1 Welcome to Economics
1.1 Introduction
The Complexity of the Economy
The economy is complex.
A simple sentence to start the semester, but something that is important to remember as we move through this semester. Even if you take both introductory microeconomics and macroeconomics, you will only scratch the surface of how complex the economy is. Consider this scenario below.
Pretend that you intend to construct a regular yellow pencil. What do you need? You will need some wood (cedar wood to be specific), graphite (which comprises the “lead” in the pencil), rubber for the eraser, and metal for the ferrule (the band on the top that connects the eraser to the rest of the pencil.) But, where will you find the wood? Will you need to cut down a tree? If so, where will you find the resources needed to do that like a saw, goggles, gasoline for the saw, etc. Already you are seeing the sheer number of connections before we even have a felled tree. To create something as simple as a pencil, we require the assistance of thousands, or more likely tens of thousands, of others. Now, consider an iPhone or a Galaxy tablet and the sheer increase in complexity with these goods.
The scenario above is not something I came up with. Instead, it is a scenario that countless students have been exposed to over the past half-century. In 1958, Leonard Read published I, Pencil which is the story of the life of a pencil. If you would like to read the short story, you can visit the Foundation for Economic Education or you can also watch a short movie adapted from the book by the Competitive Enterprise Institute.
The Central Problem of Economics
Many students come into economics not really knowing what they will learn. Some students think issues like taxes and the stock market will be discussed. Others believe this is a course about money. None of those things are true. Instead, economics is the study of decision-making due to scarcity of resources.
As humans, our wants are unlimited. While we all have basic needs like food, water, and shelter, it is our desire for wants that puts a strain on the economy. Therefore, we need to decide how to best use our scarce resources. This is the crux of the study of economics.
Over the next several sections we will discuss the ways that individuals make decisions and the way those decisions impacts groups of people. These pillars of economic thought will guide us through the rest of the semester.
1.2 The Individual and the Decisions they Make
In this section, we will discuss the ways that individuals make decisions. This will be our first set of the pillars of economic thought.
Trade-offs and their Costs
Pillar 1: We all face trade-offs.
From Wikipedia: Trade-off
A trade-off (or trade-off) is a situational decision that involves diminishing or losing one quality, quantity or property of a set or design in return for gains in other aspects. In simple terms, a trade-off is where one thing increases and another must decrease. Trade-offs stem