How's it everybody.... Welcome to the first lecture for econ 130 or 131,principles of macro or microeconomics. Today we're going to be covering chapter one... chapter one is a really important chapter just like it is for just about any textbook any principles level especially... it gives a big overview of the field that we're talking about in terms of economics. We're going to get to understand some of the ground rules and some of the language that is that's going to be important for us to kind of carry forward with us, as we move through the chapters and try to understand how economists think. Because when it comes to economics it's really about an economic way of thinking. A structured way of approaching issues and problems, and solving things in that way. So first off let's look at it as a framework for analyzing solutions to economic problems. It's a consistent way of looking at the world. It's seeing clearly some of the essential.. the essential aspects and the functions and uh making decisions on some very sound principles and rules. Essentially economics is about trying to make decisions. How do we make the decisions that we do in our life, when we have so many different ones that we have to make? How do we make good ones? How much time to study, for example... this is one of the things that, especially if you're new to college, if you're new to living away, if you're new to having so much... much... Independence. This can be... sometimes be a challenge. How much time do you devote to studying given now all these other freedoms and options that you have. Choosing which courses to take. A lot of you guys had a lot of other courses that you've probably could have chosen to take. And who knows, after this term you may have wished you've taken it instead of taking this from me. But hopefully you actually enjoy this class from me. But of course choosing which courses to take... there are many reasons why to take one versus the other. Another decision that we had to make was building a fixed Railway infrastructure. Should we have done it? What are the options that we had? Was this the best way to go? I think we see, if you're familiar with our fixed Railway infrastructure, that is struggling to make it, heavily overburdened with costs. I think you kind of know the answer already to whether or not it was something we should have done. But with 2020 hindsight it's really easy to throw stones. Anyway other decisions that we've seen, send send troops away or bring them home, how much pollution is actually acceptable? Some people think that zero pollution is actually acceptable... but you know a lot of things that we use on a regular basis creates a lot of pollution... the the process of manufacturing your iPhones or your Samsungs or whatever, there's a lot of pollution that comes from all that so we generally make a decision, how much do we accept to accomplish and to acquire some of the things that we want or need? And we'll talk about wants or needs in a bit, and of course one of my favorite decisions... should I catch should I catch one more last wave, for those of you who surf, you know that decision comes up, and when you finally make that decision to catch one more wave, isn't it funny... the sun's going down and that last wave takes forever to come. But anyway, again 2020 hindsight right? another thing we're going to have to do is be aware of the terminology. The thing about economics is we take commonly used words that you use in your in your life maybe not daily but nearly daily, but we add specific meanings and conditions, so to speak, to the word, so sometimes that makes it challenging for people to remember that because we have to uh go away from our general accepted understanding of the word "resources" for example and now we have to be able to answer questions about resources under the conditions of knowing that 'resources are things used to produce other things to satisfy people's wants.' Now of course it made sense, but if you solve multiple choice question without remembering this or even covering this you'll have four probably perfectly acceptable looking answers for resources... so, it's 'things used to produce other things to satisfy people's wants'.... that's what represents 'resources' in our class. When we use terminology...our "wants" for example, we know what we want, but in in this class especially in this textbook uh and in this field of Economics oftentimes we consider wants are 'things that we would buy if our incomes were unlimited'... uh... what would we buy if our incomes were unlimited? and uh you know that's what really distinguishes and sets the framework for the discussion. Here you see uh Mansions, you see that Russian billionaires boat uh yacht that was parked in Aloha Tower uh by the Aloha Tower uh docks, and so forth like that, for a couple months here in Hawaii, and uh you know it it changes the discussion. I mean I can walk around saying "you know I'm really satisfied with my motorcycle... my old uh my old van... my minivan, or my Saturn, or whatever, and uh say "I don't want a Mercedes! I don't want a Tesla! I don't want a Range Rover! These are cars actually that are way out of my price range as a teacher, uh but you know what? Is it really true that I don't want them, or is it that I scaled back my desires because my income is limited? But if my incomes were unlimited why wouldn't I want a Mercedes? a BMW? a Tesla? a Range Rover? Why wouldn't I want them all? And uh well, maybe parking is issue... not if my income was unlimited. I'd go ahead and rent or buy a a parking structure and put my car collection in, that's what Jerry Seinfeld does, so why wouldn't I do do that? So this concept, this understanding of this concept of 'wants' really being tied into ""if your incomes were unlimited" is very important. Other things you can see here, it's a gold plated Ferrari, a gold toilet bowl, and if your income was unlimited maybe youd want to buy the island of Lanai... that's what Larry Ellison did ...and Larry Ellison, the founder of Oracle I believe, um he uh spent a lot of money... he's turning that Island into actually a really cool pretty cool destination place. um And also taking care of it in terms of being a good steward of Natural Energy, providing for the island. I I don't live there so I don't know the inside story. I don't know what the residents think. uI've heard some positive writeups as well as uh..... actually I haven't really heard a negative thing about it, but you know I'm sure that's out there. uh... anyway let's get to the the definition of economics as per this textbook... 