mie lec # 01 - 02 week one

7/31/2019 MiE Lec # 01 - 02 Week One

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Micro Economics Economics Overview

Facilitator: Wahid Rasheed

The University of Lahore, Islamabad Campus.

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Lec # 01

Economics is the social science that analyzes the production, distribution, andconsumption of goods and services. The term economics comes from the Ancient Greek

οἰ κονοµία (oikonomia, "management of a household, administration") from οἶ κος (oikos, "house") + νόµος (nomos, "custom" or "law"), hence "rules of the house(hold)".Currenteconomic models emerged from the broader field of political economy in the late 19th

century. A primary stimulus for the development of modern economics was the desire to

use an empirical approach more akin to the physical sciences.

Economics aims to explain how economies work and how economic agents interact.

Economic analysis is applied throughout society, in business, finance and government,

but also in crime, education, the family, health, law, politics, religion, social institutions,war, \ and science. The expanding domain of economics in the social sciences has been

described as economic imperialism

Factors:

Resources Description

Entrepreneur

CapitalLand

Labour

Machinery

Raw Material

Etc

Economics

Production

Distribution

Consumption

Goods&

Services

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Economy of Scale:

Efficiency Equality

Product Attributes:

Forms of Product:

Economics

Replication

Innovation

Invention

Production

Features

Function

Benefits

Product

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Economic Strategic Fit:

Dimensions of Economics:

Common distinctions are drawn between various dimensions of economics. The primarytextbook distinction is between microeconomics, which examines the behavior of basic

elements in the economy, including individual markets and agents (such as consumers

and firms, buyers and sellers), and macroeconomics, which addresses issues affecting an

entire economy, including unemployment, inflation, economic growth, and monetary andfiscal policy. Other distinctions include: between positive economics (describing "what

is") and normative economics (advocating "what ought to be"); between economic theory

and applied economics; between mainstream economics (more "orthodox" dealing with

the "rationality-individualism-equilibrium nexus") and heterodox economics (more

Activity What Why Where When Who How

Production

Distribution

Consumption

Micro

Economics

Macro

PositiveWhat Is………

NormativeWhat to be….

Rational Behavioral Rational Behavioral

PositiveWhat Is………

NormativeWhat to be….

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"radical" dealing with the "institutions-history-social structure nexus");and between

rational and behavioral economics.

Ten Principles of Economics

Economy. . . . . . The word economy comes from a Greek word for “one who manages a

household.”

A household and an economy face many decisions:

•Who will work?

•What goods and how many of them should be produced?

•What resources should be used in production?•At what price should the goods be sold?

Society and Scarce Resources:

•The management of society’s resources is important because resources arescarce.

•Scarcity . . . means that society has limited resources and therefore cannot

produce all the goods and services people wish to have.

Economics is the study of how society manages its scarce resources:

•How people make decisions.

•People face tradeoffs.

•The cost of something is what you give up to get it.

•Rational people think at the margin.

•People respond to incentives.

•How people interact with each other.

•Trade can make everyone better off.

•Markets are usually a good way to organize economic activity.

•Governments can sometimes improve economic outcomes.

Ten Principles of Economics:

•The forces and trends that affect how the economy as a whole works.

•The standard of living depends on a country’s production.

•Prices rise when the government prints too much money.

•Society faces a short-run tradeoff between inflation and unemployment.

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Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

•A market economy is an economy that allocates resources through thedecentralized decisions of many firms and households as they interact in markets

for goods and services.

•Households decide what to buy and who to work for.

•Firms decide who to hire and what to produce.

•Adam Smith made the observation that households and firms interacting inmarkets act as if guided by an “invisible hand.”

•Because households and firms look at prices when deciding what to buy and sell,

they unknowingly take into account the social costs of their actions.

•As a result, prices guide decision makers to reach outcomes that tend tomaximize the welfare of society as a whole.

Principle #7: Governments Can Sometimes Improve Market Outcomes.

• Market failure occurs when the market fails to allocate resources efficiently.

•When the market fails (breaks down) government can intervene to promoteefficiency and equity.

•Market failure may be caused by an externality, which is the impact of oneperson or firm’s actions on the well-being of a bystander.

• Market power , which is the ability of a single person or firm to unduly influencemarket prices.

Principle #8: The Standard of Living Depends on a Country’s Production.

•Standard of living may be measured in different ways:

•By comparing personal incomes.

•By comparing the total market value of a nation’s production.

•Almost all variations in living standards are explained by differences incountries’ productivities.

•Productivity is the amount of goods and services produced from each hour of a

worker’s time.

•Standard of living may be measured in different ways:

•By comparing personal incomes.

•By comparing the total market value of a nation’s production.

Principle #9: Prices Rise When the Government Prints Too Much Money.

•Inflation is an increase in the overall level of prices in the economy.

•One cause of inflation is the growth in the quantity of money.

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•When the government creates large quantities of money, the value of the moneyfalls.

Principle #10: Society Faces a Short-run Tradeoff between Inflation and Unemployment.

•The Phillips Curve illustrates the tradeoff between inflation and unemployment:Inflation – Unemployment, It’s a short-run tradeoff!

Summary

•When individuals make decisions, they face tradeoffs among alternative goals.

•The cost of any action is measured in terms of foregone opportunities.

•Rational people make decisions by comparing marginal costs and marginalbenefits.

•People change their behavior in response to the incentives they face.

•Trade can be mutually beneficial.

•Markets are usually a good way of coordinating trade among people.

•Government can potentially improve market outcomes if there is some marketfailure or if the market outcome is inequitable.

•Productivity is the ultimate source of living standards.

•Money growth is the ultimate source of inflation.

•Society faces a short-run tradeoff between inflation and unemployment.

"Economics is the science of choice. It began with Aristotle but got mixed up with ethics in

the Middle Ages. Adam Smith separated it from ethics, and Walrus made it mathematical.

Alfred Marshall tried to narrow it, and Keynes made is fashionable. Robbins widened it, and

Samuelson dynamized it, but modern science made it statistical and tried to confine it again.

But the science won't stay put. It keeps cropping up all over the place. There is an

economics of money and trade, of production and consumption, of distribution anddevelopment. There is also an economics of welfare, manners, language, industry, music,

and art. There is an economics of war and an economics of power. There is even an

economics of love.

Economics seems to apply to every nook and cranny of human experience. It is an aspect of

all conscious action. Whenever decisions are made, the law of economy is called into play.

Whenever alternatives exist, life takes on an economic aspect. It has always been so. But

how can it be?

It can be because economics is more than just the most developed of the sciences of control.

It is a way of looking at things, an ordering principle, a complete part of everything. It is a

system of thought, a life game, an element of pure knowledge.

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• Economics is concerned with scarcity of resources.

• Microeconomics: Study of behavior of individual economic units. How they react andhow they interact to form larger units.

• Economics uses theory to explain actions and predict future actions.

• Theory does not work well all the time. The market test of theory is how well it does incomparison to another theory. A theory must have the possibility to being proved wrong.

• Normative Economics: What should be done. "Microsoft should be allowed to bundlethe Ms Office with Windows Xp because it benefits consumers."

• Positive Economics: What is or will happen, not what should be done. "An increase inthe property tax in the area of commercial center will tend to lower the price of apartments, everything else equal."

• Opportunity Cost: The highest-valued alternative that must be sacrificed to attainsomething or satisfy a want.

mie lec # 01 - 02 week one

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