Before you begin this course, make sure you have completed the Course Orientation in Canvas.
Did you ever wonder why engineers typically earn more money than short-order cooks, or how the price of gasoline gets established? Why is it that so many Americans drive to work, but lots of people in Britain take the train, and many Dutch ride their bicycles? Speaking of cars, why do we have so many choices when we want to buy a car, but so few choices if we want to buy cable TV or home Internet service? And why is it that if I want to buy a car, I have to go to a dealership, but I can buy a computer directly from Dell (although I don't have to)? On a more personal note, do you ever stop and think about what you choose to spend your money on? Do you choose to spend more of your income on entertainment than, say, a nicer car? Why don't you do both?
These are all questions that can be answered (or, at least, better understood) by using economic analysis. In this lesson, we will talk about some of the basic underlying principles that guide economics as a way of looking at the world.
By the end of this lesson, you should be able to:
This lesson will take us one week to complete. Please refer to Canvas for specific timeframes and due dates. There are a number of required activities in this lesson. The chart below provides an overview of those activities that must be submitted for this lesson. For assignment details, refer to the lesson page noted.
Requirements | Submitting Your Work |
---|---|
Reading: Chapters 1 and 2 in Gwartney et al., OR Chapters 1 and 2 in Greenlaw et al. |
Not submitted |
Lesson Homework and Quiz | This will be submitted via Canvas |
If you have any questions, please post them to the online discussion forum in Canvas.
I am tempted to start the course by trying to say "what economics is" and so on, but it is perhaps easiest to start with a simple illustration.
Imagine you are on a desert island. There are two things you can eat on this island: coconuts and fish. If you wish to survive, you spend all of the available daylight trying to catch fish or harvest coconuts from the palm trees. We can assume, for the time being, that all of your day is taken up doing one of these two things. You need to divide your day between gathering coconuts and catching fish since a diet of just one or the other is not healthy. Suppose you have 10 hours a day to work. It takes you one hour to catch a fish and climbing a tree to get a coconut takes half an hour. So, in 10 hours you can catch 10 fish, or you can gather 20 coconuts. You could also do a bit of both: maybe spend 8 hours fishing and 2 hours getting coconuts, which would give you 8 fish and 4 coconuts. After a few weeks on the island, you settle on a balance whereby you spend 7 hours a day catching fish and 3 hours harvesting coconuts. This gives you 7 fish and 6 coconuts per day. If you want more fish, you have to give up some coconuts, and if you want more coconuts, you have to give up some fish, because there are only a certain number of hours in a day, and you can't make more daylight!
Now, what if it turns out that you are not alone on this island. Suppose there is a person who happens to go by the name "Friday." He's been on the island a long time and has gotten good at fishing. It turns out that he can catch a fish in 20 minutes, but it also takes him half an hour to climb a tree and harvest a coconut. Friday has gotten into a routine where he fishes for 4 hours a day, catching 12 fish, and he harvests coconuts for 6 hours, getting 12 coconuts per day.
This is getting a little complicated, so we'll summarize:
Now, let's suppose that one day, you and Friday meet up for the first time. After a bit of discussion, you start talking about food, and how much food you get each day. You both work 10 hours per day and get a total of 19 fish and 18 coconuts.
What if I said that it was possible for both of you to get more fish and more coconuts, and neither of you had to work longer hours? Is this magic? Well, not quite.
Let's say you decided to spend all of your day harvesting coconuts, meaning that you were able to get 20 in a day.
At the same time, Friday spends 8 hours fishing. He is able to catch 24 fish and gets 4 coconuts in the other two hours.
Now, between the two of you, you have 24 fish and 24 coconuts. You have more fish AND more coconuts
So, collectively, you are better off. However, neither of you likes the proportion of things you have yourself. You have too many coconuts and not enough fish. Friday does not have enough coconuts. What you can do then is make a trade. Let's say you trade away 10 coconuts in exchange for 10 fish. Now you have 10 coconuts and 10 fish. Friday has 14 coconuts and 14 fish.
Let's summarize:
Friday:
So, after meeting, you both have more fish and more coconuts. How has this happened? Is this some kind of magic? As I said before, not quite.
