About me:

 Christopher Goemans
 (call me Chris)
 Department of Agricultural and Resource
Economics, Colorado State University
 Originally from Bakersfield, California
 Ph.D. from the University of Colorado
 Love to Ski
 Primary research area: Water Resource
Economics

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 About the Course:
 Course Website:
 https://colostate.instructure.com/courses/136574
 Course Syllabus
 What is the key to this being a good course?
 Please speak up!!!
 Ask questions!
 Share your experiences!

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>
> First Principles and
Basic Terms

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What is Economics?
Economics is the study of
1. money.
2. stock markets.
3. the economy.
4. choice.

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What is Economics?
Economics is the study of
1. money.
2. stock markets.
3. the economy.
4. Choice
Economics is the study of how individuals or societies
choose to use the scarce (limited) resources to try to
satisfy their unlimited wants.
The Scarcity Principle: People have unlimited wants
and limited resources. Having more of one good
means having less of another. (AKA: No Free-Lunch)
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 Market Economy and “Invisible Hand”
 Market Economy:
Decentralized decision-making.
 Invisible Hand (Adam Smith):
“It is not from the benevolence of the butcher, the
brewer, or the baker that we expect our dinner, but
from their regard of their own interest.”
 Market economy manages to harness the power of
self-interest for the good of society.
 But there can be market failures!

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What are Micro- and Macroeconomics?
Microeconomics

is the study of the individual choices/decisions of

people and groups (e.g., businesses) and the
interactions of those decisions (e.g., in markets).
Macroeconomics

is the study of the national economy and the global

economy and the way that economic aggregates grow
and fluctuate.

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What are Micro- and Macroeconomics?
Microeconomics

is the study of the individual choices/decisions of

people and groups (e.g., businesses) and the
interactions of those decisions (e.g., in markets).
Macroeconomics

is the study of the national economy and the global

economy and the way that economic aggregates grow
and fluctuate.

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Normative and Positive Economics

 Normative economic  Positive economic

principle says how principle predicts how
people should behave people will behave
 Gas prices are too  The average price of

high gasoline in May 2010

 Building a space base was higher than in
on the moon will cost May 2009
too much  Building a space base

on the moon will cost

more than the shuttle
program

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14 Key Concepts
 6 concepts about individual choice
 5 concepts about individual interaction

 3 concepts about economy-wide interaction

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 1: Resources are scarce
Resources are scarce – the quantity available isn’t
large enough to satisfy all productive uses.

A resource is anything that can be used to produce

something else.
Examples: Land, labor, capital
but also: time, attention, …

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 2: Incentive Principle

Incentives are central to people's choices

Benefits Costs
Actions are more likely Actions are less likely
to be taken if their to be taken if their
benefits rise costs rise

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 3: The real cost of something is what you must
give up to get it
The real cost of an item is its opportunity cost:
what you must give up in order to get it.

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.

Careful:
the opposite of opportunity costs are sunk
costs which are costs that were incurred in the past
and cannot be recovered anymore. They exist no
matter whether a certain activity is conducted or not.
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Example for opportunity costs

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Practice Question

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Example for opportunity costs

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4:
“How much?” is a decision at the margin

You make a trade-off when you compare the costs

with the benefits of doing something.

Decisions about whether to do a bit more or a bit less

of an activity are marginal decisions.

Making trade-offs at the margin: comparing the costs

and benefits of doing a little bit more of an activity
versus doing a little bit less.

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 5: The Cost-Benefit Principle
 Take an action if and only if the extra benefits are at
least as great as the extra costs
 Costs and benefits are not just money

Marginal
Benefits

Marginal
Costs

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Practice Question

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Marginal benefits and marginal costs

 Marginal Cost of an activity: the additional cost from

conducting one more unit of this activity.

 Marginal Benefit of an activity: the additional benefit

from conducting one more unit of this activity.

(as opposed to
Average cost of an activity: total cost divided by total number of units of
this activity.
Average benefit of an activity: total benefit divided by total number of
units of this activity.)

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6: People usually take advantage of opportunities
to make themselves better off

Anincentive is anything that offers rewards to

people who change their behavior.
(including negative rewards)
People respond to these incentives.

Examples:???

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Practice Question

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 Economic Surplus
 The economic surplus of an action is equal to its
benefit minus its costs

Total
Benefit

Total Cost

Total
Surplus
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Practice Question

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7: There are gains from trade

Ina market economy, individuals engage in trade:

They provide goods and services to others and
receive goods and services in return.
Why would people trade?

There are gains from trade: people can get more

of what they want through trade than they could if
they tried to be self-sufficient.

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8: Markets move toward equilibrium

An economic situation is in equilibrium when no

individual would be better off doing something
different.

Any time there is a change, the economy will move to

a new equilibrium.

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9: Resources should be used as efficiently as
possible to achieve society’s goals
Aneconomy is efficient if it takes all opportunities to
make some people better off without making other
people worse off.
Shouldeconomic policy makers always strive to achieve
economic efficiency?

Equity means that everyone gets his or her fair

share. Since people can disagree about what’s “fair,”
equity isn’t as well-defined a concept as efficiency.

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10: Markets usually (but not always) lead to
efficiency
The incentives built into a market economy
already ensure that resources are usually put to
good use.
Opportunities to make people better off are not wasted.
Exceptions: market failure, the individual pursuit
of self-interest found in markets makes society
worse off
 in such cases, the market outcome is
inefficient.

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11: When markets don’t achieve efficiency
government intervention can improve society’s
welfare.
Why do markets fail?

Individual actions have side effects not taken into

account by the market (externalities).

One party prevents mutually beneficial trades from

occurring in the attempt to capture a greater share of

resources for itself.
Some goods cannot be efficiently management by

markets.
 Examples
 Traffic Jams
 Aquifers

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 Economy-wide interactions
 12: One person’s spending is another person’s
income
 13: Overall spending sometimes gets out of line
with the economy’s productive capacity.
 14: Government policies can change spending.

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 Economic Models
 Simplifying assumptions
 Which aspects of the decision are absolutely
essential?
 Which aspects are irrelevant?
 Abstract representation of key relationships

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How do I become an “economic naturalist”?

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►ECONOMICS IN ACTION

Chapter 1: Appendix

Working with Equations, Graphs, and

Tables

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 Definitions
 Equation
 Variable
 Dependent variable
 Independent variable
 Parameter (constant)
 Slope
 Intercept

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 From Words to an Equation
 Identify the variables
 Estimate the parameters
 Slope
 Intercept
 Write the equation
 Example: Phone bill is $5 per month plus 10 cents
per minute
B = 5 + 0.10 T

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 From Equation to Graph

B = 5 + 0.10 T
 Draw and label axes B D
 Horizontal is 12
independent variable
C
 Vertical is dependent 8
variable A
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5
 To graph,
 Plot the intercept
T
 Plot one other 10 30 70
point
 Connect the
points

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 Changes in the Intercept

 An increase in the
intercept shifts the
curve up
 Slope is unchanged
 Caused by an increase
in the monthly fee
 A decrease in
the intercept
shifts the curve
down
 Slope is
unchanged

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 Changes in the Slope

 An increase in the slope makes the curve steeper

 Intercept is unchanged
 Caused by an increase in the per minute fee
 A decrease in the
slope makes the
curve flatter
 Intercept is
unchanged

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 From Table to Graph

Time
10 20 30 40
(minutes/month)
Bill
$10.50 $11.00 $11.50 $12.00
($/month)

 Identify variables
 Independent
 Dependent
 Label axes
 Plot points
 Connect points

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