FIRST PRINCIPLES
Common Ground
One must choose
David Hume 1750-1776 Adam Smith
Thomas Malthus (first demographer): typical English couple have 6 children
exponential growth. He thought that we were going to die because we were not going
to have enough resources.
To understand how an economy works, you need to understand more than how
individuals make choices. Through the study of economics, we will discover common
principles about individual choice and interaction.
OBJECTIVES: what is economics, three principles (A.Individual Choise, B. Choice
Interaction, C. Economy-wide interaction)
What is economics?
Economics: social science that studies the production, distribution and consumption of
goods and services from the Greek oikonomia meaning administration or management
of a household
Economy: system for coordinating society’s productive activities
Market economy: an economy in which decisions about production and consumption
are made by individual producers and consumers
Definitions
Microeconomics: branch of economics concerned with how people make
decisions and how these decisions interact
Macroeconomics: branch of economics concerned with the overall economy
Market failure: when individual pursuits of self-interest lead to bad results for
society. Ex. Pollution
Invisible hand: Refers to the idea that individual pursuit of self-interest can
lead to good results for society as a whole (pyramid)
Adam Smith 1776 An Inquiry into the Nature and Causes of 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 their regard to their own interest.”
Recession: a downturn in the economy (GDP goes down)
Economic growth: growing ability of the economy to produce goods and
services
, Three Principles:
Principle #1: Individual Choice
Individual choice is the decision by an individual of what to do, which
necessarily involves a decision of what not to do
Basic principles behind the individual choices:
A. Resources are scarce.
B. The real cost of something is what you must give up to get it.
C. “How much?” is a decision at the margin.
D. People take advantage of opportunities to make themselves better
off.
Basic Principles of Individual Choice Resources
A resource is anything that can be used to produce something else.
Ex.: Land, labor (time of workers), capital (machines)
Resources are scarce – the quantity available is not large enough to satisfy all
productive uses.
Ex.: Petroleum, lumber, intelligence
Basic Principles of Individual Choice: Opportunity Cost
The real cost of an item is its opportunity cost: what you must give up in order
to get it.
Also defined as the value of the next best alternative.
Opportunity cost is crucial to understanding individual choice:
Ex.: The cost of attending the economics class is what you must give up to be in the
classroom during the lecture.
Sleep? Watching TV? Rock climbing? Work?
All costs are ultimately opportunity costs.
Common Ground
One must choose
David Hume 1750-1776 Adam Smith
Thomas Malthus (first demographer): typical English couple have 6 children
exponential growth. He thought that we were going to die because we were not going
to have enough resources.
To understand how an economy works, you need to understand more than how
individuals make choices. Through the study of economics, we will discover common
principles about individual choice and interaction.
OBJECTIVES: what is economics, three principles (A.Individual Choise, B. Choice
Interaction, C. Economy-wide interaction)
What is economics?
Economics: social science that studies the production, distribution and consumption of
goods and services from the Greek oikonomia meaning administration or management
of a household
Economy: system for coordinating society’s productive activities
Market economy: an economy in which decisions about production and consumption
are made by individual producers and consumers
Definitions
Microeconomics: branch of economics concerned with how people make
decisions and how these decisions interact
Macroeconomics: branch of economics concerned with the overall economy
Market failure: when individual pursuits of self-interest lead to bad results for
society. Ex. Pollution
Invisible hand: Refers to the idea that individual pursuit of self-interest can
lead to good results for society as a whole (pyramid)
Adam Smith 1776 An Inquiry into the Nature and Causes of 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 their regard to their own interest.”
Recession: a downturn in the economy (GDP goes down)
Economic growth: growing ability of the economy to produce goods and
services
, Three Principles:
Principle #1: Individual Choice
Individual choice is the decision by an individual of what to do, which
necessarily involves a decision of what not to do
Basic principles behind the individual choices:
A. Resources are scarce.
B. The real cost of something is what you must give up to get it.
C. “How much?” is a decision at the margin.
D. People take advantage of opportunities to make themselves better
off.
Basic Principles of Individual Choice Resources
A resource is anything that can be used to produce something else.
Ex.: Land, labor (time of workers), capital (machines)
Resources are scarce – the quantity available is not large enough to satisfy all
productive uses.
Ex.: Petroleum, lumber, intelligence
Basic Principles of Individual Choice: Opportunity Cost
The real cost of an item is its opportunity cost: what you must give up in order
to get it.
Also defined as the value of the next best alternative.
Opportunity cost is crucial to understanding individual choice:
Ex.: The cost of attending the economics class is what you must give up to be in the
classroom during the lecture.
Sleep? Watching TV? Rock climbing? Work?
All costs are ultimately opportunity costs.
