Traditionally, most doctors in the United
States have worked in private practices that
they own by themselves or with other doctors.
But lately, an increasing number of doctors
have chosen to be salaried employees of hospitals.
Soaring health care costs have led many insurance
companies and the state and federal governments
to reduce the payments they make to doctors
in return for treating patients.
Doctors in private practice have found their
incomes fluctuating, which makes a steady
income from a hospital salary more attractive.
One rule from the healthcare changes passed
by Congress in 2010 requires doctors and hospitals
receiving payments from Medicare to convert
to electronic record keeping.
Doctors can avoid the cost of acquiring new
computer systems, and the paperwork necessitated
by other new rules, by choosing hospital employment.
Choices made by individual health care providers
to facilitate compliance with federal laws,
creates changes to the landscape of health
care decisions
we make as consumers of that care.
People must make choices as they try to attain
their goals.
The choices people make represent the trade-offs
made necessary by scarcity.
Scarcity is a situation in which unlimited
wants exceed the limited resources available
to fulfill those wants.
Economics is the study of the choices people
make to attain their goals, given the realities
of scarce resources.
An economic model is a simplified version
of reality
used to analyze real-world economic situations.
Scarcity is a regular situation in which unlimited
wants exceed the limited resources available
to fulfill those wants.
The economic systems scattered around the
world cover the spectrum from Centrally Planned,
to Mixed, and Free Enterprise economies each
approaching the solution in different ways.
These all share the challenge to decide what
to produce, how to produce it, and for whom
production is generated for.
The easiest way to distinguish between scarcity
and shortage is that scarcity is a naturally
occurring limitation on the resource that
cannot be replenished.
A shortage is a market condition of a particular
good at a particular price.
We need to look a little deeper into the ideas
of scarcity and shortage.
What makes a shortage happen?
We might ask a specialist who knows a little
something about the supply and demand curves.
Let us take a short walk with Buzz.
Tour Guide Barbie knows that a shortage caused
the 1995 market situation of Buzz Lightyear
dolls running out of stock.
Just think, "What Would Barbie Do?"
The easiest way to distinguish between the
two is that scarcity is a naturally occurring
limitation on the resource that cannot be
replenished.
A shortage is a market condition of a particular
good at a particular price like Buzz Lightyear
dolls in 1995.
A shortage occurs whenever quantity demanded
is greater than quantity supplied at the market price.
More people are willing and able to buy the
good at the current market price than what
is currently available.
When a shortage exists, the market is not
in equilibrium.
At equilibrium, the quantity demanded equals
the quantity supplied at the market price.
The term 'shortage' can be easily confused
with scarcity, which is one of the underlying
basic problems of economics.
The easiest way to distinguish between the
two is that scarcity is a naturally occurring
limitation on the resource that cannot be
replenished.
A shortage is a market condition of a particular
good at a particular price.
Over time, the good will be replenished and
the shortage condition resolved.
In this microeconomics class, we will explore
how the economy of our country exists as thousands
of small and large sectors of industry, are
intertwined with our trading partners, and
served by our government's establishment of
security, safety,
and a world class monetary system.
Our focus in microeconomics is on how households
and firms make decisions to promote and grow
their organizations.
This class will be unlike any other journey
you have made before as you discover explanations
for events happening in the world around you.
[Music]
Rational individuals weigh the benefits and
costs of each action while exercising reason,
sound judgment, and good sense.
People making rational decisions implement
actions
only when the benefits outweigh the costs.
This theme prevails through all aspects of
economics and will be revisited throughout
this course.
Economists emphasize that consumers and firms
consistently respond to economic incentives.
Many rational decisions made by people and
companies are influenced by our government,
in the form of taxation, production incentives,
and regulations placed on how businesses operate.
Incentives are seen in government efforts
to decrease the costs of producers making
certain goods and thereby the costs to consumers.
Be mindful of your responses to incentives
created to influence how you consume goods
and services.
We use the word "marginal" to mean an extra
or additional benefit or cost from making
a decision.
The optimal decision is to continue any activity
to the point where the marginal benefit equals
the marginal cost.
Marginal analysis is analysis that involves
comparing marginal benefits and marginal costs.
This marginal theme has a prominent seat in
economics and traverses into many other aspects
of study.
Become comfortable with what Marginal means
and how it is applied.
You have already conducted marginal analyses
in college as you decided how many credits
to carry this semester.
Was the marginal cost of taking one more class
worth the marginal benefit of getting it done?
Costs are not just the additional tuition
fees, it includes your most scarce resource:
your time.
Now you are thinking like an economist!
Many times, we do not recognize all incentives
we respond to.
Sometimes our decisions seem rather irrational
when viewed in hindsight.
Could it be possible that a great healthcare
system would encourage a ghastly unhealthy
obesity epidemic?
