Economics 2010 Lecture 2 What’s Economics?

OVERVIEW: What is Economics?  Define Economics  Economic Questions  Explain economists’ way of thinking  What Economists Do and How  The Economy

“Economics”  “Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses” (Lionel Robbins)  “Economy is the art of making the most of life” (George Bernard Shaw)  “Economics is what economists do” (Jacob Viner)

“Economics”  To start with, anybody who would like the world to be a better place should be able to think like an economist. (Diane Coyle)

Economic Questions  What is the government’s role in economic life?  Can the government help us to protect our environment?  Can it be as effective as private enterprise at producing goods and services?

Economic Questions  Other examples?

Economic Questions  Economics is the study of choices…  How do individual choices end up determining what, how, and for whom goods and services get produced?  When do choices made in the pursuit of self- interest also promote the social interest?

How Economists Think  Society’s wants exceed the resources available to satisfy them => scarcity, the source of all economic problems  Scarcity forces us to make choices  We make most choices at the margin  We make choices driven by incentives

Scarcity  Wants exceed the resources available to satisfy them  Scarcity results in economic activity  Economics is the study of how people decide to use their limited resources to try to satisfy their unlimited wants

Choice  People are different, otherwise there would be no Economics!!!  Scarcity implies choice  Economics is the science of choice

Choice and Opportunity Cost £ You can think about every choice as a tradeoff—an exchange—giving up one thing to get something else. £ The classic tradeoff is “guns versus butter”  Choice implies cost: opportunity cost  Opportunity cost: the benefit of the best alternative forgone

Tradeoffs We all face tradeoffs between: £ enjoying current consumption and leisure time £ more consumption and leisure time now and more future production, consumption, and leisure time

Tradeoffs In general, society faces tradeoffs about: £ What £ How £ And for Whom to produce goods and services

Individual self-interest £ Economists take human nature as given and view people as acting in their self-interest £ “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest” (Adam Smith)

Choices “at the margin” We make choices in small steps, or at the margin Choices are influenced by incentives

Choices “at the margin” £ The benefit from pursuing an incremental increase in an activity is its marginal benefit £ The opportunity cost of pursuing an incremental increase in an activity is its marginal cost

Choices “at the margin” £ For any activity, if marginal benefit exceeds marginal cost, people have an incentive to do more of that activity £ If marginal cost exceeds marginal benefit, people have an incentive to do less of that activity

What Economists Do  Economists try to understand how incentives affect individual choices so that the common good can be reconciled with individual self-interest aqui

What Economists Do  Microeconomics and macroeconomics  Economic science  Economic policy aqui

Economic Science £ Theory to direct and interpret observations (e.g.. Building models) £ Observation and measurement (testing the theory) Two approaches of science: “Is” versus “Ought to be”: positive versus normative approaches

Economic Policy  Efficiency: are we wasting? can we make it for less? Could we do better for the same?  Equity: is it fair?  Growth: can we grow faster?  Stability: can we get an economy with less sharp changes?

The Economy  The economy is a mechanism that solves five problems about goods and services:  What?  How?  Who?  Where?  When?

The Economy  Decision makers £ Households £ Firms £ Governments

The Economy  Co-ordination mechanisms £ Markets £ Command mechanisms

Questions?  Next, we will talk about making and using graphs