The 5Es of economics (2023)

The 5 E's of Economics

YO.What is the economy??

What is the study of economics? A common definition of "textbook-like" might be:

The economy is thestudy ofhow can wechooseto uselimited resourcesto get themaximum satisfactiondounlimited human desires

This definition has four parts that we need to discuss:

1. the "study of" economics
2. choice
3. lack
4. maximizing satisfaction

A definition of "economics" I used when I first taught is:

(NOTE: I'm Mark, and shortly after moving to Illinois, I bought a house on Wonder Lake in McHenry County. Wonder Lake is a beautiful private lake, but we didn't have a boat.)

My definition highlights an important component of economics: SCARCITY. The reason you don't have a boat, or the reason you don't have everything you want is SCARCITY.

The term "scarcity" has a slightly different definition in an economics class than it does in the "real" world.

NOTE: Many words have different meanings in an economics class than the definition you already know. For example, let's take the word DEMAND. If I ask you "What happens to the demand for boats when the price of boats goes up?"

If the price of boats goes up, the demand for boats goes up. 🇧🇷 🇧🇷 🇧🇷 🇧🇷 🇧🇷

NO! DEMAND DOES NOT FALL. TheRequired quantitylow, but not required. BECAUSE ECONOMISTS HAVE A DIFFERENT DEFINITION OF DEMAND. We'll talk more about that later.

Another example is the word INVESTMENT. In an economics class, the term "investing" does NOT mean the stock market, the money markets. or mutual funds. We'll have to call these things "financial investments" because the term "investment" has a different meaning in economics.

So let's go back to the term FAULT. Scarcity does not mean that just a little bit of something is available. For example, I grew up in northeast Minnesota. About 30 miles from my hometown was the town of Erskine, Minnesota. Outside the city there is a certain type of rock that cannot be found anywhere else in the world. They called it "Erskinite". Erskinite is only found near Erskine, Minnesota, and only a small amount has been found. BUT IT IS NOT LITTLE. -- WHY? 🇧🇷

Because nobody wants to. For there to be scarcity, things must be LIMITED and WANTED. ERSKINITE is plenty and NOT SCARCE because nobody wants it.

Goods and services are scarce. These are the things we want. Goods are tangible things that satisfy our desires (such as boats, computers, cars, etc.), services are intangible things that satisfy our desires (such as the services of an accountant, dentist or lawyer). Even in the United States, one of the richest countries in the world, goods and services are scarce. WHY?

This brings us to another important principle in economics.

After teaching economics for a year or so, I bought a boat. Since I have defined economics as the study of why I don't own a boat, I have a problem. But then I just changed my definition a little bit. Noweconomics Is: The Study of Why Mark Doesn't Have a . 🇧🇷 one . 🇧🇷 .one that?

This leads us to the second principle: economists assume that humans have UNLIMITED DESIRES. As soon as I got a boat I wanted a bigger boat. After getting a bigger boat, he wanted a sailboat. then a rowboat and. 🇧🇷 🇧🇷 And the list goes on. (Now I have 5 boats and I want a jetski.) Have we had EVERYTHING we could ever want?

Since human wants are limitless and the resources used to satisfy them are limited, there is scarcity. Even in the United States, one of the richest countries in the world, there are shortages, if we use our new definition of FRENCH. Do you have everything you want? There is always scarcity, because human needs are limitless.

This brings us to a third important idea: because of scarcity, WE MUST MAKE DECISIONS. Some economists call this the "economicization problem". We can't have everything we want, so we have to choose.

That's what economics is all about: MAKING DECISIONS. Due to scarcity, we as individuals, and our society as a whole, must make choices. For example, when I thought about buying a boat, I also needed shoes for my daughter. Assuming I can't afford both (again, you can pay as much or as little as you like?) Would I have the option of making a boat or shoes?

Hm-m-m-m-m? 🇧🇷 🇧🇷 - - - - - I have a beautiful boat!

Ourmetais to make decisions that reduce scarcity as much as possible. Due to unlimited wants, we can never eliminate scarcity, but it can be reduced with the right decisions. Hopefully, that's what governments are trying to do: make the right decisions to reduce scarcity and raise the standard of living for their citizens.