The above story may seem a little simplistic - it is - but it powerfully illustrates some important topics that we talk about in the field of economics. What has happened? Well, the first thing that happened after the meeting of you and Friday is that you decided to specialize. You decided to do what you are good at - gathering coconuts. Friday concentrated most of his time on what he is good at - catching fish. By focusing on what you are each good at, you became more efficient. You then decided to trade. Specialization and trade made you both better off and made the sum of the two of you better off.
Complicated? Of course! So, let’s do some more examples.
Rob's Choice | Coconuts | Fish |
---|---|---|
#1 | 0 | 8 |
#2 | 1 | 6 |
#3 | 2 | 4 |
#4 | 3 | 2 |
#5 | 4 | 0 |
What is Rob's opportunity cost of coconuts? 2 fish
What is Rob's opportunity cost of fish? 0.5 coconuts
Rob Meets Friday
It turns out that Friday is living on the other side of the island. Friday has a "production function" such that .
Friday's Choice | Coconuts | Fish |
---|---|---|
#1 | 0 | 4 |
#2 | 1 | 3 |
#3 | 2 | 2 |
#4 | 3 | 1 |
#5 | 4 | 0 |
Living by himself, Friday chooses 2 C and 2 F.
What is Friday’s opportunity cost of coconuts?
Of fish?
Can Rob and Friday make each other better off?
YES, THEY CAN.
Note the 4 Step Approach
Remember, More is Better Than Less!
Rosie O’Donnell and Donald Trump are stuck on a deserted island. Rosie has the production function , where T is the production of turtles and B is the production of bananas. The Donald has production function . If they could not trade with each other, Rosie would choose to produce 3 turtles, and the Donald would produce 13 turtles.
Figure out a possible production/allocation system where both the Rosie and the Donald would be better off trading than not trading.
Rosie has the production function , which implies that each turtle cost 3 bananas. She chooses , which implies that , .
The Donald has production function , which implies that each turtle costs 1/6th of a banana. The Donald chooses , so, .
Turtles are much cheaper for the Donald rather than Rosie (1/6th of a banana vs. 3 bananas). So, Donald should trade turtles with Rosie for bananas.
Many trades/production decisions are possible.
Assume Rosie makes all bananas. Since for her, , she makes 20 bananas.
If Donald makes all turtles, he makes 25 turtles.
So, we now have .
Without trade , . So, now we have more production of each.
So, now assume that The Donald trades 6 turtles for 5 bananas.
The Donald now has , . Before, he had and . So, he is better off because he has more of both.
Rosie now has and . Before, she had , . So, she is better off.
Both parties gain from trading!
Eric and Rod are stuck on a desert island. There are two goods, fish (F) and coconuts (C). Eric has production function , and without trading chooses . Rod has production function and without trading chooses . Explain an arrangement that can make both better off. Make sure you don’t fall into the trap!
The same idea holds for more complicated scenarios involving more than two people and more than two goods. If people in a society decide to specialize and make a lot of what they are good at making, and then trade some of the things that they make for other things they want, then both they and the society they are part of will be better off. Or, as I will say a little later on, specialization and trade generate wealth for society.
This is perhaps not hard to understand. We all specialize in something and sell it and use the proceeds of that sale to buy other things. A university professor specializes in teaching students and generating research. The university pays the professor for this, and with his wages, he buys food, housing, transportation, clothing, leisure, and many other things. He is better off doing this than trying to make his own food, build his own house and manufacture his own car. A construction company might build a hundred houses a year, which is more than the owners of the company need. So, they sell some of those houses to buy the other things they need to live. This is how our society is organized.
As a society, we have much more wealth because we arrange our societies this way. Without trade (that is, buying and selling things), we would each have to be a fully self-sufficient unit, and each of us would have much less in such a world. We do not trade because we like each other or even care about each other - we usually don't even know the people we are trading with - but we do so because it is in our own best interest. This curious fact - a society of people, each acting in their own best interest (or out of selfish motives), leads to an increase in the wealth of society as a whole - was first written down and expounded upon by Adam Smith, the author of a book called The Wealth of Nations, which was written in 1776 and was the founding text of modern economic thought. We'll talk a bit more about Smith later.