In several weeks we will study the healthcare
system of the USA and compare it to healthcare
in other countries as we look into unanticipated
consequences of the system we have.
Obesity is not the only complicating effect
of our systems, as we will learn costs to
the USA economy far exceed the costs witnessed
in other countries.
Again, cost considerations are not just about
the money we spend, it includes the marginal
costs of unanticipated obesity in the USA.
[Music]
Every society faces the economic problem that
it has only a limited amount of economic resources,
so it can produce only a limited amount of
goods and services.
Society faces trade-offs.
A trade-off is the idea that, because of scarcity,
producing more of one good or service means
producing less of another good or service.
Every activity has an opportunity cost: the
highest-valued alternative that must be given
up to engage in an activity.
Trade-offs force society to answer three fundamental
questions:
1.) What goods and services will be produced?
2.) How will the goods and services be produced?
and
3.) Who will receive the goods and services produced?
Answers to these questions are determined
by the choices
consumers, firms, and the government makes.
Each choice made comes with an opportunity
cost.
Most often, producers make goods and provide
services on the basis of their ability of
turning the product into revenue.
The decision to make one thing versus another
thing hinges on the Opportunity Cost of the
revenue foregone for the option not taken.
Sending a mission to Mars may mean we do not
achieve the cure for cancer.
Our human capital and mission funding reserves
are limited, so we need to consider all trade-offs
and select a path forward.
Firms choose how to produce the goods and
services they sell.
For example, firms often face trade-offs between
using more workers or more machines.
Decisions like these are faced by the companies
producing the product and those decisions
are made on the basis of financial incentives.
It might be a tax benefit experienced by employing
more workers, or it might be higher profits
experienced by off-shoring production to lower
cost workers in other countries.
In the United States, who receives the goods
and services produced depends largely on how
income is distributed.
An important policy question is whether the
government should intervene to make the distribution
of income more equal.
Income equality generates substantial debate
across the nation.
It becomes of question of what is income equality?
Should the High School Life Guard at the local
pool make the same amount of money as medical
doctors who studied in college for 14 years
then invested in a private practice?
We often see income equality issues in the
media
but do not always recognize what it is.
It includes discussions about marginal tax
rates set small for low income earners, but
large for high income earners.
Societies organize their economies in two
main ways.
A centrally planned economy is an economy
in which the government decides how economic
resources will be allocated.
A market economy is an economy in which the
decisions of households and firms interacting
in markets allocate economic resources.
Today, only a few small countries, such as
Cuba and North Korea,
still have completely centrally planned economies.
In a market economy, the income of an individual
is determined by the payments received for
what is sold.
Generally, the more extensive the training
a person has received and the longer the hours
the person works, the higher his income will
be.
The high rates of unemployment and business
bankruptcies during the Great Depression of
the 1930s caused a dramatic increase in government
intervention in the economy in the United
States and other market economies.
Some government intervention is designed to
raise the incomes of the elderly, the sick,
and people with limited skills.
In recent years, government intervention has
expanded to meet goals such as the protection
of the environment, the promotion of civil
rights, and the provision of medical care
to low-income people and the elderly.
Some economists argue that the extent of government
intervention makes it more accurate to refer
to the economies of the United States, Canada,
and Western Europe as mixed economies rather
than pure market economies.
A mixed economy is an economy in which most
economic decisions result from the interaction
of buyers and sellers in markets but in which
the government plays a significant role in
the allocation of resources.
Market economies tend to be more efficient
than centrally planned economies.
There are two types of efficiency.
Productive efficiency is a situation in which
a good or service is produced at the lowest
possible cost.
You might have heard of this situation involving
the selection of the low-cost bidder for a
city park project, a bridge development, or
even a space program contractor.
Yup, that is Productive Efficiency.
Allocative efficiency is a state of the economy
in which production is in accordance with
consumer preferences; in particular, every
good or service is produced up to the point
where the last unit provides a marginal benefit
to society
equal to the marginal cost of producing it.
This is why we have so many different makes
and models of cars on the roads of America.
Each consumer seems to have a different desire
for the 'dream car' and producers are happy
to make that vehicle just right for the buyer.
That is Allocative Efficiency.
Voluntary exchange is a situation that occurs
in markets when both the buyer and the seller
of a product are made better off by the transaction.
In America, voluntary exchange is the reality
we experience.
It involves the jobs we take and how we spend
our money on the goods and services we want.
In the 1990s I lived and worked in the Newly
Independent States of the Former Soviet Union
where 8 decades of a centrally planned economy
existed.
There was one brand of car on the streets,
the Moskvich, made to a uniform design and
available in 3 colors - ahh what a selection!
This was Allocative Inefficiency.