Another way of saying this is that we want to get the MAXIMUM SATISFACTION possible with our limited resources. We don't want to make any choice, we want to make the BEST choice.

There are three, and only three, options (options) for society to deal with scarcity, and all societies must deal with scarcity because there are limited resources and unlimited wants.

These three options are:

1. Economic growth
2. reduce our desires, and
3. use our existing resources wisely (don't waste what few resources we have).

Let's look at each of them briefly.

Economic growth(the first "E")

We define Economic Growth as the increase in CAPACITY to produce goods and services. This is not how the term is normally defined. Later this semester we will discuss the various definitions of economic growth, but here we will use this most fundamental definition:

Economic Growth is the increase in CAPACITY to produce goods and services.

This means that we are CAPABLE of producing more, but it does not necessarily mean that we will produce more. More on that later.

This type of economic growth is caused by:

a) more resources
b) best resources
c) better technology

If we had more resources, we could produce more goods and services and satisfy more of our needs. This will reduce scarcity and give us more satisfaction (more goods and services). Therefore, all societies try to achieve economic growth.

reducing desires

A second way for a society to deal with scarcity is to reduce its needs. If we didn't want so much, there would be less scarcity. For example, we know that gasoline is scarce. (Do you get everything you want for the price you want? If you have to pay a price for something, then it's in short supply.) Space on our roads is also often at a premium. Let's say the President of the United States decides to do something about these problems by starting a new program called: SHARE A CAR WITH YOUR NEIGHBOR. It includes a law that says there can only be ONE CAR FOR EVERY TWO FAMILIES. This would reduce gasoline and space shortages on our roads, but. 🇧🇷 🇧🇷 🇧🇷 Let's remove this president!!!

The option to REDUCE NEEDS is one of the options that societies have to deal with scarcity, but it is not a very good option. Perhaps in times of war, if our president asked us to "hitchhike with our neighbor", we would. But it's not a long-term solution to the problem of scarcity that most of us would accept. Although it is an option that we must take into account.

This brings us to the third option for dealing with scarcity (and the remaining 4 "Es" of economics).

Using our existing resources wisely= maximize satisfaction

Societies can reduce scarcity not only by (1) getting more resources, better resources or better technology (i.e. ECONOMIC GROWTH), or (2) REDUCING THEIR NEEDS, but also (3) USING THEIR EXISTING RESOURCES WISELY

There are four ways societies can use their EXISTING resources to reduce scarcity. I call them the 4 Es of economics: four ways to use our existing resources to reduce scarcity and get the most satisfaction possible. The fifth E (economic growth) also reduces scarcity and gives us more satisfaction, but it does so using ADDITIONAL resources. Societies will try to achieve the 5 E's of the economy.

The four ways societies can use their EXISTING resources to reduce scarcity are:

1. Productivemiefficiency
2. assignedmiefficiency
3. Completemijob, and
4. mitranquility

Maximizing Satisfaction --
[Four is more:Efficiency, Efficiency, Equity, Employment]

Let's look at each of them individually, keeping in mind

1. its definition,
2. examples of each, and most importantly
3. How do they reduce scarcity and help society achieve MAXIMUM SATISFACTION with its available resources?

PRODUCTIVE EFFICIENCY

Production efficiency can be defined or achieved by producing at a minimum cost

By producing at minimal cost, LESS RESOURCES are used and MORE can be produced. This reduces scarcity and gives us more satisfaction with our existing resources.

We can produce at a minimum cost and obtain productive efficiency through:

one. not using more resources than necessary
B. use resources where they are most appropriate
C. using appropriate technology

Let's look at each of them individually using some examples. REMEMBER that our goal is to understand how to reduce scarcity and help society get the most satisfaction possible from its existing resources. That is the purpose of economics. You should keep that goal in mind as we go through these examples.

not using more resources than necessary

How does this MAXIMIZE SOCIETY SATISFACTION?

If companies use additional resources they don't need, those resources are wasted. As we know that resources are limited and human needs are unlimited, let's not waste any of the few resources we have. By not using more resources than necessary,release resourcesthat can be used elsewhere and WE PRODUCE MORE.

