Introduction to Economics A Roadmap

What is Economics? A social science concerned with the efficient use of limited or scarce resources to achieve maximum satisfaction of human material wants.

Economics …is the study of the allocation of scarce resources in response to unlimited wants. …it’s about choice. Society is forced to choose because resources are scarce.

Why Study Economics? Economics for Citizenship Well informed citizens will vote intelligently Well informed politicians will choose wisely among alternatives Professional and Personal Application Businesspersons need an understanding of economy Problems are examined from social rather than personal viewpoint

Scarcity Scarcity is the condition in which wants ˃ available limited resources “Wants” are the desires for goods and services Individuals and firms derive utility from goods and services Goods and services are produced w/ the 4 factors of production B/c of scarcity, a rationing device is needed for allocation Whatever rationing device is used, there will be competition B/c of scarcity, individuals and firms must make choices When choices are made, opportunity costs are present Changes in opportunity costs affect human behavior

Economics is Descriptive Based on facts —observable and verifiable behavior of certain data or subject matter Economists examine behavior of individuals and institutions engaged in the production, exchange, and consumption of goods and services.

Economic Principles I (laws, models) Task of analysis is to systematically arrange, interpret, and generalize based upon facts Principles and theories bring order and meaning to facts by tying them together, putting them in correct relationship to one another and generalizing. Principles are expressed as the tendencies of typical, or average consumers, workers, or business firms

Economic Principles II (laws, models) Economists make three generalizations: Other things equal” assumption —controlling all variables except one (Cet Par) Abstractions—do not mirror the complexity of real world Graphic Expressions—models used to show theory

An Economic Way of Thinking Evidence supports the theory. No further action is needed, but continue to examine. Decide on the economic behavior to be explained Identify the critical variables you believe are involved State the simplifying assumptions State the hypothesis Test theory by comparing predicted results against real-world events Evidence rejects the theory. Formulate a new theory or amend existing one.

Policy Economics Applied Economics that recognizes the principles and data which can be used to formulate local, national, or international economic policies. Determining a course of action to resolve a problem or to further a nation’s economic goals (more on these goals in a minute).

The Economic Landscape Macroeconomics: looks at economy as a whole and its basic subdivisions such as government, business and households. Macro looks at totals or aggregates to examine the “big picture”. Microeconomics: looks at specific units or segments of the economy, a particular firm, a household, a specific market, or the government. Micro looks at the “trees not the forest”.

Economic Goals I POSITIVE Economics… collects and presents facts. It avoids value judgments Positive economics concerns WHAT IS —what the economy is really like. NORMATIVE Economics… involves value judgments. Normative economics is concerned with HOW IT SHOULD BE!

Economic Goals II All policy-makers worldwide, struggle to accomplish the following goals … in varying degrees, depending upon the prevailing economic and political environment economic growth – full employment – economic efficiency – price-level stability – economic freedom – equitable distribution of goods and services – economic security – balance of trade

Three Basic Questions of Any Economic System 1. What? What goods and services will be produced and offered for sale, and in what quantities? 2. How? How will the goods and services be produced? 3. For Whom? Who will consume the goods and services which are produced?

Equity versus Efficiency: the Economist’s Dilemma Equity-fairness. The economist analyzes the relative fairness of policy measures. For example, an economist may ask, “Does this tax weigh more heavily on lower income households?” Efficiency-best use. The economist analyzes the relative efficiency of policy measures. For example, an economist may ask, “Does this tax provide for efficient collection and administration without dislocating sectors of the economy?”

Efficiency Technological or productive efficiency: getting the greatest quantity of output from the resources that are being used —least cost! This is the output associated with a firm’s lowest average costs. Allocative efficiency: choosing the most valuable mix of outputs to produce—what society wants! In a competitive market, this where demand equals supply.

Conclusion You should now be able to: Define ‘economics,’ ‘scarcity,’ ‘equity,’ ‘productive efficiency,’ and ‘allocative efficiency’ Discuss why scarcity is central to the study of economics Discuss the economic way of thinking and problem-solving, including an overview of the three main generalization economists make Differentiate between macroeconomics and macroeconomics Recognize normative and positive economic statements Identify the three main questions all economic systems must address Briefly discuss the trade-off between equity and efficiency