It was not about what consumers wanted, it
was what the centrally planned economy provided.
Inefficiency arises from various sources.
Sometimes governments reduce efficiency by
interfering with voluntary exchange in markets.
The production of some goods damages the environment
when firms ignore the costs of environmental damage.
In this case, government intervention can
increase efficiency.
Society may not find an efficient economic
outcome to be desirable.
Many people prefer economic outcomes they
consider fair or equitable even if these outcomes
are less efficient.
Equity is the fair distribution of economic
benefits.
Programs designed to increase equity may reduce
efficiency.
Life is full of trade-offs.
[Music]
Economists are known for using graphs, charts,
formulas and models to explain our concepts.
We follow the scientific method used by other
scientists in a wide range of studies.
This short list approach to solving and explaining
complex situations requires simplification
and streamlining.
We consider models most effective when they
aid understanding and increase awareness of
complex situations.
Consider how the model can be used in real-life
situations, how we can test its accuracy and
how modeled results respond to changes in
key economic variables.
An economic variable is something measurable
that can have different values,
such as the incomes of doctors.
A hypothesis in an economic model is a statement
that must be correct or incorrect about an
economic variable.
To test a hypothesis, we analyze statistics
on the relevant variables.
Economists accept and use an economic model
if it leads to hypotheses that are confirmed
by statistical analysis.
Basically, we accept them if they work.
Positive analysis is concerned with what is.
Normative analysis is considered as what ought
to be.
This is a nexus of economic thinking as many
people confuse statements of what SHOULD be
and what IS.
When people make statements like wages should
be higher we quickly identify the word 'should'
to see it as a Normative statement.
A stable economist will make statements like,
'wages made higher by 3% can increase tax
collections by the US Treasury by 2%'.
Now we have a Positive Analysis result and
we can debate the accuracy of the statement.
Normative statements cannot really be debated
because they are based on opinions, not facts.
Because economics studies the actions of individuals,
it is often considered a social science.
Economics considers human behavior in every
context, not just in the context of business.
Economists have played an important role in
formation of government policies in areas
such as the environment, health care, and
poverty.
This does not limit the scope of issues economists
approach, it puts understanding to the opportunities
it conveys.
[Music]
We look at the big picture from the blimp
and call it Macroeconomics,
when the camera goes to field play coverage, it is Microeconomics.
You can think of Microeconomics as household
decisions made in local markets, and considerations
of how government decisions affect our choices.
This is where we are going in this class.
[Music]
Across all topics of economics, you will discover
we use certain terminology that other studies use.
When I talk of Depression I am generally not
speaking about a mood or mental state,
I am talking about a slowdown of the economy like
the USA experienced in the 1930s.
Shared terminology reaches into accounting
when we talk of capital, investments, and
technology.
When you hear an economist talking of demand,
it is not a rude request made with urgency,
it is about how buyer's wants are matched
with their willingness to pay.
You will collect a broad understanding of
how and when to apply these expressions in
the discussions you are involved in.
Expand your understanding with accurate terminology
and meaning.
[Music]
In our everyday lives we are rather accustomed
to visualization aids.
We watch TV, play video games and read books
and maps.
These are all different ways of reducing the
real world to something graphically descriptive.
We do not show everything of the real world
on a map, we only show what is important to
what we want to know about, like a road, park
or point of interest.
We use graphs, charts, and models a lot in
economics as a tool to describe concepts that
convey important findings.
Values for an economic variable are often
displayed as a bar graph or a pie chart.
In this case, panel (a) shows market share
data for the U.S.
automobile industry as a bar graph, where
the market share of each group of firms is
represented by the height of its bar.
Panel (b) displays the same information as
a pie chart, where the market share of each
group of firms is represented by the size
of its slice of the pie.
Often, we display data as it was observed
through time.
In this case it is Ford motor company sales
each year for 11 years.
Panel A put the line on the chart starting
at zero sales climbing to above 7 million
cars sold.
Panel B shows the same data, but truncates
the first 4.5 million sales to give more resolution
to the line's changes.
The data are identical, but if you did not
pay attention to the Y-axis values your understanding
would be skewed.
Watch out for this one, it happens a lot in
our lives, not only in economics.
The figure shows a two-dimensional grid on
which we measure the price of pizza along
the vertical axis, or y-axis, and the quantity
of pizza sold per week along the horizontal
axis, or x-axis.
Each point on the grid represents one of the
price and quantity combinations used in the
table.
By connecting the points with a line, we can
better illustrate the relationship between
the two variables.
We regularly use tabular data like you might
enter into your spreadsheet program and then
graph it to display what the numbers "look
like".
The information is identical, but seeing it
both ways helps you to explain your findings
to yourself and others.
We can calculate the slope of a line as the
change in the value of the variable on the
y-axis divided by the change in the value
on the x-axis.