'economics' is 'the study of how people allocate their limited resources to satisfy by their unlimited wants'... essentially it's the study of how people make choices. A lot of people think economics, uh say "what is economics about?"... they might answer it economics about making money or they might answer economics about business. No... those uh, making money, and econom... and business, does deal with economics, because those all deal with limited resources, and they all uh trying to satisfy unlimited wants, so the study of 'how people allocate their limited resources to satisfy their unlimited wants,'... that once 'unlimited' concept, if.... what we would buy if our incomes were unlimited.... uh, we have two types of economic fields that we break it down to... uh we have microeconomics, Micro, when you think of small components... so the microeconomics deals with: individuals, households, and firms... so looking down here in this picture, you see from the top view ,you see the individual components of an economy.... the people, the people moving about, you see their actions, uh their behaviors... that's what microeconomics focuses upon. Micro types of questions tend to be things like, how much maybe should I buy, how much should I save, as an individual... another microtype questions might be, how much should we produce, uh for uh, of a product, for society? How much do we charge for it? how many people do we hire? or our very important one that we're going to be looking at is how do we, uh, should we be shutting down operations? Other microtype questions that don't necessarily.... uh, uh...people, when they first study economics, don't necessarily associate with it, because it seems like such a big issue, but uh other micro things like pollution, uh Education, Health Care, crime, Etc.... again it's all about how do we manage? To mitigate pollution, you know, how do we, how do we, how do we distribute education? Do we uh do we do vouchers, do we just do a blanket provision? Do we privatize everything? Same thing with health care... how do we manage crime? How do we manage our police force? How much time and money do we spend training them? Things like that. uh so these are microtype questions, that can all fit uh within this this scope. On the other hand there's macroeconomics. Macroeconomics is uh the economy as a whole. macroeconomics deals with Aggregates. Aggregates are also known as total amounts or Aggregates, total quantities uh so instead of the individual look, we pull back a little and we lose sight of the individuals, and so you might see the neighborhood... but even better, in terms of macro view, you pull back even further, uh you get to see even more... so macro types of uh uh discussion points... would be things like inflation or deflation, uh typical ones... economic growth, unemployment, other macro issues, fiscal and monetary policy, International Trade Etc. These are the macroeconomic ideas. uh Now this chapter introduces the concept of what an economic system is to do... an economic system is to answer three basic questions... the three basic questions, for the first one i,s what and how much of a good to produce for society. Okay um the second one would be, how to produce for society, and the third one is for whom to produce it... um and so the economic system uh looks to address this. uh To do things to to assemble uh resources and to assemble our endowments of natural resources and so forth, and to get out what we need to society. uh There's a couple ways uh we can classify the methods of delivery system... one is a centralized, uh or otherwise known as a 'command and control' system versus the 'market system' or the 'price system '...so uh centralized command and control... centralized command and control tends to be associated with a lot of inefficiencies... that's when you have um, that's when you have people in charge making decisions for communities ...uh sometimes with input, sometimes without input, sometimes with input but handling it wrong, and making just bad decisions... um back in the cold war with the Soviet Union Russia communist system, uh the the propaganda coming out of there was that there was a lot of lines people waiting in, lines for everything... you would work your day then you would after that, you would go and wait in line... wait in line for a 45 minutes or hours.... for things like toilet paper, and then you would go look for uh vodka, Waii in line for that,or you would look for shoes... wait in line for that, and it was a very inefficient system, because if you were waiting for shoes you waited for hour, you got up there and it turns out that they didn't have your size... maybe you were size 12 and they had size 9 and size 14... uh the reason why it was so bad is because there was no information feedback going into a centralized command and control... you have decision makers who, to make a one-way decision and issue that, in a sense, and that's that's how much, how it's produced, how much one Community gets, and so forth and so on... so it's turned... it's a very inefficient system and it led to a lot of uh shortages and then some places, surpluses... and essentially just all kinds of inefficiencies. On the other hand we have the 'Market based system' where we have interactions