Examples:

(a) Janitors at Harper

Let's say Harper College employs 50 janitors to clean its buildings, and that's enough to do a good job. If Harper hired 25 more janitors, it would be a waste. While they can probably find something to do to keep themselves busy, they aren't necessary. Fifty janitors can do the job. So society would be better off if Harper did NOT employ these extra janitors so they could get a job somewhere else (perhaps at a boat factory) where they would produce more for society. It would be productively inefficient to employ 75 janitors at Harper. Harper's costs will be higher (productive inefficiency) and society's output will be lower (lower satisfaction).

b) Supermarkets: USSR

Several years ago, one of my students gave me this example. He had visited Moscow when the communist Soviet Union still existed. He said he was shocked when he walked into a grocery store and saw four clerks at every till! What a waste of labor resources. In the United States we find one or two workers in a paid position and only a few will be open. In Moscow, ALL stands were opened with four employees each. This is productively inefficient. Their costs are higher, and since labor is wasted, they will produce less. They are not achieving the maximum possible satisfaction with their limited resources (productive inefficiency).

(c) Motorola/Sears/AT&T/etc. lay off thousands of workers

Take a brief look at one or a few of the following news articles. (When you click on the link, they should appear in a new browser window.)

• http://cnnfn.com/1999/12/07/companies/layoffs/
• http://cnnfn.com/1999/01/07/economy/challenger/
• http://cnnfn.com/1998/03/20/companies/aviones/
• Coca-Cola lays off 6,000 employees
  http://cnnfn.com/2000/01/26/worldbiz/coca-cola/

Are these layoffs good for society?

If each company could continue to produce the same amount of output after laying off thousands of workersso they must have been productively inefficient before the layoffs. So if it would be good for Harper to hire just 50 janitors (and lay off the additional 25) or if it would be good for supermarkets in the Soviet Union to fire some of their employees, THEN THESE LAYOUTS ARE GOOD FOR SOCIETY. 🇧🇷

I realize this can be a little controversial. If you have questions, let's discuss them in ourDiscussion Forum🇧🇷 (When you click on the link, it should appear in a new browser window.)

Keep in mind the OBJECTIVE:reduce scarcity and get the maximum satisfaction possible from our limited resources🇧🇷 If these companies can still produce the same amount of output with thousands less employees, laying them off makes them available to work elsewhere producing MORE for society.

BUT, will they find another job? These articles indicate that, in today's economy, you are likely to:

• http://cnnfn.com/1999/08/06/economy/jobs/
• http://cnnfn.com/1999/12/03/economy/jobs/

WHAT IF I CAN'T FIND A JOB? Would it be better for society if they stayed in companies where they are not needed or were unemployed receiving unemployment benefits or social security?

I would consider the possibility that it would be BETTER for society if they were unemployed with unemployment insurance or welfare. That way we know they are AVAILABLE for any new boat company looking to build a new factory.

Not all layoffs are good for society. To see:layoffs.htm

use resources where they are most appropriate

The second way to produce at minimum cost and achieve productive efficiency is to use resources where they are most appropriate.

How does this MAXIMIZE SOCIETY SATISFACTION?

If companies use resources where they are most appropriate, MORE can be produced with the same amount of resources.

Examples:

(a) secretaries/truck drivers

Let's say I have a company that employs secretaries and truck drivers. Usually secretaries write letters and truck drivers drive trucks. One day I decide to try something new. I made secretaries drive trucks and truck drivers write letters.

What happened to the COST per cargo delivered or the COST per letter written? I wish you were thinking "they went up". Therefore, we are not producing at minimum cost and are productively inefficient. Also, and most importantly, LESS WILL BE PRODUCED.

Therefore, to be productively efficient and derive the maximum possible satisfaction from our existing resources, we must use resources where they are most suitable.

(b) doctors/engineers

(Video) Introduction to Policy Analysis

Doctors should work in hospitals and engineers should build bridges. That would be productively efficient. More bridges will be built and more lives will be saved. It would be productively inefficient (ie, more expensive) for engineers to work in hospitals and doctors to build bridges. Fewer bridges would be built and fewer lives saved. That would be productively inefficient: a waste of existing resources.

(c) Illinois-corn/Alabama-cotton - another example, but with something new

Illinois has resources (climate, machinery, soil, etc.) better suited to growing corn, while Alabama has resources better suited to growing cotton. So it makes sense that Illinois grows corn and Alabama grows cotton, since that way we get more corn and more cotton with the same amount of resources. This is productively efficient. But there's just one problem. In Illinois, we have a lot to eat (corn) but no clothes (cotton). And in Alabama they have cotton clothes, but they're dying. So what do we do?