Now, given this simple example as an introduction, we can move on to start talking about economics in a bit more of a formal and structured manner.
Please note that we will not go into further detail in the course notes on budget constraints or production possibilities frontiers, and therefore this material will not be on any quizzes or tests.
Economics is a social science. What exactly does that term mean? "Social" means that is about examining the way the people organize their interactions with each other in societies. "Science" means that the "scientific method" is used as a way of thinking about and studying social organization. We have some other social sciences, such as sociology, anthropology, education, history, and law. These disciplines all look at different aspects of societies or examine them from a certain perspective. Economics is the social science that concerns itself with how people make consumption and production choices in a world of endless wants and limited means.
Economics is not an ideology or a set of political beliefs; it is merely one of the ways in which people try to understand the society we live in, and how it works. It is a way of looking at the world, what we call the "economic way of thinking." This has proven to be a useful tool for understanding and explaining a great deal of human behavior. It explains how people do many of the things they do, and why, and it allows us to predict, with a reasonable degree of confidence, what the effects of some action taken by a government or a group of individuals will be.
Note that I said, "reasonable degree of confidence." That could be taken as a set of meaningless weasel words, with terms like "reasonable" and "confidence" not being clearly defined. However, what I am trying to do when I make this statement is to avoid being too sure about our knowledge of the outcomes. While it is true that people behave in a way that is "generally" predictable, you must always remember that when we study societies, we are talking about people, and people do not uniformly behave in a predictable manner. In mathematical terms, there are too many variables, and we cannot isolate and correct them all. So, what I am saying here is the "soft-sell" on economics: it is a helpful and pretty reliable way of understanding the world, just not a perfect or strictly deterministic way. Note that the "economic way of thinking" has been applied to many other social science disciplines, most famously law and sociology, and it has done a great deal to explain behavior in these areas. If you are interested, you may want to read more about the works of people like Richard Posner in law and economics, and Gary Becker in sociology. Economics also has strong ties to the field of psychology. Several of the recent Nobel Prizes in economics have been awarded to scholars or teams studying economic behavior from a psychological perspective. This should be unsurprising: both disciplines have the goal of trying to figure out how and why people make the decisions and choices that they make.
A great many economics textbooks have been written, and they all strive to start at the same place, laying out what the "fundamental principles" are. One of the best attempts is by Gregory Mankiw, a professor at Harvard University and former chair of the President's Council of Economic Advisors. He has laid out a list of ten "principles of economics" that is broadly accepted as a good summary of the main points that I will try to make here.
Actually, it's more like "7 Principles," because the last three pertain to macroeconomic issues, which is an area of study that will not be addressed in this course. Instead, we will examine microeconomics, which is the study of individual economic actors: people, and firms, and their interactions in markets. Included as an agent in this study will be governments, which play a large role in the economic lives of every individual and every firm.
A good understanding of these seven points will provide you with a very solid grounding for how to think about economic problems throughout this course and throughout the rest of your lives. I will list them below, with some explication. Before I list them, I want to add three "axiomatic" statements that have to be considered before we move on. An axiom is an assumed statement, sort of a "first principle" that is not, or need not be proved. It is a basic understanding of how things happen.
Axiom 1: Things that we want to consume more of are called economic goods or, usually, just "goods". The opposite of a good is a "bad," which is something that we want less of. However, there are very few things that are universally bad - almost every economic bad is somebody else's good. For example, we might think of pollution from burning coal as bad, and it certainly has a detrimental effect on many people, especially those who live near power plants. But the more pollution a plant operator can put into the air, the more electricity he sells, and the more money he makes.
Axiom 2: All goods are scarce. It is important to understand what "scarce" means in this context. There are quite a few words that have one meaning when used in general conversation, and a narrower, more specific definition when used in economic analysis. In general usage, "scarce" usually refers to something that is in short supply, or is running out, or is hard to find. In economics, scarce simply means that something is not limitless. Another way of thinking about it is this: a good is considered scarce if we have to give something up to consume it. When viewed in this light, the phrase "all goods are scarce" makes a bit more sense. Bottles of orange juice or episodes of TV shows are not scarce in the general sense, but they certainly are in the economic sense.
