dtucker300 Loc: Vista, CA

Considering the level of economic illiteracy among the citizens of the United States and particularly many of the participants on OPP, I am providing this small primer in economics for your edification.

The reason for the study of economics is to help one better understand the world in which you live.
The second reason is to make you a more astute participant in the economy.
The third reason is to give you a better understanding of both the potential and limits of economic policy.

This is not a be-all and end-all discussion of economic principles but is provided to give you an overview of what economics is all about. I sincerely hope you will follow this thread as I will gradually update it from time to time with another of the ten economic principles necessary for a basic understanding of how people make economic decisions, how people interact in economies, and how the economy as a whole.

The following is from the textbook Principles of Economics, Fifth edition, 2007, by Gregory Mankiw.

N Gregory Mankiw is a professor of economics at Harvard University. As a student, he studied economics at Princeton University and MIT. From 2003 to 2005, he served as the chairman of the President's Council of Economic Advisers.

Ten Principles of Economics

The word economy comes from the Greek word oikonomos, which means “one who manages a household.” At first, this origin might seem peculiar. But in fact, households and economies have much in common.

A household faces many decisions. It must decide which members of the household do which tasks and what each member gets in return: Who cooks dinner? Who does the laundry? Who gets the extra dessert at dinner? Who get to choose what TV show to watch? In short, the household must allocate its scarce resources among it various members, taking into account each member’s abilities, efforts, and desires.

Like a household, a society faces many decisions. A society must find some way to decide what jobs will be done and who will do them. It needs some people to grow food, other people to make clothing, and still others to design computer software. Once society has allocated people (as well as land, buildings, and machines) to various jobs, it must also allocate the output of goods and services they produce. It must decide who will eat caviar and who will eat potatoes. It must decide who will drive a Ferrari and who will take the bus
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The management of society’s resources is important because resources are scarce. Scarcity means society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the highest standard of living to which he or she might aspire.

Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by an all-powerful dictator but through the combined action of millions of households and firms. Economists, therefore, study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. For instance, they examine how the multitude of buyers and sellers of a good together determine the price at which the good is sold and the quantity that is sold. Finally, economists analyze forces and trends that affect the economy as a whole, including the growth in average income, the fraction of the population that cannot find work, and the rate at which prices are rising.

The study of economics has many facets, but it is unified by several central ideas. Here, we look at Ten Principles of Economics. These ten principles will give you an overview of what economics is all about.

How People Make Decisions

There is no mystery to what an economy is. Whether we are talking about the economy of Los Angeles, the United States, or the whole world, an economy is just a group of people dealing with one another as they go about their lives. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we begin our study of economics with four principles of decision making.

To be continued...

dtucker300 Loc: Vista, CA

Principle one: People face Trade-offs

You may have heard the old saying, “There ain’t no such thing as a free lunch.” Grammar aside, there is much truth to this adage. To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal for another.

Consider a student who must decide how to allocate her most valuable resource—her time. She can spend all of her time studying economics, spend all of it studying psychology, or divide it between the two fields. For every hour she spends studying one subject, she gives up one hour she could have used studying the other. And for every hour she spends studying, she gives up an hour that she could have spent napping, bike riding, watching TV, or working at her part-time job for some extra spending money.

Or consider parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of the family income for retirement or the children’s college education. When they choose to spend an extra dollar on one of these goods, they have one less dollar to spend on some other good.

When people are grouped into societies, they face different kinds of trade-offs. The classic trade-off is between “guns and butter.” The more society spends on national defense (guns) to protect its shores from foreign aggressors, the less it can spend on consumer goods (butter) to raise the standard of living at home. Also important in modern society is the trade-off between a clean environment and a high level of income. Laws that require firms to reduce pollution raise the cost of producing goods and services. Because of the higher costs, these firms end up earning smaller profits, paying lower wages, charging higher prices, or some combination of the three. Thus, while pollution regulations yield the benefit of a cleaner environment and improved health that comes with it, they have the cost of reducing the incomes of the firms’ owners, workers, and customers.

Another trade-off society faces is between efficiency and equality. Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society’s members. In other words, efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices.

