Economics 2010 Lecture 2 What’s Economics?. OVERVIEW: What is Economics? Define Economics Economic Questions Explain economists’ way of thinking.

Economics 2010Economics 2010

Lecture 2

What’s Economics?

OVERVIEW:OVERVIEW:What is Economics?What is Economics?Define EconomicsEconomic QuestionsExplain economists’ way of thinkingWhat Economists Do and HowThe Economy

““Economics”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”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 QuestionsEconomic 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 QuestionsEconomic Questions

Other examples?

Economic QuestionsEconomic 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 ThinkHow 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

ScarcityScarcity

Wants exceed the resources available to satisfy them

Scarcity results in economic activityEconomics is the study of how people

decide to use their limited resources to try to satisfy their unlimited wants

ChoiceChoice

People are different, otherwise there would be no Economics!!!

Scarcity implies choiceEconomics is the science of choice

Choice and Opportunity CostChoice 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 costOpportunity cost: the benefit of the

best alternative forgone

TradeoffsTradeoffs

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

TradeoffsTradeoffs

In general, society faces tradeoffs about:

What How And for Whom to produce goods and

services

Individual self-interestIndividual 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”Choices “at the margin”

We make choices in small steps, or at the margin

Choices are influenced by incentives

Choices “at the margin”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”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 DoWhat Economists Do

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

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What Economists DoWhat Economists Do

Microeconomics and macroeconomicsEconomic scienceEconomic policy

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Economic ScienceEconomic 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 PolicyEconomic 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 EconomyThe Economy

The economy is a mechanism that solves five problems about goods and services:

What?How?Who?Where?When?

The EconomyThe Economy

Decision makers Households Firms Governments

The EconomyThe Economy

Co-ordination mechanisms Markets Command mechanisms

Questions?Questions?

Next, we will talk about making and using graphs