Axiom 3: Wants are unlimited. This is perhaps a polite way of saying "people are greedy" in the sense that people almost always prefer to consume more goods than less. If they reach a limit to how much of some good they want to consume, it is not hard to find another good they would like to consume more of. It is important to consider that things like leisure, rest, and peace of mind can be seen as goods.
Now, moving on to Mankiw's list:
This means that we have to make choices in a world of unlimited wants and scarce resources. If you want something, you will have to give something else up. You have to make a choice. Perhaps, in a perfect world, we would not have to make choices – we could have all that we want without having to give up anything else, but this is not the world we live in. From the desert island example, we had a simple trade-off: if you wanted more coconuts, you had to give up fish, and vice versa. If you wanted more leisure time, you had to give up some food to get it.
In everyday life, we think of costs generally in terms of money, or perhaps time or effort. However, whenever you make an economic choice, what you give up are all of the choices that you didn’t make. This is what we call an “opportunity cost.” Ask the average man on the street what the cost of a bag of Doritos is, and he will say “99 cents.” Ask an economist, and he will tell you “every other thing that I could have spent 99 cents on." Or maybe, “the most valuable thing I could have spent 99 cents on, but did not because I spent it on Doritos.” Needless to say, this causes a lot of people to avoid having conversations with economists at parties but, nonetheless, thinking about costs in this way helps us better understand economic decision making. This contains a secondary point: money is only a tool, a store of value or a method of accounting. Money is only basically good for one thing: exchanging for goods that we consume. So, the cost of one consumption choice is the most valuable consumption choice we could have had, but chose not to make. Likewise, the opportunity cost of an investment, of either time or money, is the best other investment we could have made with that time and/or money. For example, the opportunity cost of going to an 8 am class is probably an hour of sleep for most people. Once again, think back to the desert island economy: it took you an hour to catch a fish, or half an hour to get a coconut. So what was the cost of a fish? Well, you can look at it two ways: first, you could say that it cost you an hour. This is true, but, really, an hour was only good for one of two things: catching fish or harvesting coconuts. So, if you spent an hour catching a fish, you were giving up two coconuts. We say that the opportunity cost of the fish is two coconuts - 2 coconuts is what you have to give up to gain an extra fish.
Opportunity cost is all the other things you give up to get something else. For example, let’s say you buy a car for 25 thousand dollars. If you don't spend your money on buying the car, you could invest your money (for example: deposit it into a savings account and receive interest or buy stocks, ...). When you buy the car, you give up all the other things that you could have done with the 25 thousand dollars. In economics, you should consider all of those. For example, if investing the money would give you interest, then, the opportunity cost of buying the car would be 25 thousand dollars plus lost interest of given up investment.
Another example: When you are a full-time student, the opportunity cost would be: the tuition that you pay plus money that you could have made if you were working and not spending your time at school.
Another example: Let's assume you are living in Pittsburgh and you want to buy a TV. There is a store in Pittsburgh that sells the TV for 500 dollars. However, you find a store in New York that has a TV on sale for 300 dollars. But there is no shipping service. So, you need to go there and pick it up there. What would you do? The true cost of buying the TV from the store in New York is \$300 plus all the other costs that you don't need to pay if buy the TV from the Pittsburgh store. If you decide to buy the TV from New York:
Next is a short video with more explanation.
“Thinking at the margin” means that we think about the next decision we need to make, and the incremental effects of that decision. Put another way, people have to be forward-looking, because the past is in the past, and nothing can be done to change it.
I will talk about this in more depth in the next section when we address rationality and utility maximization. This principle is intuitively very obvious: every child understands the notion of the carrot and the stick: positive and negative incentives designed to modify behavior. A further examination of this topic leads us to discover that people usually act in their own best interest, so when governments design policies, they have to be sure that they are incentivizing the “right” behavior. An interesting topic has arisen recently: the Estate Tax, which is applied to inheritances, is set to be reinstated at the beginning of 2011 after having lapsed at the end of 2009. This means that a wealthy person dying a few minutes after the coming New Year will leave his or her heirs with a significantly larger tax bill than if he died a few minutes before midnight. Thus, the heirs perhaps have an incentive to see to it that a terminally ill parent dies a little bit earlier. This is what is called a “perverse incentive,” because our society generally frowns upon people trying to cause others to die earlier than they otherwise might. Whenever you participate in an economic transaction, it always helps to think about what incentives the other person in the transaction faces.