of buyers and sellers... we call it also the 'price system'...why do we call it the price system? Price is a very important concept, when it comes down to an information relaying device... um and it relays a lot of information... price, high prices versus low prices, usually, for example, indicates things that are relatively uh scarce versus what are relatively abundant respectively... so uh that's uh that's what a market system, and with that feedback uh of the buyers and sellers interacting we tend to have what we call call equilibrium, uh we, where we find uh a situation where the suppliers like to, uh, will meet demanders, uh given a certain price, and and there's some efficiency achieved... we don't have shortages hopefully, or theoretically we don't have shortages, or we don't have surpluses... Of course we're going to talk about market failures as well, that does lead to shortages, or or surpluses of either activities or goods and services and so forth. But essentially a market system, price system ,is the efficient one of the two, um and uh like I said, which one are we? Well actually I said we're the price, Market based system, but in reality uh we're a blend... uh we're... there's centralized command and control... if you recall during hurricanes or pandemics, uh when things are in shortage, often times if we're a pure market-based system, it's based on supply and demand... and during a hurricane, uh bottled water, rice, toilet paper especially, and things like that, they're in high demand... and what would happen to the price normally, if it was totally free and unregulated? Prices would Skyrocket... because of demand... but we have laws against price gouging, in terms... in times of disaster, so therefore, you know there is some command and control in there... there's other other probably a little bit better uh examples, but I think that gives you the idea that... it's not... we're not a a pure Market price system. um One of the important assumptions that we operate under in economics, and this helps to uh kind of keep perspective of people's behaviors, and we try not to get too much into psychology issues... uh we don't we don't burden ourselves with the thought processes. We like to look at outcomes... so what we also like to consider then, is that people are considered 'rational and self-interested' individuals... that's one of the assumptions that we make. And when you make that assumption - that people are rational and self-interested individuals, it does remove a lot of uh superfluous noise and discussion that we can get lost in... um so looking at this at this quote from Adam Smith in 1776 from his book The Wealth of Nations, " it is not from the benevolence of the butcher the Brewer or the baker that we expect our dinner but from the regard to their own interest,"... so here you see in this picture, you see a steak, you see some wine, you see some um bread, or whatever else in there. And so looking at this uh statement, what it's essentially saying is that you don't have, uh you don't have beef on your plate because the butcher's benevent, you don't have Ale in your mug or or beer in your pint, or or wine in your glass, because the Brewer is is a benevolent... you don't have bread on your plate because of the same thing. You have it because they are pursuing their own self-interest. They're trying to make a living. They're trying to make profits. And for that reason you have what you need in front of you to eat. So the economic system of people being 'rational and self-interested'... pursuing their own goals actually fulfills other purposes as an economy... not just their self-serving ones. So this concept kind of takes us to the concept of the Invisible Hand....uh the Invisible Hand is the guiding force... this invisible hand is sort of that 'pursuit of self-interest'... it's the hand that guides and assembles and gets the engines of the economy going... that people are pursuing, their self-interest, and they can achieve, so the Invisible Hand effect is getting that going. um So rationality assumption, let's add this concept...is that people do not intentionally make themselves worse off. um You know even though we see people doing what we consider sometimes irrational or just crazy or just stupid you know you might question them, you might judge them, but as an economist you might want to stop, take a step back, and say... "well let's just assume that they're rational that they're not intentionally make themselves worse off"... There was a big uh a big media uh focus on Waimea Bay rock, there was a rock jumping competition in the middle of our pandemic, and there were pictures of people crowded onto the rock sharing spaces, and getting too close to each other, and so forth... and a lot of people said these people are really crazy, they're stupid, um you know, are they really irrational in doing something like that? Well we'll just assume that they did not intentionally make themselves worse off. Someone might answer that, and say "well what about those people who have those pandemic parties where there's someone who's sick and they party uh together to to infect themselves?" and to... maybe it's to create some kind of herd immunity .Well that just answers it... they're not trying to make themselves worse off, they're actually trying to make themselves better off by doing so. Were they wrong? Were they...were they what you would consider to be stupid? Maybe. Maybe they were wrong and stupid... but they didn't intentionally be wrong and stupid. They intentionally did the action, but they weren't intentionally being stupid and irrational... that's... so, being 'rational' that 'we do not intentionally make themselves worth off' does not mean that we don't make mistakes. We do make mistakes and so sometimes we have to re-evaluate and go back to the old drawing board. So try not to get in lost in discussion when you're discussing certain people and their behaviors... uh