 Hi and welcome to your course on economics. I'm Dr. Hannah Kling, Professor of Economics at Belmont Abbey College and I'm delighted to lead you through this journey of learning economics. Economics is obviously one of my favorite topics since I chose to get my degree in the subject, but I hope through these lessons economics will become one of your favorite topics too. The thing I love about economics is the different lens it gives you to look at the world. It's a powerful way to view not just monetary things, not just thinking about money, but thinking about how people make choices. Every discipline brings its own lens or viewpoint, and economics is not the only way to look at the world. Obviously every discipline has something valuable to bring to the table, but what I want to give you is the ability to put on the economics glasses to look at the world when that is an important thing to do. I love economics because it combines kind of an intuitive, common sense approach with the ability to generate some really powerful insights. Economics gives you the ability to leverage some really basic premises into some really important conclusions. We can resolve mysteries, solve problems, and reveal answers about human behavior. So in this course we're going to explore how to think like an economist. We're going to think about how people make choices. We're going to think about how a market economy coordinates people's actions. And then we're going to think about what leads to economic well-being and progress. And we're going to think about the inner relationships between political decisions, the economy, and individual choices. And finally, you're going to learn how to apply this economic way of thinking to some financial decisions that you will face. Throughout these lessons, you'll learn that economics is about much more than how to make and invest money. This course is broken down into four modules. The first is an introduction into the economic way of thinking. The second explores economic progress and well-being. The third looks at economics and government. And the fourth applies the economic way of thinking to personal finance, decisions that you may make soon, whether to go to college, what career to pursue, and how to manage your money. As you approach this course, I recommend that you take a look at the study guide that accompanies it. You'll see that at the beginning, there's a vocabulary matching exercise. And I recommend that you do that first before you look at the book or watch these lectures. The vocabulary is really important to give you the tools that you need and understanding that you need for the vocabulary that we have in economics. After you do that, take a look at the book sections and take notes on the book. As you take notes, don't just summarize what's in the book. Also take notes on some questions that you may have, some things that you don't understand. And then you can bring those questions to the lecture and hopefully have those answered here. After you've done that, watch the lecture and take notes on that as well. You can try varying the order of these three activities and see what works best for you. Figure out what helps you learn best and pursue things that way. After you've read the book and watched the lectures and taken notes, then do the quiz and check the answers. If you got many wrong, revisit your notes, look over the book, rewatch the video, and retake the quiz. Finally, write answers to the short answer questions. These are open-ended questions and there are suggested answers in the study guide. But you will learn the most by discussing these questions with other people, whether they have a background in economics or not. So I encourage you to do that as the final step to really solidify your understanding is through discussing and applying the economic ideas that you will truly learn. So here we are in the first section, the economic way of thinking. So what is the economic way of thinking? How do you think like an economist? Well, as I said earlier, my goal is to give you a whole new way of looking at the world. With the economic way of thinking, you'll be able to make better decisions. You'll think about the true costs and benefits of choices that you face. You'll also be able to better understand the world around you. The economic way of thinking gives you a way to predict the behavior of other people, and that can be extremely helpful. The economic way of thinking will also help you be a realist. You'll be able to identify the trade-offs that accompany any decision. You'll be able to think about what's attainable and what's not attainable. And you'll be able to predict the likely outcomes of a change or choice, even if those outcomes are at odds with the intended outcome. To introduce the economic way of thinking, let's start with a thought experiment. I'm going to introduce a situation, and we're going to walk through this together. So back in the olden days, people had to share phones. Phones were attached by a cord to the phone system, and there weren't very many phones available. So a family would have just one phone. A dormitory or hotel might have one phone in the lobby, and businesses would have just a few phones available. So this created a problem. You would see that people spent too much time on their calls. Other people had to wait their turn even if their call was more important. Incoming calls couldn't get through, and so people were faced with the problem. How do we set up a system so that the most important calls can be made and no one is sitting hogging the line? Well, before we can think about