We exchange or negotiate. We in Illinois sell corn to Alabama and they sell us cotton.

If we didn't trade, we would have had to grow corn and cotton, and Alabama would have done the same. The result would be LESS CORN and LESS COTTON produced. With the same resources we would have less goods because we are not using resources where it is more convenient, that is, productive inefficiency.

(d) North Dakota-potatoes/Honduras-sugar

North Dakota has adequate resources for growing potatoes (cool climate, good soil, etc.). Honduras in Central America has adequate resources for growing sugar or sugar cane (hot and humid climate, poorer soils, etc.). Therefore, it is productively efficient to grow potatoes in North Dakota and to grow sugar in Honduras. Costs are lower and, more importantly, you can grow more with your existing resources. this helps society derive the maximum possible satisfaction from its existing resources.

Why, then, do they grow sugar (beetroot) in North Dakota? The sugar we get from beets is very expensive. Why grow sugar beet in North Dakota when we can get cheap, high quality sugar from Honduras?

The answer has to do with trade. There is free trade between Illinois and Alabama. Free trade means that the government does not try to restrict trade with taxes or other barriers. Thus, Alabama and Illinois can use their resources where they best adapt and achieve productive efficiency, that is, produce more with the available resources.

But there are trade restrictions on sugar between the US and Honduras. This then encourages farmers to be productively inefficient. Barriers to free trade result in higher prices and this encourages North Dakota farmers to grow sugar, resulting in production inefficiency and LESS PRODUCTION.

(e) free trade

Free trade, then, is a necessary condition for achieving productive efficiency, as it allows resources to be invested where they best suit them, regardless of the state or country.

f) discrimination

Economists have a slightly different view of discrimination. They would ask, "How does discrimination affect the number of ships (and everything else) that are produced with available resources?" As discrimination is, by definition, NOT USING RESOURCES WHERE THEY ARE MOST APPROPRIATE, it results in higher costs and lower output, or production inefficiency.

usingappropriatetechnology

The third way to produce at minimum cost and achieve production efficiency is to use the right technology. By "appropriate" we mean technology that minimizes costs. This is sometimes called "better" technology. But I prefer "appropriate" because "better" infers "high tech" or computer technology. But not always the most up-to-date technology is the most appropriate (lower cost).

How does this MAXIMIZE SOCIETY SATISFACTION?

By using cost minimization technology, you minimize the amount of resources used, as these are the resources that make up production costs.

Examples:

(a) agriculture: EE. UU. / Kenya

For example, in the US, farmers use tractors to plow their fields, while in Kenya, an East African country, most fields are plowed by hand. It could be argued that both farmers ARE being productively efficient. The cheapest way to plow in the US is to use a $100,000 tractor. In Kenya, tractors, fuel, repairs, etc. they are very expensive and labor is relatively cheap, so it makes economic sense to plow by hand.

(b) agriculture: tractors / helicopter

Why don't American farmers use "modern" technology and plow their fields with helicopters and laser beams (sort of like the Jetsons)? The answer is easy, it would be very expensive. There are cheaper and more productively efficient ways to get the job done.

Allocative efficiency

The second way to use our existing resources to maximize social satisfaction is allocative efficiency.

Allocative efficiency is about using our limited resources to produce:

• THE RIGHT BLEND OF PRODUCTS
• MORE THAN PEOPLE WANT
• LESS THAN PEOPLE DON'T WANT

How does this MAXIMIZE SOCIETY SATISFACTION and REDUCE SHORTAGE?

If we are to get the maximum satisfaction possible from our limited resources, not only do we have to be productively efficient (use as few resources as possible, use our resources where they are best suited, and use the right technology), BUT WE ALSO HAVE TO PRODUCE THERIGHTGOODS AND SERVICES. It would be a waste of our limited resources to produce many of the things we don't want and few of the things we do.

For example:

one. steel: horseshoes or wagons

It would be a waste of our limited supply of steel to produce billions of horseshoes that nobody wants and only a few cars that people want. That would be designatively inefficient.

