Economics: an introduction Growth Economics Roberto Pasca di Magliano 2015/2016

ECONOMICS: an Introduction What is Economics all about? Even someone who is not familiar with the discipline probably has an idea of the main topics that Economics is concerned with A first list of these topics, could be the following:  markets, competition, market structure  consumption, production  labour market  inflation  public spending, taxes, public debt,  stock market  multinationals, globalization, foreign investment

But a mere list of topics is not enough The list (even if enriched) is not enough to define the economic science. These topics are not the sole interest of economics but they also concern:  Other disciplines (sociology, law, etc.)  Social actors (enterprises, banks, trade unions, etc.)  Institutions (either local, national or international) It is necessary to specify the point of view and the method that the economist chooses to use while studying these topics.

What is Economics? Economics is a social science which studies the choices of the economic agents and the interaction that establishes itself among the single choices. In other words, it studies the modality through which individuals, organizations and enterprises employ scarce resources to produce various types of goods and services, as well as the ways in which they are distributed among the subjects (families, entreprises) to satisfy their present or future needs. Economics assume that the choices of the agents are: based on a criteria of rationality aimed to maximize objectives of individual interest (profits, utility, etc.)

General Principles: Scarcity Scarcity of resources happens everytime that, given the needs of a society at a given time, the means available to satisfy them are not sufficient. A consequence of scarcity is that society, institutions, organizations and individuals are almost always forced to choose within a limited set of possibilities between objectives and scarce means applicable to alternative uses. Scarce means that any resource acquires a value (price)

General Principles: Reliable information It is assumed that all the data relative to the prices of any good and to the available technologies are known and available a-priori both to the entreprises who produce goods, and to the consumers who buy them.

General Principles: Rationality A fundamental principle on which are based most of economic analyses is the rationality of choices. Rationality assumes that economic agents’ behavior uses standard criteria as it is assumed that everybody is perfectly capable of assessing the costs and the benefits following each available set of alternative scenario.

Microeconomics and Macroeconomics Economics is articulated into two major sub-disciplines: microeconomics and macroeconomics MICROECONOMICS emphasize the individual dimension of the various economic problems (choice of the single consumer, choice of the single firm, the functioning of a given market, the determination of a price, etc.) MACROECONOMICS study the functioning of the economic system as a whole (national product, consumption, saving, investment, employment and unemployment, inflation etc.)

Microeconomics The main topics it deals with are: 1. Consumer Choice Theory How a rational consumer decides to spend his own income in order to maximize the satisfaction (utility) that he draws from his purchases 2. Theory of Production How a firm chooses the inputs to be used and in which quantity, as well as how it decides about production mix 3. Market Structure Characteristics and degree of market power held by sellers and buyers

Macroeconomics The main topics it deals with are: 1. National Income How to determine a country’s GDP, national consumption, saving, investment, public expenditure, etc. 2. Employment Causes, typologies (structural, conjonctural), consequences 3. Political economy Fiscal policies (taxes, transfers, public investments), as it is run by the State Monetary policies (interest rate, currency exchange rate) as it is run by the Central Bank

Main Schools of Thought Classical School (1600/1700, until the second-half of the 1800s) Main authors : Abate Ferdinando Galiani, Adam Smith, Thomas Malthus, David Ricardo, Stuart Mill, Karl Marx Economics is a social science that studies questions such as capital accumulation and income distribution Marginalist or Neo-classical School (since 1870 circa) Main authors : Jevons, Walras, Marshall, von Hajek, Friedman, Say, Philips Economics studies how to obtain the best result in the presence of a given amount of resources available

Main Schools of Thought (2) Keynesian School (since 1930 circa) Main Thinkers: Keynes, Galbraith, Stiglitz, Dornbusch, Phelps Growth is no longer driven by offer, but rather sustained by demand, even public Development different from growth (since 1950 circa) Main thinkers of development: Lewis, Kuznets, Bauer, Myint, Streeten, Sen, Yunus The problems of the economies of the developing world are concerned not only with economic aspects but also with institutional and social ones; unlike growth that is concerned only with economics and is concentrated in the developed countries

The State and the Market Periodically, in conjunction with major economic events that raise the attention of the public opinion, the scientific and political community interrogate themselves on the role of the free market The discussion aims at understanding the extent and the modalities of State intervention in the market mechanism At the extremes of this debate, there are on the one hand the supporter of State intervention and on the other the liberal oriented economists

Comparing the two positions Supporter of State intervention sustains that: outcome by market allocations may not be socially acceptable the market, if left unregulated and free to follow its own rules, does not function well Market supporter argues that: market is the most efficient mechanism market has an automatic capacity to increase well-being moral qualities (i.e.: meritocracy)