• Each of us acts purposefully

• We have ends, goals, desires, objectives, etc

• We use means in the world that we believe will achieve our ends

• Acting with purpose distinguishes humans from everything else in the universe

• Artificial intelligence researchers face "the frame problem"

  • We thought: computation is hard, perception is easy
  • We've found: computation is easy, perception is hard!

• Machine learning and artificial intelligence are "dumb"¹
• With the right models and research designs, we can say "X causes Y" and quantify it!
• Economists are in a unique position to make causal claims that mere statistics cannot

• Only individual people act

• The individual is the base unit of all economic analysis

• "How will action/choice/policy/institution [X] affect each individual's well-being?"

• Actions that satisfy human desires provide a service

• An object that can provide services is called an economic good or a resource

• Goods and services provide "utility" (satisfaction of a desire) when we consume them

• An economic bad is something that hinders our ability to satisfy our desires

• Scarcity: human desires are practically unlimited, but our ability to satisfy them (with goods and services) is limited

• How do we best economize limited resources to satisfy our unlimited desires "efficiently?"

• We can only pursue one goal at a time

• This implies that we must choose to forgo all other alternatives when we pursue each goal

• We can only pursue one goal at a time

• This implies that we must choose to forgo all other alternatives when we pursue each goal

• The (opportunity) cost of every choice is the next best alternative given up

  • "You can't have your cake and eat it too"

• What does it mean to say that "spending money 'stimulates' the economy"?

• What does it mean to say that "spending money 'stimulates' the economy"?

• Scarce resources used in one industry can not be used in other industries

• Every (visible) decision to spend on X yields more X, and destroys an (invisible) opportunity to spend on Y

• "Classical Economists" (c. 1776-1870)

• Goods have "natural" prices, determined objectively by cost of production (wages+rents+profits)

  • Labor theory of value: prices of goods determined by amount of "labor hours" to make

• All human choices are made "on the margin, considering a small change from your current situation

• Buying, selling, consuming, or producing a discrete unit of a particular good at a time

• Each unit of a good consumed provides marginal utility

• Value is subjective

  • Each of us has our own preferences that determine our ends or objectives
  • Choice is forward looking: a comparison of your expectations about opportunities

• Preferences are not comparable across individuals

  • Only individuals know what they give up at the moment of choice

• Value is measured as an ordinal concept
  • We can rank our objectives relative to each other (but cannot quantify further)
  • We pursue highest-valued objectives (highest marginal utility) first
  • Pursuing one objective means not pursuing others!

• Value inherently comes from the fact that we must make tradeoffs
  • Making one choice means having to give up pursuing others!
  • The choice we pursue at the moment must be worth the sacrifice of others! (i.e. highest marginal utility)

The Law of Diminishing Marginal Utility: each marginal unit of a good consumed tends to provide less marginal utility than the previous unit, all else equal

Example: Suppose you have 5 uses for water by their value to you. Assume each use requires exactly 1 gallon of water:

1. Drink water
2. Take a shower
3. Wash car
4. Water plants
5. Change goldfish's water

Example: Suppose you have 5 uses for water by their value to you. Assume each use requires exactly 1 gallon of water:

1. Drink water
2. Take a shower
3. Wash car
4. Water plants
5. Change goldfish's water

Suppose you have only 1 gallon of water, what will you do with it?

Example: Suppose you have 5 uses for water by their value to you. Assume each use requires exactly 1 gallon of water:

1. Drink water
2. Take a shower
3. Wash car
4. Water plants
5. Change goldfish's water

Suppose you have have 2 gallons of water, what will you do with them?

Example: Suppose you have 5 uses for water by their value to you. Assume each use requires exactly 1 gallon of water:

1. Drink water
2. Take a shower
3. Wash car
4. Water plants
5. Change goldfish's water

Suppose you had 5 gallons of water, but spill one. Which activity will you stop doing?