lecture 1 introduction and ten principles of economics

7/21/2019 Lecture 1 Introduction and Ten Principles of Economics

http://slidepdf.com/reader/full/lecture-1-introduction-and-ten-principles-of-economics 1/31

Concepts, Methods and Issues in Economics:

An Introduction



SCARCITY AND EFFICIENCY: THE TWIN

THEMES F ECNMICS

• What is economics!

• "er the #ast ha#$ centur%, the stud% o$ economics has

e&perienced to inc#ude a "ast ran'e o$ topic(

• What are the ma)or de$initions o$ these 'ro*in'

su+)ects!



Economics

• ana#%-es ho* a societ%.s institutions and techno#o'%a$$ects prices and the a##ocation o$ resources amon'di$$erent uses(

• e&p#ores the +eha"iour o$ the financial markets,inc#udin' interest rates and stoc/ prices(

• e&amines the distribution of income and su''eststhat the poor can +e he#ped *ithout harmin' the

per$ormance o$ econom%(

• studies the business cycle and e&amines ho*monetar% po#ic% can +e used to moderate the s*in'sin unemployment and inflation(



Economics

• studies the pattern of trade amon' nationsand ana#%-es the impact o$ trade +arriers(

• #oo/s at growth in de"e#opin' countries and

proposes the *a% to encoura'e the e$$icientuse o$ resources(

• as/s ho* 'o"ernment po#icies can +e used to pursue important 'oa#s such as rapid

economic growth, efficient use of resources,full employment, price stability and fairdistribution of income(



And….

• This list is a good one, yet you couldextend it many times over. But if we boildown all these denitions, we nd one

common theme:Economics is the study how societies

use scarce resources to producevaluable commodities and distribute

theme among diferent people

“Economics is the study of how societymanages its scarce resources”.



Three +asic 0uestions: 123

(1) What commodities are produced and in *hat0uantities!

• A societ% must determine ho* much o$ each o$ the man% possi+#e 'oods and ser"ices it *i## ma/e and *hen the% *i## +e produced(

• Wi## *e produce pi--as or shirts toda%!

• A $e* hi'h40ua#it% shirts or man% cheap shirts!

• Wi## *e use scarce resources to produce man% consumption'oods 5#i/e pi--as6!

• r *e *i## produce $e* consumption 'oods and morein"estment 'oods 5pi--a ma/in' machine6, *hich *i## +oost production and consumption tomorro*(




(2) How are 'oods produced!

• A societ% must determine ho* *i## do the production,

*ith *hat resources, and *hat production techni0ue

the% *i## use(

• Who $arms and *ho teaches!

• Is e#ectricit% 'enerated $rom oi#, $rom coa# or $rom

the sun!• Wi## $actories +e run +% peop#e or +% ro+ots!




(3) For whom are produced!• Who 'ets to eat the $ruit o$ economic acti"it%! Is the

distri+ution o$ income and *ea#th is $air and e0uita+#e!

• Ho* is the nationa# product di"ided amon' di$$erenthouseho#ds!

• Are man% peop#e poor and a $e* rich!

• Do hi'h incomes 'o to teachers or ath#etes or auto*or/ers or

Internet entrepreneurs!• Wi## societ% pro"ide minima# consumption to the poor, or must

peop#e *or/ i$ the% are to eat!



9RINCI9ES F ECNMICS

An Introduction:

A househo#d and an econom% $ace man% decisions:

Who *i## *or/!

What 'oods and ho* man% o$ them shou#d +e produced! What resources shou#d +e used in production!

At *hat price shou#d the 'oods +e so#d!



9RINCI9ES F ECNMICS

An Introduction (contd.)

• Societ% and Scarce Resources:

– The mana'ement o$ societ%.s resources is important

+ecause resources are scarce( – Scarcity( ( ( means that societ% has #imited resources and

there$ore cannot produce a## the 'oods and ser"ices peop#e

*ish to ha"e(

The main aspects of economics can be summarized into

ten basic principles (continued in the next slide)



TEN PRINCIPLES OF

ECONOMICS• Ho* 9eop#e ma/e decisions !

