What Everyone Should Know About Wealth & Prosperity

by James Gwartney, Richard Stroup, and Dwight Lee

10 Key Elements
of Economics
CommonSenseEconomics.com
Provide an introductory flavor for the course

Bridge between common sense & basic
principles of economics

Begin to help you think like an economist

Provide some explanation as to why our
economy and our world work the way they do
Incentives are the costs and benefits of
making specific decisions.

Changing incentives alters peoples
behavior.

Incentives operate on all levels- personal,
familial, industry and societal level.
When the price of gas
rises, do you change
your behavior?

Do you really?

Whats the difference
between short-run
changes and long-run
changes in behavior?
Incentives dont
matter only to the
greedy and selfish.

What incentives do
volunteers have, if
not monetary?

Why do you
volunteer?
Does wearing a seat
belt create any
incentives?

Why do people get in
more accidents now
that cars are safer?


Our resources are limitedbut our desire
for goods & services is NOT.

When production costs are high, it is
because the resource in question is
desired for other purpose(s) as well.

A resource is scarce if it has more than
one valuable use.
Because we are constantly
faced with scarcity, we must
make choices.

Every time we choose one
thing (material or not) we
refuse something else.

We constantly make trade-
offs in our decisions.
What if someone else
buys your lunch?

Merely a shifting of cost,
not an elimination

And is it really free?

Few, if any, decisions are all-or-nothing.
Marginal means additional
Marginalism is seldom ignored in our
personal decisions, but frequently in our
conversations and in politics.
To get the most out of our resources, we
should only take an action when the
marginal benefits are greater than the
marginal costs.
Marginal Decision Examples
How clean is your house?
Do you clean to 100%
cleanliness?
How about when company
is coming?
How about when selling
your house?
You clean to the point
where the marginal costs
outweigh the expected
marginal benefits!
People gain when they trade
Trade moves goods from people who
value them less to people who value
them more.

Trade makes larger outputs/consumption
possible as we specialize.

Voluntary exchange allows production
costs to fall through mass production.
Trade exists at many levels
Enrolling in this class

Shopping at Safeway

Having a garage sale

Taking a vacation

Buying imports from
China & Mexico


Spending resources on:
Searching out trading partners
Searching out product information
Negotiating terms of trade
Closing sales
Why do we experience
transaction costs?
Physical objects
Cant get there from here!
Lack of information
Finding sellers/ best deals
Political obstacles
Taxes, tariffs, licensing
requirements, regulations,
etc.
Role of middlemen?
Increase or decrease TC?


Why profits are not the enemy
People of a nation are better off if their
resources produce valuable goods &
services.
Less productive use of resources should
thus be discouraged.
This is the function of profits and losses.
Profit is a reward for transforming
resources into something of greater
value.
A T-shirt factory has total
production costs of $20,000.
1,000 T-shirts sold at $22 each =
$2,000 in profit.
Wealth has been created for the
producer and consumer.
What if shirts can only be sold for
$17 each?
T-shirts are worth less to
consumers than the resources
required to produce them.
Whats the trade-off if firms continue
to operate at a loss?
People are different in many waysThis
is our greatest asset!
Differences in income arise because they
affect the value of goods and services
individuals are willing to provide.
There is a direct link (ceteris paribus)
between helping others & income.
If you want a large income- figure out
how to help others!!!
College students are
rewarded for
studying
Star athletes and
entertainers are
rewarded for their
special skills
Entrepreneurs are
rewarded for their
innovations.

What is Economic Progress?
Americans produce and earn THIRTY TIMES
as much as they did in 1750.
Why are Americans so much more productive
today than they were 250 years ago?
Why is economic progress important?

Sources of Economic Growth
Investments in productive assets
Tools, machines, human capital

Improvements in technology
Internal combustion engine, electricity,
computers, by-pass surgeries, etc.

Improvements in economic organization
Legal system, competitive markets, etc.
Adam Smith, The Wealth of
Nations (1776)
It is his own advantage, indeed, and
not that of society which he has in
his view. But the study of his own
advantage naturally, or rather
necessarily, leads him to prefer that
employment which is most
advantageous to societyHe
intends only his own gain, and he is
in this, as in many other cases, led
by an invisible hand to promote an
end which was not part of his
intention.
Primary function of markets is to provide
information (both to buyers and sellers)
Consider the price of apples
Price indicative of what consumers are willing and
able to pay, but also incorporates costs of
production/bringing to market
Things constantly happen to make both consumer
value & production costs vary
Perhaps the most common source of
economic error.
Actions often promote secondary effects.
Tariffs & quotas to protect domestic
industries
Paying for pencils in the 2
nd
grade class