Lecture 1: The Economic ProblemOutline:
1. Different theoretical perspectives in economics.
a. Different "schools of thought" in economics
b. Different definitions of economics.
2. "The economic problem" in neoclassical economics.
a. Human wants
b. Resources
c. Scarcity
d. Choice
e. Opportunity Cost
3. The Production Possibility Frontier (PPF) as a model of "the economic problem"
4. The four main economic problems
5. Microeconomics versus macroeconomics
6. Economic systems
a. Definition
b. Types of economic systems
c. Capitalism
7. New Field Guide: 1.1, 6.1, 6.3, 7.8, 9.4, 10.2
1. Different theoretical perspectives on economics:
a. Schools of thought
* There are different "schools of thought" in economics.
* Each "school" has a different view of how the economy functions.
* Some of the more prominent "schools of thought" are:
Neoclassical
Marxian
Institutionalist
Feminist
Ecological
b. Definitions of economics
* Each "school" defines the study of economics differently.
Question: Which of the following definitions is associated with which "school of thought"?
i. Economics is the study of the use of scarce resources to satisfy unlimited human wants.
ii. Economics is the study of how humans, interacting with one another and the environment, provide for their own survival and well-being.
iii. Economics is the study of how habits, patterns of activity, and patterns of thought, guide people's behavior.
iv. Economics is the study of the social relations of production.
v. Economics is the study of the relationship between social systems and ecological systems in sustaining human life.
2. The economic problem in neoclassical economics: A problem of SCARCITY
Human Wants > Resources
(Unlimited) (Limited)
What are these things?
Human wants: These are the things that human beings need for survival and want in addition to what is needed for survival.
Note: Neoclassical economists assume that human wants are met by consuming products.
Products: Goods and services that are produced from resources.
Goods which are tangibles such as food, clothing, housing.
Services which are intangibles such as education, housecleaning, child care.
Resources: Natural Resources (N) such as land, rivers, forests, minerals.
Labor (L) which includes mental and physical human capabilities.
Capital (K) such as tools, machinery, buildings (Sometimes also called manufactured resources).
What is the economic problem?
Scarcity: Insufficient resources to meet all human wants
Choice: Scarcity necessitates the making of choices - all societies must decide what wants will be satisfied and whose wants will be satisfied.
Opportunity cost: Choice implies the existence of cost - the opportunity cost of using resources for one purpose is the benefit that is given up by not using them in an alternative way.
Question: What is the opportunity cost of choosing to skip class?
3. The Production Possibility Frontier (PPF)
* This is a tool that economists use to portray the economic problem in simple graphical terms.
Example: Education versus Nuclear Weapons
Definition:
The PPF shows all the combinations of two goods that a society can produce when all its resources are fully utilized.
Features of the PPF:
Boundary - separates attainable combinations (A,B,C) of goods from unattainable combinations (D)
Moving along the boundary - shows the necessity of making choices (A versus B)
Negative slope - shows opportunity cost - when all resources are fully utilized it is not possible to produce more of one good without producing less of the other (A to B means more nuclear weapons and less education)
Question: What is the opportunity cost of moving from point A to point B?
Question: What is the opportunity cost of moving from point C to point B?
Shape of the PPF - the bowed-out shape tells us that opportunity cost is increasing - as we produce more and more of one good the opportunity cost of doing so increasing. The explanation is that resources are not equally good at producing both goods.
Question: If opportunity cost was constant, what shape would the PPF be?
Shifting the PPF - factors that shift the PPF outward include more resources and improvements in technology.
Question: If improvements in technology are specific to nuclear weapons, how will the PPF shift outward?
4. Four fundamental economic problems:
* Neoclassical economics maintains that all economic systems must find ways of addressing four fundamental economic problems.
Microeconomic problems:
1. What goods and services are produced and how are they produced?
2. What goods and services are consumed and by whom are they consumed?
Macroeconomic problems:
3. How much unemployment and inflation exist?
4. Is productive capacity growing?
5. Microeconomics versus Macroeconomics:
* Microeconomics is the study of economic decision making by, and economic outcomes for individual consumers, firms and the government.
* Macroeconomics is the study aggregate, economy wide decision making and aggregate, economy wide outcomes.
6. Economic Systems:
Definition:
An economic system is a method of coordinating economic decisions.
Types of economic systems:
* In theory there are three pure types of economic systems defined by their method of coordinating economic activities:
* In practice all economic systems contain elements of all three pure types of systems - hence in practice all economic systems are MIXED.
* In practice an economic system is defined in terms of one of these three types meaning that is the predominant mechanism for coordinating economic activities.
Traditional - economic behavior is based primarily upon tradition, custom, and habit.
Examples: earlier societies such as feudal societies in Europe, some developing countries.
Command - economic behavior is determined by some central authority, usually the government, which makes economic decisions in a centralized way.
Examples: a decade ago almost one third of the world - the Soviet Union and Eastern Europe - lived under command systems, today China and Cuba still do.
Market - economic behavior is determined by the individual, independent, decentralized decisions of people in response to market prices.
Examples: the U.S., France, U.K, Japan.
Question: What are some of the traditional, command and market elements in the U.S. economy?
Definition:
Capitalism describes a market economic system, characterized by private ownership of the means of production (resources).