I might be inclined to make a stronger statement: that trade MUST make everybody better off, but we can go with Mankiw’s weaker statement for now. The fundamental notion behind voluntary trade is that each party is giving up something in exchange for something that they place a higher value upon. If this were not the case, the person would choose to not make the trade. For example, when I buy a bag of Doritos, the shopkeeper will voluntarily make the trade because I am paying him more money than he paid for the chips, so he’s better off, and I will voluntarily make the trade because I get more happiness from consuming the chips than anything else I could spend that 99 cents on. We’re both made better off by the transaction. We will look at applications of this notion in much more depth later on.
This is another statement that could be made a little more forcefully, but we can let it be. Markets refer to institutions (not just places) that allow people to voluntarily and willingly participate in trades to improve their lives. People sell their labor and brain power to firms, which use it to help them make profits for the owners of those firms. People use the money they earn to purchase goods and services to help them live their lives in a way that best makes them happy. In a truly free-market system, we have millions of individual, voluntary economic transactions taking place every day. In reality, sometimes (or, perhaps, always) markets do not work in this idealized manner, which leads to the next principle.
When markets do not work well, we speak of “market failure” (there will be much more on this later in the course). Sometimes a government can intervene in a market, by setting rules or restrictions that enable a better outcome for society than would be obtained through an unfettered free market. Many people believe, for example, that product safety laws or workplace safety rules are unambiguous improvements upon unregulated outcomes. However, the government cannot fix every problem, and sometimes government intervention in a market can end up making things worse for society. This is what is called “government failure,” and we will also look at this in much more depth later on in the course.
The last three principles, which I will simply list below, pertain to macroeconomic issues that will not be addressed in this course.
As outlined in the previous section, we are trying to study why people make the economic decisions that they make. To try to understand this question, we assume that people do things that make them happy. This is not a difficult concept to understand: any time we are faced with a choice, there is an outcome that will make us happier than another outcome. Some choices are not very enjoyable, such as doing our laundry or paying our taxes, but we do so because the alternative will leave us with less happiness: most of us prefer clean clothes to dirty, and most of us prefer to not be hounded into court by the taxman.
Economists don't use the word "happiness," but instead have coined another term: "utility." You might think of a utility as the company that provides your electricity or drinking water, and these have the same root meaning derived from the word "use." In the economic context, think of utility as the use, the value of the use or the happiness derived from the use of some good. Basically, "utility" is the economic catch-all term for whatever benefit we get from the consumption of some economic good, or in a broader sense, the benefit we derive from the outcome of an economic decision.
So, if somebody gets utility from making a decision, and more utility (happiness) is unambiguously better than less, then we make the claim that people are "rational utility maximizers." That is, in every decision that we make, we think rationally about the outcomes and make the choice that gives us the most utility. This is a simple and elegant statement, and it lies at the foundation of modern western economic thought, but it is not completely uncontroversial or even all that uncomplicated. For example, many decisions are not simple yes/no or A/B choices. Sometimes there are many possible choices - indeed, there are usually many possible choices, and we don't always know which of those choices will make us happier for the simple reason that we cannot see the future with perfect foresight. People make uninformed decisions, hurried decisions, unlucky decisions, and just plain wrong decisions every day. We are not perfectly rational, and we usually do not have either the time or knowledge, or foresight to always make the correct decision. This is an area of intense study at the boundaries of contemporary economic thought - several of the recent Nobel prizes in economics have gone to people researching what is called "behavioralism," a field of study that spans economics, psychology, and neurology. In other words, it gets really complicated. So, we make the assumption that people are rational utility maximizers. It may not be perfectly true, but it is reasonably defensible (most of us try to make the best decisions most of the time, and we don't deliberately do things that will hurt ourselves). Most importantly, it gives us a firm foundation to build upon. It is what we call a "simplifying assumption": we can assume it to be true, and doing so will allow us to answer a broad swath of questions about economic decision-making and outcomes. And after we have reasonably answered all of those questions, we can start relaxing our assumptions one at a time to see how the outcome changes. It turns out that, even if you relax the assumption of perfect rationality, most of the answers to the questions do not change in a meaningful or substantive manner.
