YOU DECIDE: What should I tell new economics students?

Date posted: September 2, 2011

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

To paraphrase Dickens, it is the best of times and the worst of times for economics. It is the best of times because as an economic educator for 34 years, I’ve never seen interest in economics higher. But it is also the worst of times because not only is the economy very challenged, but economists don’t appear to have easy answers for turning it around.

As a new semester starts at North Carolina State University, I have an opportunity to teach economics to about 100 undergraduates. So what do I — and should I — tell them about this discipline held in both high and low regard? Obviously a full 15-week semester can’t be condensed into one article, but here’s a summary of some major points I cover.

Economics is about choice. Economics only exists because our resources (money, time) are limited, but our goals, wants and desires are unlimited. Therefore, we have to choose how to use our resources, and choice is hard. All of us would rather have our cake and eat it too, as my late mother used to say. Economics is fundamentally a set of principles that helps us work through our choices.

We respond to incentives. If there’s a hidden world to economics (the “invisible hand,” as coined by the 18th century economist Adam Smith), it is that our economic behavior responds to incentives, both on the benefit and cost sides. Examples are everywhere. Most of my students are in college because they know a college degree is usually associated with a higher salary. I buy more gasoline when the price is lower than I do when the price is higher. Big profits earned by the first maker of the latest techno gadget will motivate other manufacturers to enter the market and ultimately bring prices and profits down.

Incentives motivate both consumers and businesses to move toward products and services where the difference between benefits and costs is the greatest. Of course, the valuation and assessment of these benefits and costs are often subjective, which is one reason we all don’t make the same choices.

Competition keeps things in line. Competition is the consumer’s best friend. When businesses have to vie for our purchases, they’ll be motivated to be efficient and offer the lowest possible price. For example, a recent study found airports dominated by one or a few carriers had noticeably higher fares than airports with many competing airlines.

But with competition comes work and change. Many products and services are multi-faceted; price isn’t always the only important factor. So consumers have to devote time and effort to evaluating the many alternatives. Also, competition brings change — sometimes at a rapid and confusing rate. Bookstores are fighting to stay alive as tablet and on-line reading increase. The big three U.S. automakers I grew up with in the 1950s no longer dominate auto sales. Competition is messy.

Market segmentation rules. The most common business technique that consumers face is market segmentation. In fact, one economist said selling is really all about market segmentation. This technique simply involves categorizing — in a legal way — consumers into different groups and selling products and services to each group at the maximum price they’re willing to pay. Groups less sensitive to price pay more, while groups more sensitive to price pay less.

Market segmentation can explain many of the price differences we observe. The airlines’ Saturday night stay is used to separate leisure travelers — who usually stay over a weekend — from business travelers — who generally travel during the workweek. If business travelers are less sensitive to price, they’ll pay a higher fare. Consumers who really want a new product now pay more than if they waited until the hype wore off. And those who buy large quantities have more to gain from a lower price than someone purchasing a small amount. Therefore, the big buyers — who are more sensitive to the price — get a break by paying a lower price per unit.

What do we do when the market fails? A well-functioning economic market requires that all major economic costs are recognized and paid for. But this isn’t always the case. Pollution is an excellent example. When I drive my vehicle, I emit some pollutants, which reduce air quality and impose costs on others. Yet I don’t pay for these costs. So in this sense, the market has failed. A major debate among economists and policymakers is how to handle this market failure — with regulation, with “pollution prices,” or with improved technology or methods to reduce the cost?

The two big macro issues are business cycles and growth. Business cycles are the irregular ups (expansions) and downs (recessions) in the national economy. Economists have long sought the formula for eliminating these cycles and allowing the economy to grow at a smooth, consistent rate. We’re still looking!

Over the long term, economic growth — a.k.a. improving living standards — is determined by improvements in physical capital (machinery, technology, infrastructure) and human capital (education, training). But what’s the best combination of the two, and what’s the proper role of private companies and individuals and of governments in stimulating growth? These are big questions!

So there you have it, a sort of mini lesson that covers the waterfront of economics. Have I motivated you to learn more about the “science of choice,” or have I made you even more dismayed about what some call the dismal science? I hope it’s the former, but you decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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