When government policies are designed, these two goals often conflict. Consider, for instance, policies aimed at equalizing the distribution of economic well-being. Some of these policies, such as the welfare system or unemployment insurance, try to help the members of society who are most in need. Others, such as the individual income tax, ask the financially successful to contribute more than others to support the government. While achieving greater equality, these policies reduce efficiency. When the government redistributes income from the rich to the poor, it reduces the reward for working hard; as a result, people work less and produce fewer goods and services. In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller.

Recognizing that people face trade-offs does not by itself tell us what decision they will or should make. A student should not abandon the study of psychology just because doing so would increase the time available for the study of economics. Society should not stop protecting the environment just because environmental regulations reduce our material standard of living. The poor should not be ignored just because helping them distorts work incentives, Nonetheless, people are likely to make good decisions only if they understand the options they have available and the consequences of the decisions. The study of economics starts with recognizing and acknowledging life’s trade-offs

permafrost Loc: Minnesota

Interesting... Points to ponder ... or debate..

debeda

Good piece, thank you for sharing this!

dtucker300 Loc: Vista, CA

Principle 2: The Cost of Something Is What You Give Up to Get It

Because people face trade-offs, making decisions requires comparing the costs and benefits of alternative courses of action. In many cases, however, the cost of an action is not as obvious as it might first appear.

Consider the decision to go to college. The main benefits are intellectual enrichment and a lifetime of better job opportunities. But what are the costs? To answer this question, you might be tempted to add up the money you spend on tuition, books, room, and board. Yet this total does not truly represent what you give up to spend a year in college.

There are two problems with this calculation. First, it includes some things that are not really costs of going to college. Even if you quit school, you need a place to sleep and food to eat. Room and board are costs of going to college only to the extent that they are more expensive at college than elsewhere. Second, this calculation ignores the largest cost of going to college—your time. When you spend a year listening to lectures, reading textbooks, and writing papers, you cannot spend that time working at a job. For most students, the earnings given up to attend school are the largest costs of their education.

The opportunity cost of an item is what you give up to get that item. When making decisions, decision-makers should be aware of the opportunity costs that accompany each possible action. College athletes who can earn millions if they drop out of school and play professional sports are well aware that their opportunity cost of college is very high. It is not surprising that they often decide that the benefit is not worth the cost.

debeda

Interesting. Also interesting that
many people think of "cost" as strictly dollars and cents. Which makes the family analogy a really good one, because of the balance of time spent often considered in that equation.

dtucker300 Loc: Vista, CA

Did you ever see the movie Click with Adam Sandler? I think it was in the early 2000s. He is given a remote that lets him fast-forward through any life event to avoid the things that do not interest him. Before he knows it he is an old man who missed out on his children growing up because he was too busy with work and earning money.

debeda

No, I didnt see that. Sounds depressing 😐

dtucker300 Loc: Vista, CA

Biden’s policies are ruining the economy
by Isabelle Morales
June 18, 2021

https://www.washingtonexaminer.com/opinion/bidens-policies-are-ruining-the-economy

The policies being pushed by President Joe Biden and congressional Democrats are hurting the economy.

Paying people not to work has meant people are sitting at home instead of returning to their jobs. Trillions of dollars in spending are causing runaway inflation. And now, Biden is proposing the largest tax increases since 1968, which will harm working families and small businesses and throttle much-needed new investment.

There are clear signs the economic recovery is stalling. Federal unemployment benefits pushed by Democrats provide out-of-work people with an additional $300 per week in addition to existing state unemployment. Because of this program, more than 1 in 3 workers could make more money staying at home than working. As a result, countless businesses are unable to find workers to hire. Forty-two percent of small businesses couldn’t fill a job opening in March, according to data by the National Federation of Independent Business.

It is not a coincidence that recent monthly jobs reports have been disappointing. In April, the U.S. economy added just 278,000 jobs, a far cry from Dow Jones estimates that predicted 1 million new jobs. In May, the numbers improved but were still below estimates. Employers added 559,000 jobs and the unemployment rate fell by 0.3 percentage points to 5.8%. This fell short of the 650,000 additional jobs analysts had predicted. At present, the U.S. economy still needs an additional 7.6 million filled jobs to reach its February 2020 pre-pandemic level. With a vast majority of states and localities open, there is no reason for this lackluster job creation.

People are also seeing significant inflation because of Democratic policies. From May 2020 to May 2021, consumer prices increased by 5%, the fastest increase since 2008.