B. crude oil: gasoline or kerosene

People want more gasoline and very little kerosene. Therefore, to use our resources wisely, we must use our crude oil to produce more gasoline and less kerosene.

C. small cars or SUVs

As consumer tastes shifted from small cars to large SUVs, an efficient distribution society would use its resources to produce more SUVs and fewer small cars.

Distributive inefficiency occurs when we use our limited resources to produce TOO MUCH or TOO MUCH. This results in excesses and shortages.

How does allocative inefficiency affect scarcity and our attempt to maximize our satisfaction?

Whenever we produce too much (excess) or too little (lack), we are allocatively inefficient. We are NOT using our resources in such a way as to achieve the maximum possible satisfaction.

Examples of distributive inefficiency:

(1) American agriculture produces mountains of unwanted grain

American (and European) farmers used to produce mountains of grain that they couldn't sell. WHY? Pizza Hut doesn't produce piles of pizza that it can't sell. Home builders don't build hundreds of homes they can't sell. Why did the United States grow more grain than it knew it could sell?

The answer is - the government. The US government would buy surplus grain from farmers. This encouraged them to plant even more. The allocative inefficiency here is not mountains of grain that nobody wants, but the loss of resources that farmers used to grow that grain. Labor, land, energy, chemicals, machines, etc. were wasted producing something that society did not want. The real loss is the products we might have had if farmers hadn't used so many resources by producing excess grain. This is allocative inefficiency and reduces the satisfaction society receives from its resources. (NOTE: Government policy changes have reduced the amount of excess grain produced.)

Long queues in Poland

Before 1989, when communism collapsed in Eastern Europe, Poland and other countries suffered from severe shortages of consumer products that led to long queues. This is a good example of allocation inefficiency. Severe scarcity reduces society's satisfaction.

(3) Super Bowl Tickets (another example of something new)

Missing Super Bowl tickets. Hundreds of thousands of fans want to watch the game, but there are only around 80,000 seats available. This is distributive inefficiency. WHAT CAN BE DONE?

Build a bigger stadium? Play a series 2 of 3 (or 4 of 7)? Or - why not just raise the price? The price of a regular Super Bowl ticket is around $200. At this low price, hundreds of thousands of people want to go. But what if the price increases to $1,000 or $2,000, or whatever price results in only 80,000 tickets being sold? If they raise the price, there will be no shortage. THE SHORTAGE IS CAUSED BY A VERY LOW PRICE. This translates into distributive inefficiency and less satisfaction for society.

(4) Natural disasters: "price increases"

Let's try another example to illustrate the importance of getting the price right to achieve allocation efficiency. After Hurricane Hugo hit Florida a few years ago, the price of plywood, water, hotel rooms, and many other things increased dramatically. Were these price increases bad for people living in Florida?

NO!!!!

This might seem controversial to many of you, but let me explain and I think you'll agree with me.

After Hurricane Hugo, the people of Florida did not have all the plywood they wanted or needed. This is distributive inefficiency. To help them, we would like two things to happen: (1) more plywood should be shipped to Florida, and (2) the people of Florida should try to keep the plywood they have. That's good for the people of Florida.

Let's say the price of plywood has increased from $15 per sheet to $60 per sheet. WHAT HAPPENS?

Well, the people lining up to buy plywood to fix their walls, their decks, and their outhouses will buy less and maybe decide to just fix their walls now, meaning they'll stay.

ALSO, maybe someone sitting in the back of their truck drinking beer on a Friday night in Chicago will hear a news report about the high price of plywood in Florida. And you can start calculating: 100 sheets that would fit in the back of the van would cost, in Chicago, $1,500 (100 sheets for $15 a sheet). If they drove to Florida, they could sell the sheets for $6,000 (100 sheets for $60 each). This is a profit of $4500 in one weekend! Plywood trucks would go to Florida from all over the country. That's good for the people of Florida.

Now, let's say the Florida government wants to "help" its citizens by avoiding this "price gouging": higher prices after a natural disaster. So they pass a law that makes price gouging illegal. Let's say if you sell plywood for more than $15 a sheet, you will be arrested. (See links below.) WHAT WILL HAPPEN? Does this law help people in Florida who need plywood?