It is important to state at this point that money and utility are not the same things. People are not money-maximizers; for example, most of us would rather have the weekends off instead of working a second job. I could take a second job working in a restaurant at night, but I get more happiness spending my evenings at home or out with my family.
However, in this course, and in almost any other study of economics, you will find utility defined in terms of money. This action is defined as "monetization." This is not because we believe that money is everything. It is because we are lazy and want to explain things in simple terms. So, what we are using is using money as a common unit of measure and accounting. For example, for my winter vacation choice, I could go skiing or go to a beach resort in Mexico. In order to measure the happiness obtained from these two choices, we need a common unit of measure, and since money is a universally accepted proxy as a measure of value, that is what we use. So, economists talk about everything in terms of money because doing so makes our lives (and those of students) easier.
Economists like to describe their discipline as a science. This seems odd to some people, who think of science as involving laboratories and experiments. However, any area of study that employs "the scientific method" as a mode of inquiry can be thought of as a science.
So, what is the scientific method? Well, there is no single broadly accepted definition, but there is a generally accepted framework. The scientific method is a structured method of attempting to answer questions about the world about us. In the case of economics, the "world" refers to the multitude of consumption and production decisions made by every person and firm every day.
The scientific method, as described here, has four basic steps:
We start by observing something in our environment that leads us to ask a question. Questions such as: Will a ball float in water? Will price controls lead to shortages? Will smoking cause you to die earlier? To attempt to come to an answer, we first need to ask the question in the form of a "testable hypothesis." Put another way, try to frame the question in such a way as to be able to test it and get a yes/no answer. Actually, we generally frame the questions so that the answer will be "no" or "not no." Note that "not no" is not the same thing as yes. "Not no" can be either yes, or maybe, or we don't know, or the answer is not clear. But we do want a question that can have a clear answer of "no."
This question is called a "hypothesis." We need to test the hypothesis with an experiment: some set of actions that will allow us to answer the hypothesis. In science-speak, we write the question as a "null hypothesis," so looking at our first question from above, I will state the null hypothesis as "this ball will float in water." We then perform some set of actions to test the hypothesis. In this case, there is a simple test: place the ball in water. If it sinks, we can answer "no" to the null hypothesis, or put another way, we can reject the null hypothesis. If the object does not sink, we do not answer yes, but instead we "fail to reject" the null hypothesis.
Notice that we are not trying to prove something to be true, but we are, in fact, trying to prove it to be false. This is the key aspect of the scientific method: we need to have a hypothesis that is testable and falsifiable. If something is not falsifiable, it cannot be tested scientifically. In science, nothing is proven, but many things are disproven. Some hypotheses, such as Newton's theory of gravity, have survived the test of falsifiability for centuries, and as such, we generally accept them to be "true," but, in reality, they are just yet to be disproven, after several hundreds of years of many smart people trying.
The above was a rather long-winded attempt by me to explain why economics is a science - a science that studies an aspect of a human society, which is why it is called a "social science." It is a science because economists, when they ask questions, strive to employ the concept of a testable, falsifiable null hypothesis. Unfortunately, it is much more difficult to do experiments. For example, we cannot impose a price control in one town and not in another, and observe the difference. What we can do is gather data from the world around us, and try to define "natural experiments" to help us test our hypothesis. So, for instance, we can look at different minimum wages in different states and try to ask questions about the effect of raising the minimum wage on youth unemployment. Unfortunately for us, we can not do " controlled experiments," that is, hold everything else constant and change only one variable. When dealing with society and natural experiments, there are many uncontrolled, indeed, uncontrollable variables, which can make hypothesis testing difficult and controversial.
