INTRODUCTION TO What is economics? Is it important? Why? What are some of the different types or fields of economics?

- International economics, econometrics, agricultural economics, - , macroeconomics - Positive vs. normative economics A few definitions …

• Microeconomics = the study of the economy at the level of individuals, households, and businesses. • Macroeconomics = the study of the workings of the economy as a whole. • Positive economics = the branch of economics that uses objective analysis to find out how the world works. The goal is to describe how things are. • Normative economics = the branch of economics that applies value judgments to recommend actions or policies. The goal is to advise how things ought to be done. What is economic reasoning? - Economic reasoning refers to the use of economic concepts or principles to explain the world or to guide one’s actions. - For example, the fact that people are often motivated by incentives (like money or other rewards) may have a bearing on how jobs are structured or compensated. - Think of used car salesmen or real estate agents, for instance. Would it make a difference if they weren’t paid mostly on commission? Economic Principles (from ch. 1)

• 1. Scarcity forces tradeoffs • 2. Costs versus benefits • 3. Thinking at the margin • 4. Incentives matter • 5. Trade makes people better off • 6. Markets coordinate trade • 7. Future consequences count ECONOMIC REASONING CAN ALSO HELP US EXPLAIN ECONOMIC ENIGMAS OR . CONSIDER SOME EXAMPLES. An Example: The of Plenty (aka the )

• Why do many countries with an abundance of one or two natural resources (such as oil or diamonds) sometimes fail to develop economically as well as other countries with far fewer natural resources? • Compare, for instance, nations like Venezuela (oil), Nigeria (oil) and the Congo (diamonds) with resource-poor countries like Japan, Singapore or South Korea. • Can you think of some explanations for this phenomenon? The Paradox of Plenty: some explanations

• History has shown that through corruption and the development of weak political institutions, a relatively small rent-seeking elite can capture vast wealth (easy money) while ignoring the needs of their fellow countrymen • An abundance of natural resources sometimes leads to a lack of diversification in the economy • A focus on one commodity (e.g., a mineral or a fuel) makes a country more vulnerable to volatility • Human capital is often neglected Economic enigmas or paradoxes

1 • Define or list the enigma

• List the economic principles 2 or ideas that might explain the enigma • Which is the economic 3 principle or idea that best explains the enigma? ENIGMA 1: WHY DO SOME FAST-FOOD RESTAURANTS PRICE ITEMS AT .99/ 1.99/ 2.99/ ETC. OR GUARANTEE THE CUSTOMER A FREE MEAL IF HE OR SHE DOES NOT RECEIVE A RECEIPT WITH HIS OR HER PURCHASE? ENIGMA 2: WHY DO ECONOMY SEATS ON AN AIRPLANE SOMETIMES COST VASTLY DIFFERENT AMOUNTS WHEN THEY ARE OTHERWISE IDENTICAL? Enigma 3: There are some for which the quantity demanded goes up when the price of that good rises, and falls when go down. (Clue: Think of some foods.) How do you explain this enigma? QUESTIONS? Enigma 1: Why do some fast-food restaurants price items at .99/ 1.99/ 2.99/ etc. or guarantee the customer a free meal if he or she does not receive a receipt with his or her purchase?

• “To deter theft, owners of restaurants and other retail establishments require cashiers to reconcile the total amount of cash collected during the shift with the total volume of sales rung up at the register. … One way cashiers can circumvent this control is by neglecting to ring up a proportion of their transactions. … “ • “Owners could hire supervisors to verify that cashiers ring up every sale. But that would be expensive. By offering a complimentary meal to anyone who fails to receive a receipt, owners provide an economic incentive for customers to monitor cashiers for free.” (R.Frank, The Economic Naturalist, pp. 61-2.) Enigma 2: Why do economy seats on an airplane sometimes cost vastly differently amounts even if the seats are otherwise identical?

• “A firm can attempt to sell the same item to different people at different prices. (The fancy name is ‘price discrimination.’)” • “The basic challenge for the airline industry is to separate business travelers, who are willing to pay a great deal for a ticket, from pleasure travelers, who are on a tight budget. If an airline sells every ticket at the same price, the company will leave money on the table no matter what price it chooses. … • Pleasure travelers usually spend the weekend at their destination, while business travelers almost never do.” (C. Wheelan, Naked Economics, pp. 18-9) • Buying tickets well in advance will also affect the price you pay. Business travelers are less likely to buy in advance. Enigma 3: There are some goods for which the quantity demanded goes up when the price of that good rises, and falls when prices go down. This pattern seems to violate the law of . How do you explain this enigma or paradox?

• A : a good for which the demand increases as the price increases, because of its exclusive character and its appeal as a status symbol. People also sometimes think that more expensive goods are better quality (e.g., designer clothes or luxury cars). • A Giffen good: Suppose you were poor and eat two basic foods, bread (or ) and meat. • Meat is somewhat of a luxury and is more expensive than bread (or rice). • If bread (or rice) increased too much in price, you cannot afford to buy as much meat as before and still get enough calories/food. • To compensate for less meat, you buy more bread (or rice) to gain enough calories and/or to satisfy your hunger.