Economics 100 1/2

History &
Why we are the way we are
economically….
1. Democracy

Commoners outnumbering the

nobles with creation of Gov’t policy
favoring merchants and
manufacturers rather than nobility.
2. Limited liability
Investors can lose only the amount of
their investment =
reduction of risk in investing

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 3. Patent Rights
 Protecting inventors and investors
 Before these rights, inventors had no
incentive because their ideas could
easily be “stolen”.
 Monetary incentive for invention leads
to full-time inventors… more innovation
& advancement.
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 4. Widespread literacy &
education
 Decision to make primary and secondary
education mandatory paved the way for
rapid and sustained economic growth
(technology)
*Clinton ‘97
Universal Goals of
Economic Systems
 Goals
Price Stability
*effort to alleviate inflation
*Brazil
 Universal Goals contd.
Full Employment
*What does the Dept of labor find to be an
acceptable rate of unemployment?
US & HI
*exceptional case of WWII 100% employ.
*Guns & Butter curve: Production
Possibilities Curve (PPC) & Opportunity
Cost
 Goals contd.
Quality Environment
*exploit resources without excessive
damage?
 Goals contd.
Economic Freedom
*minimal legal restraints on
marketplace
*right to buy/sell virtually any
commodity
*USSR
*China
 Goals contd.
Fair Distribution of Income
*efforts at “Robin Hood” taxation
*development of larger mid. class
*help of welfare, etc.
* Eliminate “bipolar” countries
 Goals contd
Growth
*steady, predictable, controllable
*reflects dynamic population
*Bangladesh= population far
exceeds economic development
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Scarcity
The fundamental and unavoidable
phenomenon that has created the need for
economics
*rich resources often exist in very poor countries b/c the country lacks economic
mechanisms/skills for efficiently turning into output (USSR)
*on the other hand, countries w/ relatively few natural resources can have very high
standards of living by appropriately allocating what they and other countries have (Japan &
Switz.)
 Microeconomics
Individual People Individual Firms
maximize happiness maximize profits
 Darwinian evolution
• About plants and animals competing
over limited resources to produce the
greatest progeny

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 Economics
• About human beings choosing limited
options to maximize happiness
• Remember: it is not always about $

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 Model of Human Behavior
1. Evaluate how happy each possible
option can make you
 Model of Human Behavior
contd.
1. Look at the constraints and tradeoffs
limiting your options
 Model of Human Behavior
contd.
• Choose the option that maximizes
your overall happiness
Remember!
W > R -> Sc -> Ch
Wants > Resources -> Scarcity
->Choice
 Utility
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Common measure of
happiness/satisfaction

*things you like a lot have high utility,

while things you like only a little have
low or even negative utility
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Invisible Hand

*Self­interest can promote the 
common good!!

   
 Adam Smith

 Father of modern economics
 An Inquiry into the Nature and Causes of 
the Wealth of Nations (1776)

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 Adam Smith believed….

 That if society was set up correctly, 
people chasing after their individual 
happiness would provide for other 
people’s happiness as well

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 Adam Smith said…

“It is not from the benevolence of the 
butcher, the brewer, or the baker, that we 
can expect our dinner, but from the 
regard to their own interest.”

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 Smith also said…

“…led by an invisible hand to promote an 
end which was not part his intention.”

Invisible hand of the free market allows for choices:  Gorb & Thatcher 
In other words, ppl vote with their dollars : consumer sovereignty
Ultimately addressing the 3 basic questions:
­What?
­How?
­For Whom?
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 Constraints
 Resources: usually goes to the highest bidder 

 Technology: usually technology brings increased 
production but choices remain limited by how 
advanced a country is technologically.

 Time:  fixed supply=choose how to use it