What Economics is About? Ch 1, Economics 9 e, Roger A. Arnold

An Introduction Economics is a social science (where we want to study and understand the human society) Every human society (e.g. any country or city) faces the problem of scarcity scarcity: human wants are greater than the resources available to satisfy those wants e.g. 1000 people want cars but there are only 500 cars available (example continued next slide)

Scarcity’s Effects The following are the effects of scarcity (example from last slide): 1) We need to make choices or decisions. E.g. We have to choose who will get the 500 cars (out of the 1000 people). 2) Rationing device – A way of deciding who gets the available limited resources. E.g. ‘price’ can be a rationing device. Only those people who can pay the price of the car will get the car. 3) Competition. E.g. People will compete to get those 500 cars.

Continued Economics is defined as the science of scarcity i.e. the study of how a society and individuals tackle the problem of scarcity A society that seeks to tackle and manage the problem of scarcity is called an economy An economy is made up of mainly three sectors or actors: 1) consumers or households or individuals 2) firms or businesses or organizations 3) the government In Microeconomics we study and try to explain the decision-making of households and businesses and their interaction in a market. In Macroeconomics we focus on the aggregate or total economy: all the households and (or) business and the government

Goods and Bads Goods and services (e.g. A car, food, clothes, home, education) i.e. things that make us happy, give us satisfaction or benefit The economic term for happiness or satisfaction or benefit is utility We are willing to pay for goods Bads - Anything from which individuals receive disutility (i.e. dissatisfaction) We are willing to pay for the removal of bads (e.g. we pay the garbage man) Who makes the goods? Using what?

Resources or Inputs or Factors of Production Goods (and services) are produced by firms or businesses. They are made using inputs or factors of production. Which are: Land – All natural resources, e.g. minerals, forests, water, air etc. Labour – Physical and mental effort of workers in the production process Capital – Produced goods that can be used as inputs in the production process, e.g. factories, machines, computers Entrepreneurship – The talent for organizing the above mentioned resources to produce goods. E.g. The CEO or Chairman The skills and knowledge regarding the use of resources is Technology

Opportunity Cost and Behaviour Opportunity cost is the next best alternative (or option) forgone (or sacrificed) when we make a choice or decision E.g. You made a decision to read this slide. If you were not reading this slide, what would you be doing? May be you would be spending time with your family. ‘Spending time with family’ is the opportunity cost here (you are sacrificing this option). Changes in opportunity cost affect behaviour The higher the opportunity cost of doing something, the less likely it will be done. E.g. Your favourite relative has come to visit your home. If you read this slide you will be giving up spending time with him or her. The opportunity cost has increased and you are less likely to read the slides.

Decision Making (Comparing Benefits and Costs) One effect of scarcity is that we have to make decisions. How is a decision made? According to economic theory, we make decisions by comparing benefits and costs. If benefits are greater than the costs (benefit > costs) then we may choose to do something. For example, you chose to undertake university education since, benefit of university education > cost of university education. Think about the benefits and costs of studying at NSU. Opportunity cost is a cost and hence it is included in the cost-benefit analysis. For example you could have worked instead of studying at NSU. Then the salary (benefit) from work is a cost of studying at NSU.

Efficiency In economics or business or in daily life we want to make the best choice (or decision) or we want to obtain the maximum benefit from a given situation. That is we want to be ‘efficient’. For example, a student can choose CSC, EEE or BBA as his or her major? Which one will (s)he choose? The one that gives him or her the maximum benefit (e.g. The highest GPA or the highest paying job or more satisfaction) Incentive Something that makes us undertake an activity. E.g. A student might study very seriously for a tuition waiver. The tuition waiver is the incentive for studying seriously. Incentives affect the behaviour of the individuals. Without the tuition waiver (incentive) the student may not study very seriously. In Economics, incentive can be a reward (e.g. bonus marks) or punishment (e.g. a fine).

Exchange or Trade Trade: ‘The giving up of one thing for something else’ E.g. we may ‘give up’ 6 taka for a cup of tea at a tea-stall. A trade has usually two sides: The buying side and the selling side. People engage in trade or exchange because they expect to be better-off (happier or more satisfied) after the trade That is, the benefit from the trade > cost of the trade. Trade takes place in a market (Ch 3)

Theory or Model An abstract (simple) representation of the real world designed with the intent to better understand it or explain it. The simplification can be done using assumptions. In a theory or model we focus only on the variables that are the main or critical ones needed to explain an activity or event. A good theory accurately predicts real world phenomenon. When a theory becomes widely accepted (or it is very accurate at predicting real word events) it may become a law. E.g. the law of gravity

Ceteris Paribus Means “All other things constant” or “Nothing else changes” This assumption is essential when we want to study and determine the correct relationship between two variables (see Appendix A of Ch 1). For example, someone may say that if the price of pen increases then the number of pens people buy will decrease. But this is only true if we assume ceteris paribus. Since, we are assuming that price of pencil, income of people are remaining constant. Otherwise the statement may not be true. E.g. if the price of pen increases and the income of people increases as well…then the number of pens that people buy might not decrease.

Appendix A (Ch 1) In a model or theory we might be interested to study of the relationship between different variables. There are three possible relationships between two variables: Directly (Positively) Related: Two variables are directly related if they change in the same way (they both increase or decrease together). E.g. Hours of study ↑ then CGPA ↑ or study hours↓ then CGPA ↓. Inversely (Negatively) Related: The variables change in opposite ways. E.g. hang-out with friends ↑ then CGPA ↓ or hang-out ↓ then CGPA ↑. Independent: Variables are not related. If one changes the other does not change. E.g. temperature on Moon and your CGPA are independent (not related).

Continued The relationship between two variables can be represented using graphs. Usually, we place the dependent variable on the y-axis and independent variable on the x-axis. If the variables are directly (positively) related we will have an upward sloping graph.

In case of a negative relationship In case of independence we will have a downward we might have a vertical sloping graph (as below) or horizontal line (as below).