acting in a self-interested fashion, we may end up worse as a society because those individuals are making decisions that aren't necessarily for the collective good.
Okay. With all that said, that gets us now to thinking again about the key ideas that, you know. where we would describe that someone is an economist. What would make us think that that person is an economist?
Well, certainly if they think about things like supply and demand, that certainly is a pretty good clue, but it's something much deeper than that. It's these six things. So let's start first with the first idea here, is that choice is a trade-off. What does that mean? It basically means that When we make choices, we're talking about doing one thing rather than the other.
And I'll link to the second idea and the third idea. We can think about that doing one thing gives us a benefit. Not doing something else is the cost of what we had to give up for doing that. So you can see with those first three bullet points, you know, it's not enough just to say, like, you know, I'll buy lunch for you until you think the lunch is free. You get this very old, corny phrase that economists say is that there's no such thing as a free lunch, which is horrible because every time I've had to go out to eat with economists, someone always says that dumb joke.
But what does that mean? You know, if I offer to take you to lunch, right, and we don't really know each other that well, right? I'm your professor, you're the student. And I say, hey.
Steve, let's go to lunch. And you're like, dude, what a creep. Like, we don't even know each other.
You know, what are we going to talk about, you know? And I'm trying to convince you to go to lunch with me. So I'm like, I will pay for lunch for you. You know, like, geez, what a weird guy.
We don't even know each other. So here's where you have to think, right? You being Steve, right?
It could be, I'm really, really hungry. I don't have anything better to do anyway. But dude, this guy is really weird. And what is he going to talk about all this time?
So you have to make that kind of trade-off, right? We can think that the trade-off isn't as bad if the person inviting you to lunch is your friend, right? Or your spouse or your boyfriend or girlfriend.
These are all trade-offs. So you have to think about that trade-off. So what we think of when we think of that choice being made is that it's a rational choice, one where I'm comparing the benefits and the costs to deciding one way versus the other.
And we can measure those costs and we can try to encourage people to make certain decisions by providing incentives. Now... As an economist, I love incentives. I love incentives.
The reason why I love incentives is because, you know, just like all of us, we think we know how the world should work, right? So, for example, I want you to read the textbook, right? And you can see that in this class. I do want you to read the textbook. I want you to have access to the textbook.
So we can think of two different ways I could do that, right? Is I could make it a requirement that you do it and say, like, you must send me a picture of you. smiling next while you're holding a copy of the textbook.
Okay, I could do it that way. But what if instead of like forcing you to do something like that, what if I gave you an incentive, right? What if I said all the test questions are going to come from the textbook, right? And there's going to be at least one exam question from every page of the textbook. Well, I would imagine that that would encourage you, incentivize you to now read the textbook.
I think it's much better, much kinder, easier to get people to do things based on incentives rather than costs. Everything, again, is that trade-off. The trade-off is that exchange.
So now as we look at each of these, this is our first one again. is that every comparison of options represents a trade-off, and that when you decide to do one thing rather than another, that cost of what you give up is what's called the opportunity cost. And that's a key term. It's a very important term for economists. What the opportunity cost represents is it's the highest valued thing that you must give up in order to get that good.
So if we talked about me, you know, let's say that I have to decide whether I'm going to go to the doctor because my foot hurts. Right. Well, if I can't even afford money for food and for housing, I'm not likely to go to the doctor. not because I don't care about my foot, but because, dude, I can't even afford to eat or live. So what I would have to give up to be able to go to the doctor is eating.
That's a pretty high opportunity cost. Whereas let's say I'm kind of like ripped or like upper middle class. The opportunity cost to go to the doctor might be that I have to give up my Starbucks for the day.
Right? You can kind of see how the opportunity cost becomes lower. which then generally means that rich people use the doctor more because the opportunity cost of using the doctor is less now also when someone decides to do something they gain a benefit and we can measure that benefit that thing that they gain for bullet point number three again that rational choice is how we can compare those costs and benefits to making that decision, we make these decisions at the margin.
What does that mean? When we say that we're making a decision at the margin, is that I'm asking myself each time, do I decide to consume this good or do this activity? It's not that I decide to sleep eight hours.
It's that at the first hour, I mean, it's not that I actually do it this way, but you could say to yourself. I'm going to wake up every hour and ask myself, what's the cost of sleeping one more hour? What's the benefit to sleeping one more hour?
During a weekday, right, we can imagine that the cost of sleeping longer is higher. Because you might be missing work. You might be unable to pick up your, drop off your kids at school. So the cost would be high.
And then the benefit to sleeping longer. is not as high because right now you've got all these like, right, your spouse might already be at work, your parents are going to look down at you if you're still sleeping in the middle of the day, you're missing out on a lot of things. Whereas we could think that that same decision on the weekends is very different, right?
But the cost of sleeping one more hour isn't as high. Maybe I was just going to watch TV, a football game, something like that. well that's pretty low costs and the benefit would be dude it's the weekend i'm supposed to relax like that's what i'm supposed to do so right it can that can generally explain then why people sleep longer on the weekends than during the week and so we can measure those things we can measure those things with the marginal cost and with the marginal benefit And then economists actually equate the two to decide how much of something someone should do. Marginal cost, that would be the opportunity cost.