they may be walking around with a tinfoil hat literally placed on their head, pushing a shopping cart filled with a whole bunch of items that you have no idea why they're why they're caring around, around the street... Well they have their reasons. They're not intentionally making themselves worse off... so essentially people behave and they respond to incentives... that self-interest. Now we all have different carrots... we all have different interests that we uh that motivates us... uh some have money, some have Prestige, uh some are interested in wealth, humanitarian, friendship, power, Etc... uh For me, I originally uh uh, I originally thought I wanted to get into business. I thought money was was the way to go in my life, uh so working in LA, in the suit and tie thing, um you know, the money was pretty good. It actually was... really good and when I came to the university to teach I took a 66% pay cut to teach... uh some people would say, hey that's irrational, that's crazy... but no, I was responding to my incentives, serving my self-interests, not intentionally making myself work thought worse off. I was pursuing what I wanted to pursue. I had a different "carrot" than others, so to speak... um so, in economics we're... and especially in this class, I'm going to be using positive and negative incentives uh to achieve goals. We have positive incentives, we have rewards, we have bonuses. We have negatives incentives, we have incarceration, we have uhhhh suspensions, and things like that. All these are things to help people behave in a certain way that we're trying to achieve, given a certain policy goal. In this chapter we also talk about uh the concept of bounded rationality... the field of Economics, behavioral economics in particular. So here we have this idea of uh psychological limitations and complications, make it very challenging for us to make completely informed decisions. So we're nearly, but not fully rational. So there's bounds to our rationality, there's limits to our rationality, so because of this we tend to we use 'rules of thumb' to make our decisions. So, for... here's here's a a real basic example, we, my wife and I, my wife likes to entertain, we like to throw a lot of parties I guess, and so whenever there's a party she would, she would, you know... plan the list and so forth. And she'd send me out for things, and sometimes we we' need ice before for the party. So she'd say "Hey you know, uh go go run out to Costco to get ice cuz it's cheaper," you know and uh, I oftentimes would respond to this repeated question or this repeated request, "you know um, I could I could go run out to Costco and it might be cheaper," I mean how much is it cheap how much cheaper is it for the big bag at Costco it might be a dollar or something less per bag, "but you know I got to drive a lot uh farther uh... when I get on the road there's a percentage chance that, you know, I might get get in an accident, and when you get in an accident there's the average average cost for an accident is 'this much', you multiply that by the chance of getting into the accident, so forth ,then you know you go, go on and you get this 'expected value'," this is something you would do in my in my statistics class, calculate expected value given the probabilities and the payouts, or or or payoffs and so forth, um and then I said, "you know it's just not worth it it's not worth the extra risk risk of all those a aspects just to save a little money." So here I am trying to be not so' bounded' in my rationality. I try to incorporate as much of much relevant information as I can, but you know what I, you can't do everything, uh you can't sometimes I might say uh, you know I might go, and it turns out that it was a very bad decision for a bunch of reasons. Maybe it would have been good but the time of day that I didn't consider might have been bad... uh I didn't consider to check uh the the news reports to see if there was a big uh water main break on on the highway or something like that, so you know, we're all we all have limitations and it forces us into this uh situation of uh 'bounded rationality.'' Now moving on to consider uh the overall field of Economics as a science, economics uses models and theories. Our economic models and theories are essentially simplification of the real world. So these simplifications of the real world, um we use these models to predict and explain economic phenomenon. And one of the important uh conditions that you apply in this simplification of a real world ,is the idea of ceteris paribus, the ceteris paribus assumption. Couple ways we can say that ceteris paribus assumption is that "nothing changes but the factor or factors being studied." uh Another way of saying that is "holding all other variables equal, or constant," ceteris paribus.... uh so anyway, Latin saying ,um and that's very important, because what we're trying to do is, we're trying to look at essential variables only, and we want to see the effect that the important ones have... economics is what we call an empirical science, meaning we use empirical, observable, real world data to test the validity of our theories and models... and essentially, uh that is the sorry jump forward that is um an important uh measuring stick of the value of a model. An economic model's value does not come from how sophisticated or complicated the math is, and and and as real as realistic, uh uh relative to the world, in terms of, including all the variables possible... no, they're simplifications of the real world, they're abstractions from The Real World... in fact an economics model and theory... some of the best ones are very unrealistic in terms of the real world, because it takes out a lot of factors that could come into play but they don't....we we leave out a lot of things, but we try focus on just the essentials. And that's uh... so the true value comes from its ability to predict and explain. Not the