Principles of Microeconomics – Mr. Lilly

Topic 2 Slide Show

Positive Questions and Normative Questions

Positive Questions

•What is the extent of hunger and malnutrition in Africa?

•How would the African peoples’ health and behavior change if international food aid to African nations was doubled?  How much would their GDP per capita change?

Normative Questions

•How much effort should be given by the developed nations to hunger reduction in Africa?

•What kind of effort should be given?

•By whom?

The Scope of Economics

Early economists asked:

•How should the economy and government be structured if our goal is to achieve maximum collective human happiness?

But happiness cannot be reliably measured directly, so neoclassical economists decided to use the value of the things people buy as an estimate of their happiness.  This has resulted in several common misunderstandings.

False Conclusions Often Drawn from Neoclassical Economics

•GDP per capita is the only measure needed, and efficiency is the only goal needed to ensure maximum happiness in society.

•You can be as selfish as you want in your economic interactions with others.  The “invisible hand” will ensure that your selfishness is converted into maximum social good.

A Sample List of Our Final Goals

•Maximum human happiness.

•A society that is just.

•A society that is sustainable.

What Makes People Happy?
Answer:  Getting Their Needs Met

•Material needs:  Getting a slice of the good life for yourself.

•Social needs: To feel needed by others and appreciated by others for the help you give.  To feel you fit in to your society and your world.  To feel you belong, are loved, and are lovable.

•Esteem needs: To be looked up to by others.  To be able to boss others around.  To have more than everybody else.

•Justice needs: To feel that opportunities and outcomes are fair both for you and for others you care about.

Tension Within the Individual

The Duality of Human Nature

Economic Benefits of Ethical Behavior

Ethical behavior has both direct and indirect benefits.

•First, it helps us directly satisfy our social and justice needs

•Second, it indirectly helps us produce more wealth by reducing transaction costs.

Negative Externalities

Negative externalities:  Harmful side-effects of an economic transaction that affect persons or entities that are not parties to the economic portion of the transaction.

Examples:

•A manufacturing firm dumping pollutants in a river.

•Your upstairs neighbor listening to his music so loud you can’t study.

•An employer setting up work schedules that have a negative effect on the families of the employees.

Positive Externalities

Positive externalities:  Beneficial side-effects of economic activity that accrue largely to persons or entities that are not among the economic actors directly involved in the activity.

Examples:

•A beekeeper’s activity produces benefits to nearby farmers.

•A person keeping a flower garden in their front yard that pleases passers-by.

More Examples of Positive Externalities

•Parents raising children to become productive contributors to society.

•The Delancey Street program in San Francisco gives convicted criminals opportunities and tools to turn their lives around.

•When individual economic actors in a society treat each other in an honest and forthright manner, trust increases.  Economic transaction costs are reduced, and the number and variety of mutually beneficial exchanges increases.

Key Element of Economics #4

“Transaction costs are an obstacle to exchange; reducing this obstacle will help promote economic progress.”

•Most voluntary exchanges increase the well-being of both parties.

•Therefore the more exchanges, the better!

•With rare exceptions, anything that reduces the number of exchanges per period will retard wealth creation.

Transaction Costs Reduce Beneficial Exchanges

Gwartney and Stroup mention only two kinds of transaction cost barriers:

•Lack of adequate infrastructure

•Taxes, price controls, and government regulations

But these things also raise transaction costs:

•The percentage of cheaters in society

•The difficulty of catching cheaters

•The difficulty of identifying cheaters

Discussion Questions

Open your reader to page 1-6, Table 1.1

•Which of the reasons listed help explain why you are taking this class?

•Which explains the story in the “Commentary: Goals Beyond Survival” box on page 1-6?

•When a heroin user buys a fix from his dealer, is this a voluntary transaction?

•Does heroin add to society’s well-being?  Why or why not?

Key Element of Economics #10

“Ignoring secondary effects and long-term consequences is the most common source of error in economics.”

•See “Commentary: Goals Beyond Efficiency” on page 1-4.

•Gwartney and Stroup pp. 27-29 is optional right now.  It will be assigned in topic 6.

The Four Essential Economic Activities

•Resource maintenance

And the

•Production

•Distribution and

•Consumption

of goods and services

The Three Basic Economic Questions

•What should be produced and what should be maintained?

•There is a tension between production and resource maintenance.

•How should production and maintenance be accomplished?

•For whom should economic activity be undertaken?

•How should the wealth created by economic activity be distributed among the members of society?

The Four Modes of Economic Organization

•Customary

•Example: economic interactions within the family.

•Consensual

•Example: Kibbutzim, Amish communities.

•Administrative

•Through Exchange (Markets)