the solutions to this problem, we have to identify why this is a difficult challenge. What is creating the problem in the first place? Of course, having limited phones is part of it, but limited capacity isn't the only problem. It's the incentives the individuals face about how much time to spend on the phone. Once you finally get your turn on the phone, you have no incentive to quickly wrap up so that somebody else can get on the phone. Another difficulty in setting up a solution to this problem is how do we set up a system that's fair and isn't favoring some people over others? And for that matter, how can we tell which calls are most important? How can we systematize this so no one has to make case-by-case judgments, but there's a clear system in place that applies equally to everybody? And finally, can we figure out a way that we can set up a system that's for monitoring phone use so that no person has to sit there by the phone all the time? That would be a big waste of time to have to have a phone monitor, so it would be nice to come up with a system that can address this. So why don't you take a few moments, pause the video, and brainstorm a solution that you think might work to figure out how to allocate the phone time among all the people who want to use the phones? So to resolve this issue, many places adopted a pay phone. So this is a very economic solution. We're thinking about prices and how to use prices to allocate some scarce resource, such as phone time. So how does this resolve our problem? Well, it doesn't reduce the fact that there's only a few phones available, but what it does is it gives people the incentive to only make important calls and to cut their calls short since they're paying by the minute. So this thought experiment is probably not what you would think of as economics, but it highlights the fundamental problem that economics addresses, and that problem is something called scarcity. Scarcity basically means we always have less than we would like. Scarcity applies broadly, so the economic way of thinking can be applied to a wide variety of problems. What is economics? Economics is about the choices we have to make because of scarcity. We want to make the best use of the scarce resources we have, and this idea of making choices under scarcity unrealizes all of human behavior. And thinking about how people make choices under scarcity to use their resources the best they can helps us think about how these individual choices and efforts combine in what we call an economy. So economics is really about choice. We're going to think about what forces us to make choices. What affects the choices before us? How do we make the best choices we can with the information we have? And why do others make the choices that they do? To understand this, let's explore a little more in depth this concept of scarcity. As I said before, scarcity is simply the fact that we have unlimited wants, but we have limited resources or limited things available to meet those needs and wants. Our unlimited wants are kind of part of our human nature. No matter how much we have, we always want more. But our resources, the things that we have to meet those needs, those are limited by nature and physics. When you think about scarcity and having limited resources, we're not just thinking about money, although we often feel that money is scarce. Money is not the only thing or even the most important thing that is scarce. It's the resources that are scarce. Resources are anything we use to make things we want. This includes natural resources, human ability and effort and skill, and also time. Time is one of the most important resources we have, and until we resolve time travel, that itself is also limited. It's important to note that scarcity is not the same thing as poverty. Even the richest people have limited finite resources. Even if you have a lot of money, it's still a fixed amount. So Bill Gates has to make trade-offs, deciding how to use his finite amount of money, how to use it, how to donate it, how to use it well. Jeff Bezos, also very wealthy, but also has to make trade-offs. He faces scarcity about perhaps how to spend his time, how does he balance his time between work, family, leisure and other things. And it is this fact of scarcity that forces us to make choices. Life is full of trade-offs. Every path we take means that we didn't take other paths. We have to make choices because of scarcity. Sometimes our choices are overwhelming, so we'll wind up looking at a menu like this and feel extremely overwhelmed. Why is this so troubling? Why does this become so difficult for us? It's because everything that we say yes to means we're saying no to everything else. So what effects are available options? What effects the array of choices before us? Well, of course the economy affects what we have available, what kinds of things are produced, how expensive they are, and how many of them are available. But also our choices are affected by the rules in place, the rules from government, from other people, from organizations, and pressure that we may face from people around us. So questions like what things are legal and illegal are going to affect the choices before us? Does the government encourage or discourage certain production or certain consumption? These also affect our choices. As we think about the role of government in the economy, these two are kind of inextricably linked. We can't really think about the economy without thinking about the rules in place. So we're going to think about an economic system. An economic system is the set of rules that