sophisticated design. Okay um moving on to other concepts... uh we also need to distinguish between the idea of wants versus needs in economics... um Needs, this first one, in an economic perspective it's objectively undefinable. A need could be a wish, it could be a want, it even could be a life-saving necessity... um but of the term 'needs' is the least important one in this class... we don't talk about "needs," we generally go back to "wants"... the concept of wants... wants are desirable goods. And we also just need to keep in mind, "wants" are what... are essentially... people have unlimited wants. And it's because we want everything... if income was unlimited, we want all the good things that we want... desirable good things, um if income was unlimited. So so anyway, um you might hear a friend say "you know what I need a new car, man I got to drive in from, I got to drive in from Waianae to get to class, so I really need a car you know,"... what if you really wanted to be a jerk, you could say "no you don't need a car you just, you know, you "want" a car, uh you could get out there and just start hitchhiking really early, you'll get to campus ."or you know, "get up really early and catch the bus. I know it's only 2 and 1/ half hours to get into town from Waianae on a bus ride," things like that you know if you want to be a jerk, probably get in a fight, but anyway, um that's the difference. So we don't focus on the concept of "needs"... we we focus on the idea of" wants," and we we speak of things in terms of wants, um Economics... so we are really looking at measuring behavior... we're looking at the outcomes. We leave the other social sciences to deal with thoughts. um What we look at... is the measure measurable behavior of people... and that removes a lot of, in what we consider, maybe not totally unnecessary, but for our purposes unnecessary discussion. We'll leave it for 'necessary' discussion for the other fields in social science, or others, um So when we talk about economic discussions, we do have to distinguish between Positive versus Normative economic statements. Now positive economic statements are purely descriptive statements. They're essentially statements of 'what is'... whereas normative economic statements, they contain value judgments, and how things 'should be' ...um ideally an economist doesn't stray too far from the positive economic side... uh we like to deal with purely descriptive statements. "If A occurs B will follow"... that's a good uh typical uh 'positive' type of layout or format... um we tend to uh stray too much into the normative side. You have a lot of economists that are associated with uh political parties, political side, whether it be liberal or conservative, and they're known for that. They write articles for big publications, and uh you know they put forth uh 'positive' economic issues, concepts, but they also really build in a lot of normative statements as well. um I think in my opinion, in my opinion, and many, I think in an Ideal World an economist will deal with the Positive.... cause and effect... and they'll let a healthy functioning political party system, which we do not have in my opinion right now uh, and they, but they would let that political uh politicians go out there and get the will of the constituents, based on the votes, and their opinions, and make the normative statements, like "we should ..." Well let's get into some of them. Let's uh uh let's talk about one uh statement. "As a nation we should devote more resources to reducing poverty." uh What is that one? Is that a positive? Is that a Normative ? Well that word "should" takes us... makes it very clear it's a normative economic statement. So that's something that a politician should go out there to their constituents, and and determine how they feel. "Should we devote more resources to reducing poverty?" An economist should go and say "well if we devote more resources to reducing poverty these are the things that will have to be sacrificed." That's very, a very uh nonsubjective... it's a very objective statement, it's a cause and effect. We don't have an opinion of it, supposedly, or ideally , and we present what 'what is' and then the other side adds a little bit more dimension on the normative side. Here's another statement, "When the FED increases the money supply interest rates decrease." um You know, but there 's a lot of economists talking about the negative effects, "we shouldn't be having such a loose money supply right now." "We shouldn't have such low interest rates." "We shouldn't have so much liquidity pumped into our economy right now, we're creating real big problems for us in the future." I think it's better if they if they talk about what are the problems that they're creating in the future and then we decide... we let people, we let the community and our decision makers decide which route to take. Is it good to kind "kick the can" of debt and future problems down the road to deal with some very pressing issues we have now? um aAe we doing too much? too little? Things like that. Those are uh other areas, but economists are supposed to understand in effect, and be very clear with that, and um you know, that's uh that's probably the ideal way to look at it. um Another one, "Increases in energy costs decreases the quantity supplied by the firm, ceteris paribus." That's another positive one. It's not saying if this is "good," if this is "bad." It's just giving, "If A occurs B will follow." Anyway um that wraps up the majority of chapter 1, so hopefully this helped uh get you guys a little bit acquainted with some of the the concepts and ideas and the approaches and methods that we're going to be looking at in economics. And hopefully this will solidify and uh as we move forward it'll it'll give some good uh uh direction to the focus of how you approach the material. Anyway I hope everyone's doing well take care and uh I will talk to you guys soon, aloha.