Rise over Run.
Because the slope of a straight line is constant,
we can use any two points in the figure to
calculate the slope of the line.
For example, when the price of pizza decreases
from $14 to $12, the quantity of pizza demanded
increases from 55 per week to 65 per week.
So, the slope of this line equals -2 divided
by 10, or -0.2.
The demand curve for pizza shows the relationship
between the price of pizzas and the quantity
of pizzas demanded, holding constant other
factors that might affect the willingness
of consumers to buy pizza.
If the price of pizza is $14 (point A), an
increase in the price of hamburgers from $1.50
to $2.00 increases the quantity of pizzas
demanded from 55 to 60 per week (point B)
and shifts us to Demand curve 2.
Or, if we start on Demand curve 1 and the
price of pizza is $12 (point C), a decrease
in the price of hamburgers from $1.50 to $1.00
decreases the quantity of pizza demanded from
65 to 60 per week (point D) and shifts us
to Demand curve 3.
In a positive relationship between two economic
variables, as one variable increases, the
other variable also increases.
This figure shows the positive relationship
between
disposable personal income and consumption spending.
As disposable personal income in the United
States has increased, so has consumption spending.
Using graphs to draw conclusions about cause
and effect can be hazardous.
In panel (a), we see that there are fewer
leaves on the trees in a neighborhood when
many homes have fires burning in their fireplaces.
We cannot draw the conclusion that using fireplaces
causes the leaves to fall because we have
an omitted variable the season of the year.
In panel (b), we see that more lawn mowers
are used in a neighborhood during times when
the grass grows rapidly and fewer lawn mowers
are used when the grass grows slowly.
Concluding that using lawn mowers causes the
grass to grow faster would be making the error
of reverse causality.
The relationship between two variables is
linear when it can be represented by a straight
line.
Few economic relationships are actually linear.
However, it is often useful to approximate
a nonlinear relationship with a linear relationship.
In this class, we will generally use the straight
line approach to make example of the concepts
we discuss.
In later levels of economics, we consider
curved lines to express relationships between
variables.
The relationship between the quantity of iPhones
produced and the total cost of production
is curved rather than linear.
In panel (a), when we move from point A to
point B, the quantity produced increases by
1 million iPhones, while the total cost of
production increases by $50 million.
Farther up the curve, as we move from point
C to point D, the change in quantity is the
same 1 million iPhones but the change in the
total cost of production is now much larger
- $250 million.
Because the change in the y variable has increased,
while the change in the x variable has remained
the same, we know that the slope has increased.
In panel (b), we measure the slope of the
curve at a particular point by calculating
the slope of the tangent line at that point.
The slope of the tangent line at point B is
75, and the slope of the tangent line at point
C is 150.
The formula for a percentage change between
two variables for any two periods is expressed
as the difference between the variables divided
by the value at the beginning.
It might be the expression of your GPA from
your first year in college to the GPA you
earned last semester.
It results in a decimal number, but multiplying
it by 100 expresses it as a percent.
Look at that you just increased your GPA by
35% and now you can prove it!
The area of a rectangle is equal to its base
multiplied by its height.
Total revenue is equal to quantity multiplied
by price.
Here, total revenue is equal to the quantity
of 125,000 bottles times the price of $2.00
per bottle, or $250,000.
The area of the shaded rectangle shows the
firm's total revenue.
Ultimately, it is price times quantity, illustrated
on a graph.
The same application of geometry applies to
triangles as we use half Base x Height to
generate the area to discover a change of
demand in terms of a price reduction that
caused the quantity demanded to increase.
We revisit these types of calculations a lot
in this class.
We will use economic data provided by a clearing
house of USA economic data called the Federal
Reserve Economic Data portal, or simply FRED.
On an exercise coming to you soon, you will
collect tabular data from FRED, put it into
spreadsheet program, like Excel, graph it,
and use a tool in Excel to create a prediction
line about the number of people actually employed
in the USA.
You will compare historic employment levels
against how many people are actually gainfully
employed in the economy right now.
Your numbers will look different from these
because I did this figure in May 2016.
You will have new data and that gives life
to economic projections because they can be
made with today's numbers.
Call it data verifications, cross checking,
review or simply a Gut Check to make sure
your results look reasonable and consistent
with perceptions of the real world you are
trying to explain.
Sometimes it is a formula you created or logic
you applied to the situation.
Prepare your data, conduct a self-review of
your findings, and when you are not quite
sure of your answer, ask someone to review
it with you.
Ask me, I am your economics professor and
I care about you learning this topic.
Often, I find the best exercise is to explain
my findings to someone else.
When I explain it, I listen to what I am saying
and catch so much more than when I first prepared it.
Your turn, give it a try.
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