Ch. 1 - What is Economics PDF

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With Prof. Khan...

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DEFINITION OF ECONOMICS ECONOMICS - the social science that studies the choices individuals, governments, businesses, and societies make as they cope with scarcity and incentive ● ● ● ●

Microeconomics - the choices that individuals and businesses make and how those choices influence markets and governments Macroeconomics - the performance of national and global economies Scarcity - the inability to satisfy all our wants, which forces us to make choices Incentive - reward/penalty that encourages/discourages an action, influences the choices we make

TWO BIG ECONOMIC QUESTIONS 1. How do choices end up determining what/how/for whom goods and services get produced? 2. When do choices made in the pursuit of self interest also promote social interest?

The 'what' ●

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Goods and services - objects that people value and produce to satisfy human wants ○ e.g. agriculture production differs between countries because they have different needs What determines patterns of production? e.g. ratio of infrastructure v.s. agriculture How do choices determine the quantity of each item produced?

The 'how' ●

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Factors of production - productive resources that make goods and services ○ Land - from nature ○ Labour - work time and effort ○ Capital - human capital (tacit knowledge and skills, which expand over time), financial capital (money), physical capital (tools, machines, buildings) ○ Entrepreneurship - HR that organizes land, labour and capital Economics can explain the growth/change in (for example) human capital through education

'For whom' ● ●

People's incomes determine what goods and services they get Land earns rent, labour earns wages, capital earns interest, entrepreneurship earns profit

Do choices made in the pursuit of self interest also promote social interest? Do we produce the rights things in the right quantities? Do we use our factors of production in the best way? Do the goods and services go to those who benefit most from them?

Social interest ● ●

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Social interest involved efficiency and equity Resource use is efficient if it isn't possible to make someone else better without making someone else worse ○ You have to take away from someone to give to someone = efficient Equity = fairness (contentious topic) ○ Everyone should receive equal shares regardless of what they contribute? Certain topics put self and social interest in conflict ○ Globalization - expansion of international trade, borrowing and lending, and investment ■ Is in the self interest of consumers (cheap products), multinational firms (cheap labour) ■ Not in the self interests of low wage workers (exploitation) and small companies (unable to compete) ○ Information age monopolies - technological change over past few decades ■ Is in self interest of everyone that uses the internet , as well as the tech company moguls (rich) ○ Global warming - the majority of self interested choices individuals make (e.g. driving to work) contribute to global warming

How can governments change the incentives we face so that our self interested choices (e.g. save money) align with social interests (decrease CO2 emissions) ●

Economic instability - banks' choices to take deposits and make loans are in their self interest, but lending and borrowing may not benefit social interest (e.g. stock market crash) ○ Do banks lend to much in the pursuit of profit?

THE ECONOMIC WAY OF THINKING 1. A choice is a trade-off - You give up something to get something 2. People make rational choices by comparing benefits and costs - only the wants of that person are relevant to determine the rationality of the choice ○ What G/S will be produced, and how much? Those that people rationally choose to buy 3. Benefit is what you gain from something ○ Preferences - what a person likes/dislikes and the intensity of those feelings

4. Cost is what you must give up to get something ○ Opportunity cost - the highest valued alternative that must be given up to get something, could be tangible (the price) and intangible (the time used) 5. Most choices are 'how much' choices made at the margin - evaluating the consequence of making incremental changes in the use of your time ○ Marginal benefit weighed against marginal cost 6. Choices respond to incentives - a change in marginal cost/benefit changes the incentives we face, which causes us to change our choices

ECONOMICS: A SOCIAL SCIENCE AND POLICY TOOL The task of economic science is to discover positive statements that align with what we observe in the world, and helps us to understand the economic world ● ● ●

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Positive statements - what i s , can be tested by checking it against facts Normative statements - what ought to be, expresses an opinion and cannot be checked, represents the end goal Economic model - a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand, is tested by comparing its predictions with the facts ○ Testing an economic model is hard, so economists use natural experiments, statistical investigations, and economic experiments Economics allows people to evaluate solutions for a given goal by comparing marginal benefits and costs

GRAPHS IN ECONOMICS ● ●

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A graph is made by plotting variables x and y along their two axis, used to show relationships among variables in economic models Scatter diagram - shows relationship between 2 variables ○ Positive - upward curving slope ○ Negative - downward curving slope ○ Positive then negative - maximum point ○ Negative then positive - minimum point ○ Unrelated - vertical or horizontal Slope - change in y divided by change in x Straight line has constant slope Curved line has varying slope, can be calculated at a point or across an arc Ceteris paribus (cet par) - 'if all other relevant things stay the same', everything is held constant except for the variable whose effect is being studied...