Lesson 1 The Economy - Lecture notes 1 PDF

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Economics Jane Himarios...

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Lesson 1 The Economy The Economy Every economy is a network of producers (who are people) and consumers (who are also people). In every economy, people have to figure out three things: 1. Which goods and services to produce 2. How to produce those goods and services 3. Who gets what is produced It is very hard to arrive at answers that will make all the people happy. It’s even hard to agree on which system to use to try to answer these questions: Should we use a lottery? Appoint a dictator? Rely on majority rule? Most of the time (but not always) people rely on markets to help answer these questions. This course explores why that’s the case and also why sometimes we reject market solutions. To get started, the first thing to do is to think about these people in the economy. To understand economics, you have to know a few things about human nature. Economists are social scientists, because they study human behavior and use what they learn to describe how economies work. Here are a few important things economists have observed about people: 1. People are self-interested (we care more about ourselves and close loved ones than we do about others). 2. People are rational (we won’t knowingly do things that aren’t in our interest). 3. People have unlimited wants (by the way, this is the reason that robots can never put us all out of work—if we wake up tomorrow to find robots producing every existing good and service, we will just develop the desire for other additional goods and services). 4. People respond to incentives. Economists build models of “how the world works” based on these observations about human nature. Economic models are useful because they allow us to predict what will happen in the future. This course develops some of these models for you and shows you how to use them to make accurate predictions about what will happen in the future.

Economics Economics is the study of how people make choices. Economists study how people make decisions in order to maximize their well-being given limited time and resources.

People Re-read this page and note how many times I used the word “people.” Economics isn’t about vaguely defined firms, corporations, households, or government entities. It is about people. Frequently people work for firms or for corporations or for “the government” or organize themselves into groups (households, clubs, nonprofit groups) but ultimately all decisions are made by people. That is an important point to keep in mind....