Economics For

Everyday Life

Glenn Rivera

October 3, 2010

“Making the most of our dollars and sense”

 What is the Economy?

•Money/Banks
•The Federal Reserve
•Businesses
•Wall Street/Stock Market
•All are correct because of one common item; People
•The economy is people – buying, selling, consuming
•Are we in the economy at this moment?

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 Overview
• Definition of Economics
• The Greatest Constraint
• Economic Goals
• Three Questions Every Economy Must Answer
• Economic Assumptions
• Role of Government
• Benefits of Public Expenditures
• Costs of Public Expenditures
• How to increase GDP
• What can we learn?

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 Definition of Economics
• Economics is the study of how individuals/societies distribute
scarce resources for unlimited wants.

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 Study of…
• Study of… - Implies a discipline
• Economists study consuming behavior - Social Science

• Why are Economists interested in consuming behavior?

• The purpose of an economy is to provide a living for people

• Economics is a philosophy – Capitalism vs. Communism

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 Distribute
• An economy is a distribution/rationing system. It answers the question of,
“Who gets it?” Different economies answer in different ways
• Market Economy (Capitalism) - $ = demand; no $ = 0 demand

• Need does not equal demand

• Demand is the ability and willingness to pay for goods and services

• Most Efficient

• Command Economy (Soviet style Communism)

• An administrative attempt to determine what to make and who gets it.

• Most Inefficient

• Mixed Economy – Mix of Capitalism and Socialism

• All economies today are mixed

• Mix levels determined by values of society

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 Scarce
• Scarcity – What is Scarcity?
• From Webster’s – Deficient in quantity or number compared with the
demand : not plentiful or abundant
• What is scarce in a Market Economy?
• Anything that demands a price
• Is there anything that we consume that is not scarce?

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 Scarce Resources
• Four Factors of Production
• Land – Any natural resource
• Labor – People
• Capital – The machines, tools, buildings used to produce final
consumer goods and services
• Entrepreneurship/The Entrepreneur – The risk taker

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 Unlimited Wants
• People have unlimited wants
• More is better – (More of Everything) - The Pig Principle
• College graduate story
• Applies to all individuals, businesses, Nation States
• WE ARE CONSTRAINED

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 Greatest Constraint
• Opportunity Cost - The next best good/service that is
forfeit in order to obtain something else.
• Nothing is free. There are only tradeoffs between
alternatives. Blue Jeans Example.
• True because of finite resources/income
• We cannot escape this fact – Bill Gates
• Individuals and societies must make choices
• Guns/Butter, Roads/Schools, Police/Healthcare, etc.
• Societies/People do not act/think this way
• Historically we take it or pretend it does not exist
• Oakland CA example

There is no such thing as a free lunch!

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 Definition of Economics
• Economics is the study of how individuals/societies distribute
scarce resources for unlimited wants.

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 Economic Goals
• If our resources are scarce, and our wants unlimited, what
should we be?

• Efficient
• Productive Efficiency
• Allocative Efficiency

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 Efficiencies Defined
• Productive Efficiency – Maximum output with resources
• Allocative Efficiency – The optimal mix of goods and
services
• Private Goods/Services and Public Goods/Services
• The wrong mix is bad for society – Allocative Inefficiency

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 The Questions Every Economy Must Answer

• What to Make?

• How to Make it?

• Who Gets it?

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 #1 - What to Make?
Determined by Free Market and Government – Mixed Economy
• Free market - Price signals tell producers what to produce
• Where there is a demand, there will be a supply
• Government – Determined by values of society (welfare)

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 #2 - How To Make It?
• The cheapest way
• The cheapest mix of the factors of production are used to
produce final goods and services
• American economy is capital intensive – Capital is cheaper than labor
• Mexican economy is labor intensive - Labor is cheaper than capital

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 #3 - Who Gets It?
• Determined by Free Market and Government
• Free Market - Demand is ability and willingness
• Government - Reallocation of Goods & Services via Taxes
• Determined by values of society – Societies’ sense of equality

• Free Rider Problem - Occurs with consumption without payment

• Abuse-When pain of cost is removed, over consumption occurs

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 Economic Assumptions
• Why do Economists make assumptions?
• Economic world is too big, too complex
• Markets/People are inherently unpredictable

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 Self Interest
• All human activity is motivated by self interest
• “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.”
Adam Smith - The Wealth of Nations (1776).
• Greed is Good
• Greed defined – No moral connotation; greed drives efficient markets
• Greed is Good - Spurs competition among firms
• Promotes efficiency which lowers cost
• Promotes innovation for newer products
• Promotes quality products

• Greed is good from the buyers perspective too.

