Class Three

1.     What’s the definition of economics?

*economics is a social science: what does it mean to be one?

Human are not living alone, how individuals engage with each other is what economics about. (Few people think about that problem, while many people mistakenly believe that we are self-sufficient and the technological innovation had not actually improved sth.)

*Man Acts Purposely. Why? (Social scientist ask WHY)

We do it since we live in a world of SCARCITY. That’s the only reason we have to make choices. Basically when we choose sth., we also need to give sth. up ( 1 hour with son means 1 hour less with daughter, since the time is scarce). Scarcity is an occasion upon which we must choose.

  ---------Oil is incredibly available, but it’s still scarce, why?

  ---------Because we want MORE! We use it for EVERYTHING!

Oil is abundant but scarce, other things are not abundant, but also scarce. ( the class of Michael Rizzo) (This is a framework to illustrate what’s the role of economists)

*What role do economists have in the world?

From ancient time to modern days, philosophers had said sth. about economics (Aristotle,etc.), but they are not economists. It was not until Adam Smith, the father of economics, that economists appear.

-Man has struggled for economic problems for thousands of years: want eat, want clothes. Why economists hadn’t appeared for so long time?

-Because economists are totally unnecessary.

*Why do we need economists? Since we were POOR!

We don’t explain why we or some places are poor, it is “not be poor” that requires discussion.

We explain how we deal with the problem of scarcity.

*we ECONOMIZE(out of rationality):

We compare expected benefits with expected costs before make choices. To understand expected benefits and expected costs precisely, we need to clarify two points:

i.                     Value and cost are subjective. (no intrinsic value)

ii.                   When we talk about benefit and cost, we do not necessarily mean money, cultural value, physical comfort, and so on , also dictate to our trade-off between expected benefits and expected costs.

*What’s the technical definition of economics?

Economics is the study of the allocation of scarce resources to competing uses.

------But Rizzo think it ignores consequence of choices.

Economics do the allocation:

Long time ago, when Britain sent the prisoners (obviously whom the British do not want to kill) to Australia, half of the prisoners died on the journey. Both public opinion and laws and regulations have excerpt pressure on the captains, will that work? NO. Then an economist asked:” how do you pay the captain.” Thus, people finally realized that when the captain was paid before the journey, they have no incentives to keep the prisoners alive during the journey. When the government switched the way they pay from “the number of people walks on the boat” to “the number walks off the boat.” The percentage of survivors increased incredibly.

*Thus, economics is the study of Prudence (mentioned in Wealth of Nation by A.S.) vs. Temperance (T.M.S. by A.S.). Proper definition has to include both.