First, if the people in all those vans full of plywood find out about this anti-price gouging law, they'll turn around and go home. This is bad for the people of Florida.

Also, those people at the front of lines at lumberyards, seeing that the price is still only $15 a sheet, will buy more to fix their decks and fix their doghouses. This is bad for the people of Florida.

The result of the law against price speculation is a SHORTAGE. A shortage CREATED by law, not the hurricane.

When the price of plywood goes up to $60 a sheet after a hurricane, it's an efficient and GOOD allocation for the people of Florida. They WILL KEEP the plywood they have and send MORE. That's nice. Agrees?

Often, students say, "What about poor people who can't afford the highest prices?" Will laws against price gouging help them?

NO, because it will be missing. This means NO OFFSET available to anyone (unless they are at the front of the queue).

There are better ways to help the poor. This is especially true if we can agree that laws that keep prices low actually hurt the poor by creating scarcity. The government could give money to the poor or bring in more plywood, but a law that keeps prices low hurts everyone.

I realize this can be a little controversial. If you have questions, let's discuss them in ourDiscussion Forum🇧🇷 (When you click on the link, it should appear in a new browser window.)

Articles about "price gouging" in Florida:

• http://netra.sptimes.com/Weather/92698/Gouging_complaints__r.html
• http://www.sptimes.com/Weather/92598/Pinellas_put_on_price.html

(5) food price controls

Low prices created by the Florida government after a hurricane CREATED SHORTAGE. What happens if a government keeps food prices too low? What do you call food shortages? -- HUNGRY! Millions of people were killed by governments that lowered food prices, creating hunger. The purpose of keeping food prices low was to help the poor and hungry. The effect of keeping food prices low is hunger. When governments lower food prices, two things happen: (1) farmers earn less, so they work less and farm less, and (2) because prices are low, those who can find food buy more. the result is a shortage.

(6) gasoline

Different government policies regarding gasoline prices had different effects.

(The Second World War

During World War II, the United States government kept the price of gasoline low. This created a shortage. To deal with the shortage, they had to issue ration coupons. If you wanted to buy gas, you first needed a coupon. The government created scarcity. The government created distributive inefficiency.

(b) 1970: Arab oil embargo

In the 1970s, Israel attacked its Arab neighbors and the United States supported Israel. In response, Arab oil producers refused to sell oil to the US, which would have caused the price of gasoline to rise sharply, but President Nixon prevented the price from rising. This created a shortage. Gas stations had long queues (queues). Some would only sell gasoline on certain days or limit purchases to 5 gallons. The government created scarcity. The government created distributive inefficiency.

(c) during the Gulf War

In the early 1990s, the Iraqi government invaded the country of Kuwait, disrupting oil exports from the Persian Gulf. But there was no shortage of gas! If you wanted to buy gas, all you had to do was go to a gas station and fill up. Why didn't you run out of gas this time? Because the government let the market work and the price went up. As a result, two things happened: (1) gasoline producers did everything they could to produce more gasoline, and (2) drivers saved, hitchhiked, and drove less. Therefore, NO FAULT. This was allocatively efficient.

(Video) 5E Lesson 1 FINAL

WHAT CAN BE DONE to achieve allocation efficiency?

In a market economy, or pure capitalism, the price will adjust to achieve allocative efficiency. Inefficiency occurs when the government interferes or if one or a few companies control the market.

Equity

The third way to use our existing resources to achieve the maximum possible satisfaction is fairness.

Equity is a "fair" distribution of income or goods and services. (NOTE: This is not the same definition used by accountants.) One problem with this definition is agreeing on what "fair" means.

Fair does not mean "equal". Would an equitable distribution of income be good for society? Would it be nice if doctors earned the same as janitors? Probably not. If we paid the doctors the same as the janitors, we would have too few doctors and they wouldn't take the time to learn medicine.

We know that equity is good for society (it's one of the five E's). Therefore, equitable cannot mean the same thing as equal. But we cannot measure "fairness". This is a problem for economists. But we can DESCRIBE the actual distribution of income, and I will also try to explain how equity helps society get the maximum possible satisfaction out of its limited resources.

The distribution of income.

When economists describe the distribution of income, they usually divide the population into equally sized groups (usually five called quintiles) according to their income levels. The poorest fifth (20%) of the population is in the first quintile. In the fifth quintile they put the richest twenty percent. and divide the remainder into the other three groups according to your income.