Many goods and services have increased significantly over the past year. The cost of lumber has increased by 375%, while gasoline has increased 56%. Bacon has increased by 13%, and sugar has increased by 50.9%.

The policies Biden wants to pass in the second half of the year will make the economy worse. The Left is pushing trillions of dollars in new spending that will exacerbate inflationary pressures and will finance this wasteful spending through tax increases that will hit families and businesses hard.

As part of this proposal, Biden wants to raise the corporate tax rate to 28% and impose a 21% global minimum tax on businesses.

Under Biden, the U.S. corporate rate will be 32% inclusive of state corporate taxes. This would make the U.S. tax rate significantly higher than China’s 25% tax rate and the developed world's average 23.5% rate.

These tax increases will fall on working families in the form of lower wages and fewer jobs. According to Stephen Entin's piece on the Tax Foundation's website, 70% of corporate taxes are borne by labor while other economists argue that anywhere from 20% to 50%, to even 100% of the tax hits workers.

Corporate taxes also increase the costs of household goods and services. A 2020 study by the National Bureau of Economic Research found that almost one-third of the corporate tax falls on consumers.

Democrats also want to double the capital gains tax and apply this tax to unrealized gains at death. This would result in a capital gains tax that is significantly higher than the rest of the world, which would reduce new investment and threaten access to capital for startups.

If the Left have their way, the capital gains tax will rise to 43.4%. After accounting for state taxes, the rate will be 48.8%, more than double China’s 20% rate and the 23.2% average in the developed world.

The capital gains tax is really a tax on investment, so this tax hike will harm economic productivity and growth at a time that we need more investment to regrow the economy. This will especially harm small businesses, entrepreneurs, and startup businesses across the country that already must fight tooth and nail for access to new capital.

Democrats also want to apply capital gains at death by taking away a provision known as "step-up in basis." This will create a second death tax as the capital gains tax will be imposed on the unrealized gains of every asset owned by a taxpayer when they die. This will impose another tax on family-owned businesses, many of which are asset-rich but cash-poor.

Democratic policies are ruining the economy. They have caused rising inflation and subsidized people not to work. If Biden and the Left have their way, things will only get worse, and families and businesses will be slugged with trillions in new taxes that will put jobs, wages, and competitiveness in jeopardy.

debeda

Gonna see a lot of family trusts popping up.....

dtucker300 Loc: Vista, CA

dtucker300 Loc: Vista, CA

The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax
by Jesse Eisinger, Jeff Ernsthausen and Paul Kiel

It appears that most of them are Democrats.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

dtucker300 Loc: Vista, CA

Principle 3: Rational People Think at the Margin

Economists normally assume that people are rational. Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. As you study economics, you will encounter firms that decide how many workers to hire and how much of their product to manufacture and sell to maximize profits. You will also encounter individuals who decide how much time to spend working and what goods and services to buy with resulting income to achieve the highest possible level of satisfaction.

Rational people know that decisions in life are rarely black and white but usually involve shades of gray. At dinnertime, the decision you face is not between fasting and eating like a pig but whether to take that extra spoonful of mashed potatoes. When exams roll around, your decision is not between blowing them off or studying 24 hours a day but whether to spend an extra hour reviewing your notes instead of watching TV. Economists use the term marginal changes to describe small incremental adjustments to an existing plan of action. Keep in mind that margin means “edge,” so marginal changes are adjustments around the edges of what you are doing. Rational people often make decisions by comparing marginal benefits and marginal costs.

For example, consider an airline deciding how much to charge passengers who fly standby. Suppose that flying a 200-seat plane across the United States costs the airline $100.000. In this case, the average cost of each seat is $100,000/200, which is $500. One might be tempted to conclude that the airline should never sell a ticket for less than $500. In fact, a rational airline can often find ways to raise its profits by thinking at the margin. Imagine that a plane is about to take off with ten empty seats, and a standby passenger waiting at the gate will pay $300 for a seat. Should the airline sell the ticket? Of course it should. If the plane has empty seats, the cost of adding one more passenger is tiny. Although the average cost of flying a passenger is $500, the marginal cost is merely the cost of the bag of peanuts and can of soda that the extra passenger will consume. As long as the standby passenger pays more than the marginal cost, selling the ticket is profitable.

