Problems that econ can address¶

Scarce time
- how do i decide how much time to work and how much time to study
Resources are scarce
- How do i organize my team to maximize my revenues?
Our economy is in a recession and many people are out of work
- How do we use our recources to turn the economy around and help people get jobs?

Economic data¶

Econ data refers to quantitative and qualitative information about the economy
Quantatitive data
- refers to numbers
  - wages
  - revenues
  - prices
    - very common in econ
Qualitative data
- qualities or characteristics
  - occupation
  - race
  - sex
  - religion
  - political affiliation
  - origin country
    - this type of data is becoming increasingly common in econ

Division of Labor¶

According to Adam Smith
- the most importation of examples of scarce resource is time
  - if a business has a week to fill an order, time becomes scarce
- ex
  - introduce the Division of Labor
    - have each worker specialize in one step
    - ex
      - a doctors office has one worker handle scheduling and another handle insurance claims
      - a family has one person drive kids to school and anothe rperson buy groceries for dinner
      - a coffee shop has one worker take orders from customers and another worker make the coffee
      - a land scaping company has one worker handle the lawn and another worker handle the trees

Why does division of labor work?¶

Specialization
etc (fast)

Microeconomics vs Macroeconomics¶

Microeconomics
- individual agents
Macroeconomics
- the entire economy as a whole
ex
- micro
  - what determines how households spend their budgets
  - how do people decide whether to work and how much to work
  - how do people decide how much to save
  - how do business owners decide how many workers to hire?
- macro
  - what causes the economy to slow down?
  - what determinds how many workers are employed in the economy
  - what causes prices to go up?
  - (how) should governments support their economy?

Economics models¶

Econ models are simplified ways of thinking about the economy
since the economy is so complex, economists have found ways of "boiling down" the relationships in it
this "boiling down" is called modeling
- imagine building a model airplane or train
  - its not the exact same thing but it gives a good estimate

Circular Flow Diagram¶

graph LR B((Firms/Businesses)) -- Goods and Services --> A((Households)) B -- Wages, Salaries and benefits --> A A -- Labor Services --> B A -- Payment for Goods and Services --> B

Example of an economic model. the circular flow diagram describes how goods and services and income flow through an economy

Households are groups of people like families or people living alone or with others
Firms are businesses

(personal businesses act like households and firms)

How are economies organized?¶

For most people, econ decisions are primarily made in markets
Markets are guided by prices and quantities
- people decide how much of something to buy based on its price
  - both jobs and goods

Market organize most, but not all econ activity¶

Summary¶

Economics is the study of

The concept of tradeoff¶

We defined economics as decision under conditions of scarcity
a tradeoff is a situation in which choosing one of something leads to less of something else
- ex
  - producing more gives us more goods and services, but possibly at the expense of addition pollution
  - working more gives you more money/income, but less time to rest or study for school
  - hiring more workers allows you to create/sell more output, but costs you more to operate

Breaking down the tradeoff concept¶

When economics study choices (consumption behavior, macro policy choices, etc.), they work with models
- they develop a model, or a simplified view to try to understand how people make their choices
- two examples today
  - Budget constraint from microeconomy
  - Production Possibilist Frontier (aka "PPF") from macroeconomy

How individuals make choices based on budget constraint¶

ex
- Alex only consumes two goods, bananas and blueberries.
  - bananas cost $2 and blueberries cost $.50 each
- suppose $10 in income
- with his budget, he can either purchases at most 5 bananas, or at most 20 blueberries
- with this information, we can set up a budget constraint which gives a collection of all the different choices alexander can make

Quantifying tradeoffs¶

Suppose Alex is at a "best" decision (ie: he spends his entire budget) of 3 bananas, and 8 blueberries
but suppose that Alex is getting sick of bananas, he'd prefer to consume 1 less banana
how many more blueberries could he consume?
- 1 more blueberry?
- 2?
- 3?
- 4?
- or more?
  - examples branches off to more complex ideas like "how much does it cost to take 2 hours off of work to go to a party"
- Opportunity cost
  - 1 banana is 4 blueberries
  - 1 blueberry is 1/4 banana
  - $\$2*1$ is $\$0.50*4$

Tradeoffs at the macro level¶

The concept of tradeoff is widely applicable
the ex we saw was microeconomics
Macroeconomics also has tradeoffs
- ex
  - the country can either provide a lot of healthcare, or a lot of education, but its hard to provide both
  - there are constraints on the size of the trained workforce, and of course, people's needs are balanced between healthcare and education
  - further, it can be hard to shift to a new spot on the curve quickly, because of the time it takes to train workers and allocate resources to a different industry

Summary¶

Tradeoffs are very common in economics
- they occur at the micro and macro level
Tradeoffs can be quantified as opportunity costs, which tell you how much of something you need to give up in order to get more of something else