For data on income distribution in the US, see:http://www.census.gov/ftp/pub/hhes/income/histinc/h02.html

For 1998, the income distribution in the United States was:

Comments (Discussion Forum) ?

How does equity help society to get the maximum possible satisfaction from its limited resources?

Example of President Bush

Since it's hard for us to agree on a definition of "fairness," let me see if I can come up with an extreme example that we can all agree on. What if President Bush owned everything? I mean EVERYTHING: all the land, all the buildings, all the food, all the clothes, all the cars, everything in the country. So the rest of us have nothing. We are homeless, starving and naked. It's not a pretty picture, but can we all agree that's not fair?

Now let's say President Bush gives each of us a pair of pants. We should be able to agree that this is fairer, more equitable, right? So what happens to the satisfaction of society? By "society" I mean all of us AND President Bush. We are more satisfied because each of us has a pair of pants, but President Bush is less satisfied because he has 260 million fewer pants.

So what happens to the TOTAL satisfaction of society? It depends on HOW much happier we are and HOW much less happy President Bush is. This brings us to the Law of Diminishing Marginal Utility. Utility is the reason why we consume a good or service. You could call it satisfaction. I derive satisfaction (utility) from steering my boat. I get utility (satisfaction?) when I go to the dentist. "Marginal" means EXTRA or ADDITIONAL.

According to the law of diminishing marginal utility, EXTRA (not total) utility decreases for each additional unit consumed. The first time I drove my boat in the spring, I really enjoyed it. But after a few weekends of sailing it doesn't give me as much added satisfaction as the first time. I'm still going by boat. My total utility continues to increase. But the MARGINAL (extra) utility I get from a day is less.

OPTIONAL: For more information or a different explanation, see:

• http://william-king.www.drexel.edu/top/prin/txt/MUch/Eco416.html

Since we started without pants, the first pair we received from President Bush gives us a lot of utility (satisfaction). Also, since President Bush still has millions (or billions) of pants left, giving us 260 million lessens their utility (satisfaction) a bit. OVERALL, the utility of society (all of us plus President Bush) increases. From the same amount of resources we are getting more satisfaction.

full employment

The last E is fullmijob

Here we will define full employment as the use of ALL available resources, not just manpower. This means that if we have full employment, we are using all our labor, factories, mines, fields, etc.

How does full employment help society derive maximum satisfaction from its limited resources?

While it may sound simple to me, students have a hard time understanding why using all of our resources is necessary if we want to produce as much as possible and get the maximum possible satisfaction out of existing resources.

If we have full employment, we produce MORE. If we have unemployed resources, we produce LESS. That's why society strives for full employment: it reduces scarcity and helps achieve the greatest possible satisfaction.

What is MACROECONOMICS?

ECO 212 ONLINE! It is a MACROECONOMIC course. In a Macroeconomics course we will study the WHOLE ECONOMY or the ECONOMY OF A COUNTRY.

The Macroeconomic Topics are:

1. Unemployment (EU)
2. Inflation (IN), and
3. Economic Growth (EG)

Using our 5 Es framework, in a Macroeconomics course you would study ECONOMIC GROWTH and FULL EMPLOYMENT.

In a MICROECONOMICS course, the INDIVIDUAL parts of an economy are studied. Topics would include individual product pricing, the study of individual industries, or individual consumer decision making.

Using our 5E framework, a Microeconomics course would study ALLOCATION EFFICIENCY, PRODUCTIVE EFFICIENCY, and EQUITY.

The only component of economics that is not included in a Macroeconomics or Microeconomics course is "Reducing Consumer Desires".

Why study economics?

One last thing I'd like to briefly discuss in this introductory lesson is "why study economics?"

Most of you are taking this course because it is MANDATORY for your course. Right? Most of you probably have a major in business (management, finance, marketing, accounting, etc.), but other careers sometimes also require a degree in economics (political science, engineering, dietetics, education, nursing).

Another reason to take an economics course is to become a more informed voter and citizen. Much of what candidates and political leaders discuss can be better understood with a background in economics. This semester we will pay attention to economic and political news. We can use theDiscussion Forumdiscuss what we see and hear.