2( 9eop#e $ace trade4o$$s(

7(The cost o$ somethin' is *hat %ou 'i"e up to 'et it(

8( Rationa# peop#e thin/ at the mar'in(

;( 9eop#e respond to incenti"es(

• Ho* peop#e interact !

<( Trade can ma/e e"er%one +etter o$$(

=( Mar/ets are usua##% a 'ood *a% to or'ani-e economic acti"it%(

>( ?o"ernments can sometimes impro"e economic outcomes(

• Ho* econom% as a *ho#e *or/ !

@( A countr%.s standard o$ #i"in' depends on its a+i#it% to produce 'oods and ser"ices(

( 9rices rise *hen the 'o"ernment prints too much mone%(

2B( Societ% $aces a short4run trade4o$$ +et*een in$#ation and unemp#o%ment (



HW 9E9E MAE DECISINS

2(9eop#e $ace trade4o$$s(

7(The cost o$ somethin' is *hat %ou 'i"e up to 'et it(

8(Rationa# peop#e thin/ at the mar'in(

;(9eop#e respond to incenti"es(



• There is no such thin' as a $ree #unch

9rincip#e 2: 9eop#e Face Trade4o$$s(



9rincip#e 2: 9eop#e Face Trade4o$$s(

To get one thing, we usually have to give up another thing.

Food v. clothing

Leisure time v. work

Efficiency v. equity

uns v. !utter "overnments Trade off # wheather to producedefense equipment or consumer goods$

%&aking decisions requires trading off one goal against another'.



9rincip#e 2: 9eop#e Face Trade4o$$s

• E$$icienc% "( E0uit%

– Efficiency means societ% 'ets the most that it can

$rom its scarce resources(

– Equity means the +ene$its o$ those resources are

distri+uted $air#% amon' the mem+ers o$ societ%(



Principle 2: The ost of !omething "s #hat $ou

%i&e 'p to %et "t

• Decisions re0uire comparin' costs and +ene$its o$

a#ternati"es(

– Whether to 'o to co##e'e or to *or/!

– Whether to stud% or 'o out to *atch a mo"ie!

– Whether to 'o to c#ass or s#eep inGp#a%!

• The opportunity cost o$ an item is *hat %ou 'i"e upto o+tain that item(



• Marginal changes are sma##, incrementa# ad)ustments

to an e&istin' p#an o$ action(

9eop#e ma/e decisions +% comparin' costs and

+ene$its at the mar'in

9rincip#e 8: Rationa# 9eop#e Thin/ at the Mar'in(



Principle : People *espond to "ncenti&es

• Mar'ina# chan'es in costs or +ene$its moti"ate peop#e

to respond(

• The decision to choose one a#ternati"e o"er anotheroccurs *hen that a#ternati"e.s mar'ina# +ene$its

e&ceed its mar'ina# costs(

For e&amp#e: peop#e respond to ta& incenti"es, su+sides and

'o"ernment #a*s 'o"ernin' sa$e#% #a*s $or dri"in' etc(



+# P-P.- "/T-*0T

5<6 Trade can ma/e e"er%one +etter o$$(

5=6 Mar/ets are usua##% a 'ood *a% to or'ani-e

economic acti"it%(

5>6 ?o"ernments can sometimes impro"e economicoutcomes(



Principle 1: Trade an ake -&eryone 3etter ff

• 9eop#e 'ain $rom their a+i#it% to trade *ith one

another(

• Competition resu#ts in 'ains $rom tradin'(

• Trade a##o*s peop#e to specia#i-e in *hat the% do +est(



Principle 4: arkets 0re 'sually a %ood #ay to

rganize -conomic 0cti&ity

• A market economy is an econom% that a##ocates

resources throu'h the decentra#i-ed decisions o$

man% $irms and househo#ds as the% interact in

mar/ets $or 'oods and ser"ices( – Househo#ds decide *hat to +u% and *ho to *or/

$or(

– Firms decide *ho to hire and *hat to produce(



Principle 4: arkets 0re 'sually a %ood #ay to rganize

-conomic 0cti&ity(

• Adam Smith made the o+ser"ation that househo#ds

and $irms interactin' in mar/ets act as i$ 'uided +% an

5in&isible hand6

– ecause househo#ds and $irms #oo/ at prices *hen

decidin' *hat to +u% and se##, the% un/no*in'#% ta/e into

account the socia# costs o$ their actions(

– As a resu#t, prices 'uide decision ma/ers to reachoutcomes that tend to ma&imi-e the *e#$are o$ societ% as a