• Rotten apple example

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 Rational
Humans are always rational
• It is rational to be a pig. More is better.
• It is rational to make the most out of your purchases.

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 Role of Government
• Should Government be involved?
• Adam Smith – “Laissez Faire” Leave it Alone
• Rule of Law – Enforce the rights of the people
• Criminal Law – Police/Courts/Jail
• Corporate Law – Needed for Business
• Equity - Distribution of Resources
• Public Schools/Roads/Health Care
• Social Stability
• Economic Growth/Stability
• Monetary/Fiscal Policy
• International Trade/Globalization
• Regulation of Common Areas

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 Benefits of Public Expenditures
• Stimulate/Stabilize the Economy During Recession
• Unemployment Benefits – Less likely to beg, borrow, steal
• Fiscal Policy – Government Spending
• Monetary Policy – Increase/Decrease of the money supply
• Technological Spin-Offs (military spending)
• Medicine
• Metallurgy - Aerospace Industry
• Cell Phone Technology
• Human Capital Investments – Investment in education/training
of Workforce and the Returns to that Investment
• Public Education/Grants/Loans
• Investment in education and training of government workforce
• Example - Here

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 Costs of Public Expenditures
• Current National Debt $11.2T* as of 30 April 09
• Taxes/Government expenditures divert resources from private
investment
• When consumers/businesses have less money they save less, spend
less and invest less
• Inefficient Bureaucracies
• No bottom line (profit) to measure productivity
• Few incentives to increase productivity/spend efficiently
• Financed with Debt
• Debt must be serviced (paid $451.2 Billion in 2008**)
• Inflation from increased demand
• Market economy rations with higher prices

*http://www.treasurydirect.gov/NP/BPDLogin?application=np
**Source Treasury Direct www.treasurydirect.gov/govt/reports/ir/ir_expense.htm
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 Costs of Public Expenditures Cont

• What can you do with $451,154,049,951?

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 Costs of Public Expenditures Cont

• If an average home costs $250,000 then

• $451.2B/250K = 1,804,616 homes
• If the average cost of 4 year degree is $200,000
• $451.2B/$200K = 2,255,770 4 year degrees
• or $11.2T/155.2M = $72.2K
• Huge Opportunity Cost
• If we want more, what can we do?
• Increase GDP

*Source CIA World Fact Book -https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

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 Gross Domestic Product (GDP)
• GDP is the final market value of all goods and services
produced within a nation’s borders in a years time.

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 U.S. GDP 1929 to 2008

How Do We Get More?

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 How to increase Gross Domestic
Product (GDP)?

• Save Money/Invest Money

• Makes money more available which reduces interest rates
• Increases capital investment and personal expenditures
• Spend Money
• Spending = demand = price signal
• Puts people to work and leads to more demand
• Increase Technology And Use It
• Allows us to produce more efficiently
• Increase Productive Efficiency
• Improve processes/Work smarter, not harder
• Have we been doing this?

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 U.S. Productivity 1992-
2008

•1992 = 100%
•2008 = 139%
•2.4% Average Annual Increase

Source: Bureau of Labor Statistics, Productivity and Cost

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 Conclusion
• What can we learn from this as stewards of Government
resources?
• We need some government spending
• Understand opportunity cost – No Free Lunch
• Look for Productive Efficiency – Work smarter, not harder
• Be prepared to adapt to a changing economic/business environment

Some knowledge of basic economics is

necessary for stewardship of
Government resources

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Questions

“Making the most of our dollars and sense”