Marginal decision making can help explain some otherwise puzzling economic phenomena. Here is a classic question: Why is water so cheap, while diamonds are so expensive? Humans need water to survive, while diamonds are unnecessary; but for some reason, people are willing to pay much more for a diamond than a cup of water. The reason is that a person’s willingness to pay for any good is based on the marginal benefit that an extra unit of the good would yield. The marginal benefit, in turn, depends on how many units a person already has. Water is essential, but the marginal cost of an extra cup of water is small because water is plentiful. By contrast, no one needs diamonds to survive, but because diamonds are so rare, people consider the marginal benefit of an extra diamond to be large.

A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost. This principle can explain why airlines are willing to sell a ticket below average cost and why people are willing to pay more for diamonds than for water. It can take some time to get used to the logic of marginal thinking, but the study of economics will give you ample opportunity to practice.

debeda

👍👍👍👍👍👍Good lesson😁

dtucker300 Loc: Vista, CA

Principle 4: People Respond to Incentives

An incentive is something that induces a person to act, such as the prospect of a punishment or reward. Because rational people make decisions by comparing costs and benefits, they respond to incentives. You will see that incentives play a central role in the study of economics. One economist went so far as to suggest that the entire field could be simply summarized: “People respond to incentives. The rest is commentary.”

Incentives are crucial to analyzing how markets work. For example, when the price of an apple rises, people decide to eat fewer apples. At the same time, apple orchards decide to hire more workers and harvest more apples. In other words, a higher price in a market provides an incentive for buyers to consume less and an incentive for sellers to sell more. As we will see, the influence of prices on the behavior of consumers and producers is crucial to how a market economy allocates scarce resources.

Public policymakers should never forget about incentives. Many policies change the costs or benefits that people face and, therefore, alter their behavior. A tax on gasoline, for instance, encourages people to drive smaller, more fuel-efficient cars. That is one reason people drive smaller cars in Europe, where gasoline taxes are high than in the United States where gasoline taxes are low. A gasoline tax also encourages people to carpool, take public transportation, and live closer to where they work. If the tax were larger, more people would be driving hybrid cars, and if it were large enough, they would switch to electric cars.

When policymakers fail to consider how their policies affect incentives, they often end up with unintended consequences. For example, consider public policy regarding auto safety. Today, all cars have seat belts, but this was not true 50 years ago. In the 1960s, Ralph Nader’s book Unsafe at Any Speed generated much public concern over auto safety. Congress responded with laws requiring seat belts as standard equipment on new cars.

How does a seat belt law affect auto safety? The direct effect is obvious. When a person wears a seat belt, the probability of surviving an auto accident rises. But that’s not the end of the story because the law also affects behavior by altering incentives. The relevant behavior here is the speed and care with which drivers operate their cars. Driving slowly and carefully is costly because it uses the driver’s time and energy. When deciding how safely to drive, rational people compare, perhaps unconsciously, the marginal benefit from safer driving to the marginal cost. As a result, they drive more slowly and carefully when the benefit of increased safety is high. For example, when road conditions are icy, people drive more attentively and at lower speeds than they do when road conditions are clear.

Consider how a seat belt law alters a driver’s cost-benefit calculation. Seat belts make accidents less costly because they reduce the likelihood of injury or death. In other words, seat belts reduce the benefits of slow and careful driving. People respond to seat belts as they would to an improvement in road conditions—by driving faster and less carefully. The result of the seat belt law, therefore, is a larger number of accidents. The decline in safe driving has a clear, adverse impact on pedestrians, who are more likely to find themselves in an accident but (unlike the drivers) don’t have the benefit of added protection.

At first, the discussion of incentives and seat belts might seem like idle speculation. Yet in a classic 1975 study, economist Sam Peltzmen argued that auto-safety laws have had many of these effects. According to Peltzmen’s evidence, these laws produce both fewer deaths per accident and more accidents. He concluded that the net result is little change in the number of driver deaths and an increase in the number of pedestrian deaths

Peltzmen’s analysis of auto safety is an offbeat example of the general principle that people respond to incentives. When analyzing any policy, we must consider not only the direct effects but also the less obvious indirect effects that work through incentives. If the policy changes incentives, it will cause people to alter their behavior.

Next: How people interact.
https://www.onepoliticalplaza.com/t-219651-1.html