*ho#e(



Principle 7: %o&ernments an !ometimes "mpro&e

arket utcomes

• Mar/ets *or/ on#% i$ propert% ri'hts are en$orced(

– Property rights are the a+i#it% o$ an indi"idua# to

o*n and e&ercise contro# o"er a scarce resource

• Market failure occurs *hen the mar/et $ai#s toa##ocate resources e$$icient#%(

• When the mar/et $ai#s 5+rea/s do*n6 'o"ernment can

inter"ene to promote e$$icienc% and e0uit%(

E': Thin/ in case o$ po##ution 5'o"ernment induce ta& on emission6



Principle 7: %o&ernments an !ometimes "mpro&e

arket utcomes

• Mar/et $ai#ure ma% +e caused +%:

– an eternality, *hich is the impact o$ one person or

$irm.s actions on the *e##4+ein' o$ a +%stander(5po##ution causes a negati!e eternality, Industria#

c#usterin' IT par/s, Specia# economic Jones etc(

creates a positi!e eternality6(



HW THE ECNMY AS A WHE WRS

5@6 A countr%.s standard o$ #i"in' depends on its a+i#it%

to produce 'oods and ser"ices(

56 9rices rise *hen the 'o"ernment prints too muchmone%(

52B6 Societ% $aces a short4run trade4o$$ +et*een

in$#ation and unemp#o%ment(



Principle 8: 0 ountry9s !tandard of .i&ing epends on "ts

0bility to Produce %oods and !er&ices

• Standard o$ #i"in' ma% +e measured in di$$erent

*a%s:

– % comparin' persona# incomes(

– % comparin' the tota# mar/et "a#ue o$ a nation.s production(

• A#most a## "ariations in #i"in' standards are e&p#ained

+% di$$erences in countries. producti"ities(

• Producti!ity is the amount o$ 'oods and ser"ices

produced $rom each hour o$ a *or/er.s time(



Principle ;: Prices *ise #hen the %o&ernment

Prints Too uch oney

• Inflation is an increase in the o"era## #e"e# o$ prices in

the econom%(

• ne cause o$ in$#ation is the 'ro*th in the 0uantit% o$

mone%(• When the 'o"ernment creates #ar'e 0uantities o$

mone%, the "a#ue o$ the mone% $a##s(



Principle <=: !ociety >aces a !hort?run Trade?off

between "nflation and 'nemployment

– In$#ation or Knemp#o%ment

• It.s a short4run trade4o$$

– The trade4o$$ p#a%s a /e% ro#e in the ana#%sis o$ the

"usiness cycle L$#uctuations in economic acti"it%,such as emp#o%ment and production



Thin/in' i/e an Economist

E"er% $ie#d o$ stud% has its o*n termino#o'%

Mathematics

• inte'ra#s a&ioms "ector spaces

9s%cho#o'%

• e'o id co'niti"e dissonance a*

• promissor% estoppe# torts "enues

Economics

• supp#% opportunit% cost e#asticit% consumer surp#us

demand comparati"e ad"anta'e dead*ei'ht #oss



Thin/in' i/e an Economist

Economics trains %ou to( ( ( (

Thin/ in terms o$ a#ternati"es(

E"a#uate the cost o$ indi"idua# and socia# choices(

E&amine and understand ho* certain e"ents and

issues are re#ated(



THE ECNMIST AS A SCIENTIST

The economic *a% o$ thin/in' ( ( (

In"o#"es thin/in' ana#%tica##% and o+)ecti"e#%(

Ma/es use o$ the scienti$ic method(

Kses a+stract mode#s to he#p e&p#ain ho* a comp#e&, rea# *or#d operates(

De"e#ops theories, co##ects and ana#%-es data to e"a#uate the theories(

lecture 1 introduction and ten principles of economics

Documents