The cost to do something one more time. So that marginal, that's the one more time part of it. What's the cost of doing something one more time? What's the benefit to doing something one more time?
Well, if the marginal costs are greater than the marginal benefit, then should you keep doing it? No, right? Because the cost to doing it one more time is greater than any benefit you would get.
So you should not do it one more time. What about when the marginal benefit is greater than the marginal cost? Should you do it one more time? Yeah, you totally should because the benefit to doing it one more time is greater than the cost. Now, what ends up happening here is that as you do things, then more or less, the marginal benefit and the marginal cost change.
Let me give you an example of this. I'm going to sound incredibly spoiled here, so I realize that. So I live in Hawaii.
At my home, I have an avocado tree. Now, I don't really eat avocados, admittedly. You know, I'm not, I don't eat avocado toast. I just don't eat a lot of avocado.
I'm originally from the Midwest, and we don't have avocados. I mean, outside of the grocery store, we don't have avocados. But now that I've got this tree, I've got to eat a lot of avocado, and I have to give away to others a lot of avocado. So you can imagine the benefit I get. the marginal benefit I get from the 30th avocado.
It's not very much because, dude, I already just had 29 of them. And so the benefit is really, really low because I'm consuming so much of it. And the marginal cost is pretty high. What do we mean by that? Because if I have to sit around my house for three days straight just eating avocados, I'm not going to work, I'm not picking up the kids, I'm totally extracting myself from the world because I'm just focusing on avocados.
So the cost is very high. And so where you can see that description is something where I'd be encouraged to consume fewer avocados and not get so exhausted by it. That we would tend to see some equilibrium. at the point where the two are equal to each other.
So again, we can, you know, as we're thinking about individuals making their appropriate decisions, we can provide incentives. to encourage people to do something or we can give people negative incentives to doing something right we can say you go to jail if you break the law that would be a negative incentive that might be enough to stop you from um doing something wrong okay now what this all means when we put this all together here is that economics is essentially a social science it's not really business although some people think it is and some people try to make it out to be. Economics is a social science. And so what that means is that we do have a scientific method.
That scientific method would be like build a model, test that model with collected data, with collected facts, and then either accept or reject the hypothesis that you originally made. So we can imagine a scientific approach to understanding the world around us. That's what economics does as a social science. So we build these models then to try to understand the phenomena that's around us. And as we build these models to understand the phenomena around us, we oftentimes have to then look at how well can our model predict the future.
which is what you would want a good model to be able to do. And how well does that model stand with the facts that are being collected, the data that's being collected. If your model doesn't do a good job understanding the reality that's around, you probably shouldn't accept that model.
Now, how do we do that? How do we test a model? Well, we could. I mean, what's done sometimes is that we create a natural experiment. A natural experiment would be one where we just look at individuals making decisions and we try to see.
you know, we try to understand how people are making decisions given the certain influence or factor that exists. As an example, a natural experiment could be me saying that more highly educated individuals earn more income. Well, so then we can imagine that what I do is I collect data from people about what their income levels are and what their education level is.
And they can determine whether, you know, when these people exist in the society with those education levels, whether they're earning more money. Now, besides a natural experiment where we could try to understand that factor, what we could also do is we could combine it with or add to it with a statistical investigation. That would mean looking at two variables with a regression and trying to understand how things move either in the same direction or in the opposing direction. And then finally what you could do is you could build a economic experiment and there you would just change one factor or kind of stimulus and you would try to see how people make different decisions based on that one factor existing.
Now, economists have to, we're asked to do a lot of things as economists. And it's very important to keep in mind that some of us as economists really focus on being normative and some of us really focus on being positive. So for instance, well, let's define them first and then I'll talk about what decision I've made.
To make a normative statement, as I said here in the third bullet point here essentially, is that a normative statement is a feeling, a judgment, a statement of what ought to be. So that'd be like me saying something like, Shiding is tall, right? Like, You don't really know what tall is, right?
Like if I'm from a country full of midgets, I might be only five feet tall and I'm tall. It's an opinion as opposed to a positive statement, which would be me saying Shiding is six feet tall. Then it's either true or false.
I, myself, tend to focus on positive statements. especially in something like this class, because I don't think you're paying to take this class to learn what my personal normative beliefs are. Neither should you think that I care what your personal beliefs are.
I want you to have your personal beliefs. Knock yourself out. That's what makes life fun. But you should never feel like I am obligating you to agree with me, nor should you feel that I need to agree or disagree with you.
I don't frankly care very much either way. I care more about the positive statements, the statements of fact that are then either true or false. Economics tends to be talked about in both ways, primarily because economists are also involved in policy decisions.
So although it says here economics can't help with the normative policy goal, and that's generally true. We can think of things that are... hard to disagree with, right? So if we made the normative policy goal that people should have enough food to eat, well, what we could do is calculate, right?
2,000 calories is what people need to survive. So we could define that as people having enough food to eat, turning something that's normative into positive. And then we could calculate how many people are getting 2,000 calories of intake. And what could we do? to either make food prices cheaper or to be able to give more income to those who are buying food.
Okay, these last few slides are honestly not that important. The last slides here, I'm not gonna, you know... It's about like why you should be an economics major, why being an economist is cool. It is.
I'll tell you that. But I don't think I should test you on whether Scheidinger himself made the right career decision. You can ignore 28 onwards.
OK.