the government has in place about how scarce goods and resources are allocated in a society. And we often use the term allocated to allocate just means to distribute for a particular purpose. So we have finite resources in our economy. The rules that we have in place determine how those resources are distributed. And there are lots of ways to allocate resources. Let's think for a minute how do you get the goods and services that you want? Here in the United States, most things that we want, we pay for. But that is not the only way that we could allocate goods and services. What are some other ways that resources have been allocated? Well, you can have someone, perhaps the government, decide who gets what. You can have a system of first come first served where people wait in line and see who gets there before whatever it is runs out. Especially in very early human societies, scarce resources were allocated based on violence. And finally we can allocate resources based on prices. So there's no way that an economic system can eliminate competition for scarce resources. There's always going to be competition in an economy. This is because it's the scarcity itself that causes competition. And no economic system can eliminate scarcity. Any economic system will have competition. The economic system or rules determine how people compete, not whether they compete. So let's think about how people compete for scarce resources under these different ways of allocating the goods and resources in a society. So if someone decides, someone in power decides who gets what, how do you compete to get the things that you want and need? Well, you can try bribing the people in power. You can try schmoozing with them. You can try to gain influence in some way over the people in power. If we have a first come first served system of allocating resources, well, you've got to race to be the first person in line. If we're allocating goods and services based on violence, then you have to be the strongest or control the strongest person in your society. What does competition look like under prices, though? If you're a buyer, you compete for the things that you want by bidding against other buyers. And in a price system, the person who's willing to pay the most, the person who values the thing the most is the person who will get that scarce item. In a price system, sellers also compete. They compete for customers by providing the best product that they can at the lowest cost. So thinking about economics as competition may make you think that economics is viewing the world as kind of a dog eat dog world. Is this unavoidable competition for scarce resources just a really dire way of looking at the world? Well, no. A good economic system is not a zero sum game. A good economic system turns competition into coordination and progress. Trade, which benefits both sides, is the building block economic action. So with a good economic system in place, people can coordinate their actions beautifully, even without having too much concern for the people around them. Traffic is a great example of this. Self-interest. Your own desire for self-preservation encourages you to drive carefully, even if you don't really care about the other people on the road. And there can be an amazing amount of coordination out on the road, even with minimal rules. So even without stoplights, if there's roundabouts, just with minimal rules, people can coordinate their driving activity so that no one is crashing into anybody else. Finally, we're going to think about economics as not being the final word. As I said at the beginning, economics gives us an important array of tools for analyzing economic decisions about money and production, but also about all kinds of human choices. But this is not the only way of looking at the world, and this doesn't answer all the most important questions that we might have. So it's important to put economics in context. What questions can it answer and what questions should we leave to other disciplines? And I'd like to quote Pope St. John Paul II, who said, it is not possible to understand man on the basis of economics alone. So in this course, because it's economics, we're going to be thinking a lot about economic questions. We're going to be thinking about economic efficiency and economic progress. But this is not because those are the only worthwhile goals. Those are only two important goals, out of many important goals we might have for our society. But economic analysis can also tell us how to achieve those goals. The question is not really what makes people poor. The economic question addresses how did people become prosperous? Poverty is sort of the default state. You will always have the poor with you, but economics can help us understand how to improve the well-being, the material well-being of people around the world. But more broadly, aside from just thinking about how economics can tell us about economic questions, I'd encourage you to think about how to apply this economic way of thinking to all sorts of issues. Regardless of the goals you're thinking about trying to achieve, thinking like an economist can help you pursue those goals better, regardless of what those goals are. Understanding how incentives and rules affect human choices and human behavior. Understanding how to identify true costs and benefits of a choice are key to pursuing any goal, economic or otherwise. So in this course, you're going to learn how to think like an economist about a wide variety of ideas. And I'm glad you're joining me on this journey, and I look forward to seeing you in future lectures.