So, what kinds of questions do economists ask? Well, for the most part, they try to ask "positive" questions. A positive question is one that can be falsifiable, or put more simply, has a yes/no answer. Think of a positive question as a "how is the world" question. A different kind of question does not ask how the world is, but how it "should be." These are referred to as "normative" questions.
For example, speaking again about minimum wage laws, a positive question would be "Do higher minimum wages cause higher rates of youth unemployment?", whereas a normative question might be "Are higher minimum wages better for young workers?" The first of those two questions should have a testable answer: yes or no. The answer to the second question hinges upon the definition of "better." We often hear the phrase "There oughtta be a law," or maybe, "We should have higher minimum wages." These are political questions, based upon values-based questions that are not falsifiable. I am not saying that asking these types of questions is wrong or incorrect; clearly, this is what the entire field of politics is about. However, these are not the kinds of questions that we like to ask in economics. Economists are people who see themselves as dispassionate scientists, attempting to rationally undercover the nature of the universe. At least, that's the goal most of us strive to, and in this course, it is the method of explanation I will attempt to employ.
Stated simply, I'm here to try to help you see how things are, and not how they should be.
A positive question is a "scientific" question that you can test it, you can look at the data, build and economic model, ... and eventually conclude if it is correct or not. However, a normative question/sentence is more like an opinion, that you can agree or disagree. You can't really scientifically test it.
The following video (3:59) explains the difference between positive and normative economics.
When we start talking about market systems and trade, we will make an assumption that people have the legal right to trade something for something else, and to do as they wish with the goods they have traded for. That is, if you have money you can trade it for goods that you use in some way that you derive utility from, or if you have a good, you may sell it in exchange for either money or other goods. Of course, the good that most of us sell most frequently is our time and set of skills, sold to an employer in exchange for a salary.
This introduces the concept of "property," the stuff that you sell and/or use. A property right has two separate and specific parts. For something to be a person's property, it is necessary that both parts of the property right are present.
For somebody to hold a property right, they have to have both Use Rights and Disposal Rights. That is, for something to be considered a person's property, you have to have the right to use it as you please, and the right to exchange it for something else, or to dispose of it some other way, which can include destroying the good in question.
One confusing use of the term "property" is in the case of "public property," for which a specific individual may or may not have use rights, and definitely does not have disposal rights. There is a longer write-up on the topic of property rights on pages 32-36 of the text, which I recommend you read. Gwartney adds a third consideration, one concerning legal protection against unauthorized use, but I see this as simply an extension of the "use right" part of the definition.
Before moving on to try to understand and analyze the workings of market systems, we need to have a broad understanding of just what we are trying to study in this class, and why. This was covered in this lesson.
At this point, you should be able to answer the following questions:
If you log in to Canvas, you will find the tasks to be completed for this lesson: a timed online quiz, an untimed homework assignment, and the weekly discussion forum.
You have reached the end of Lesson 1! Double-check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there.
If you have anything you'd like to comment on or add to the lesson materials, feel free to post your thoughts in the discussion forum in Canvas. For example, if there was a point that you had trouble understanding, ask about it.
Links
[1] http://www.flickr.com/photos/mermaid99/5438463871/in/photolist-9hzxQt-9eqzWN-asu8Y9-6YzsaC-edLTJu-asrvbK-fDphqH-asrotM-7BTmPk-8xrnhA-7pvjNn-asrvte-5Sf4on-n4jvVz-astsXL-rcbmhX-RDbybo-rrkx2s-qr1XFb-BB56Vm-BcozU4-qwCCnQ-brVfZm-TDrfJn-74p3sr-5aGdur-9NEtYQ-9NGKrb-9M2DUT-tEsAP-3UN759-9NKkq5-puXqCR-9TtJAA-9NF1UU-9NED8w-9NFhVS-A8zQK-9NBTQp-rxjwxC-9NKiVG-9NJMSL-9NJFKf-9LBtLk-9NFk5w-9NEKvf-9NDcae-9NGu4g-9NFpHu-9NFRbj
[2] https://creativecommons.org/licenses/by-nc-nd/2.0/
[3] http://classroomclipart.com/
[4] https://www.youtube.com/c/MarginalRevolutionUniversity
[5] https://www.youtube.com/watch?v=x-hYzRncxTc