1czczxcxzc

8/12/2019 1czczxcxzc

1/32

What is

ECONOMICS about?

T.J. Joseph


2/32


3/32

3

Why Study Economics?

Economics helps to solve complex problems that aregreat importance to society

Economists are concerned with why the world is

what it is

Examine how individuals and firms make decisions

about consumption, investment, pricing, etc.


4/32

4

The Economic ProblemTwo general observation:

(1) Resources are limited.

What are resources?

(2) Human wants are abound/unlimited

ScarcityWe cannot have everything we want allthe time

Scarce Resources - not enough to satisfy all wants

So choiceshave to be made

Any choice involves an opportunity cost- the value of

the best alternative foregone


5/32

Unl imited Wants (Scarce goods)

Food (bread, milk, meat, eggs,vegetables, coffee, etc.)

Clothing (shirts, pants, sarees, shoes,socks, coats, sweaters, etc.)

Household (tables, chairs, sofas, beds,goods dressers, television sets, etc.)

Space exploration

Education

National defense

Recreation

Leisure time

EntertainmentClean air

Pleasant (trees, lakes, rivers,environment open spaces, etc.)

Pleasant working conditions

L imited Resources

Land (various degrees of fertility)

Natural (rivers, trees, minerals,Resources oceans, etc.)

Machines and otherhuman-made physical resources

Non-human animal resources

Technology

Human (the knowledge, skill,

resources and talent of individuals)

Scarcity and Choice


6/32

6

Fundamental Economic Questions

Scarcity and choice raises several unavoidable

questions to the society

What to produce?

More guns or more breads? More books or more

movies?

How to produce? (optimization)

Use more labour and less machines?

For whom to produce (distribution)

Distribute equally? Then on what basis?


7/327

Economics Defined

Economics is the study of how people cope with

scarcity

Economics deals with the problem of how to allocate

the limited resourcesamong competing wants in order

to satisfy as many of those wants as possible


8/328

Every society must have a means to ration scarceresources among competing uses.

Scarcity Necessitates Rationing

In a market setting,priceis used to ration goods

and resources.

When price is used, the good or resource is

allocated to those willing to give up other things

in order to obtain ownership rights.


9/329

Emergence of Markets

Markets(and its components) emerge in directresponse to scarcity.

In a market, people exchange things that they like lessor have more, for things they like more or have less

Reallocation of their resources and enhance their

individual welfare


10/3210

Fundamental Economic Questions

How shall we answer the three basic economic

questions?

Shall we allow for individual freedom of choice? Orshall we make all these decisions collectively?


11/32


12/32


13/32

13

Market Economy

Market mechanism or Price mechanismcoordinates the decision making of various economic

agents

Also known as Free-enterprise economyone in

which government does not control economic activity

The three fundamental economic questions are solved

by theprice mechanism(through demand and supply)

Adam Smith and Invisible Hand

Perfectly competitive market


14/32

14

Command Economy

Also known as Centralized economy The determination of What, How, For Whomgoods &

services are produced is done by

a dictator or

a planning committee appointed by the dictator or

using a hierarchical organizational structure

State owns all the productive resourceslike land,

factories, financial institutions, etc

Authoritarian methods are used to determine resource

use and prices


15/32

15

Mixed Economy

Most of the world economies use a mix of both

market and command systems

The government modifies (through taxes, subsidies,etc.) and in some cases replaces (through direct control

of resources) the operation of price mechanism


16/32

16

EconomicsA Social

Science


17/32

17

Economics as a Social Science

What differentiate economists from other socialscientists?

Economic analysis is based on certain presupposition

about human behavior Tries to understand why the world is what it is

Example (propositions enabling Law of Demand):

People prefer more to fewer;people seek to maximize welfare by making reasonable and

consistent choices


18/32

18

Developing Economic Theories

The real world of economic is very complex, therefore,economists turn to theory

A theoryis a set of abstractions about the real world

Economic theories are simplified models abstractedfrom the complexity of the real world

Tries to explainobserved behavior and make

predictionsabout the future

Assumption of Ceteris paribus (other things remain the

same)


19/32

19

Positive and

Normative Economics


20/32

20

Positive Economics

The scientific study of what is, what was and whatwill bethe economic relationships

Explanation and prediction (deals with actual

observed phenomena); can be proven right or wrong.

Example:

The inflation rate rises when the money supply is increased

What will be the impact of an import quota on foreign cars?

What will be the impact of an increase in the gasoline excisetax?


21/32

21

Normative Economics

What oughtto be (deals with opinions andrecommendations); reflects value judgments.

Normative statements reflect subjective values. They

cannotbe proved true or false.

Example:

The inflation rate should be lower.

The two can be hard to disentangle.


22/32

22

Common Mistakes

Pitfalls to Avoidin Economic Thinking


23/32

23

Violation of the ceteris paribuscondition. Ceteris paribusis a Latin term meaning other things

constant.

When describing the effect of a change, the outcomemay be influenced by changes in other things.

Three Pitfalls

Association is not causation.

Statistical associationalone cannot establish

causation.


24/32

24

Thefallacy of compositionis the erroneous view

that what is true for the individual (or the part)is

also be true for the group (or the whole).

Microeconomicsfocuses on narrowly defined units,

while macroeconomicsis focused on highly

aggregated units.

One must beware of the fallacy of composition when

shifting from micro-to macro-units.

Fallacy of composition

Three Pitfalls


25/32

Microeconomics

andMacroeconomics

25


26/32

Microeconomics and Macroeconomics

Microeconomics is the study of economics at the levelof the individual economic entity

Examples: the behavior of individual consumer,

individual firm, etc.

Macroeconomics deals with the sum of the behaviour

of all economic entities together (the economy as a

whole or about economic aggregates)

Examples: Study of national income (GDP),

employment, Inflation (price level), etc.

T.J. Joseph 26


27/32

Micro Vs. Macro

Microeconomics

Studies the economy at the level of individual

consumers, workers, firms, goods, and markets

Macroeconomics

Studies the economy at the aggregate level, at the

level of the economy as a whole.

Examines total consumer behavior, total

employment, total production, total sales, etc.

27


28/32

Basic Concepts

Opportunity cost: the value of the highest-valued

alternative that must be forgone when a choice is

made. It is the evaluation of a trade-off.

Marginal benefits and costs: the benefits and

(opportunity) costs associated with one additional

unit of the good.


29/32

Decision Making

Decision-making is the main job of management It involves evaluating various alternatives and

choosing the best among them

Decision making is done at the margin

Decision makers evaluate a fixed array of

alternatives.

Decision makers compare the marginal costs to

marginal benefits to determine the best alternative

This is economic decision making.


30/32

Questions for Thought

1. Which of the fo l lowing are posi t ive econom icstatements and which are normat ive?

(a) The speed l im it should be lowered to 55 m iles per

hour on interstate highways to reduce the number

of deaths and accidents

(b) Higher gaso l ine prices cause the quanti ty o f

gasol ine that con sum ers buy to inc rease.

(c) A compar ison of costs and benef its shou ld not beused to assess environmental regu lat ions .

(d) Taxes on alcohol resul t in less d r inking and dr iv ing.


31/32

Questions for Thought

1. Suppose Am y is a doctor who has reco rds that need to

be entered. Doing th is wo rk hersel f wou ld take 10

hours per week. She is contemp lat ing hir ing an

assistant cou ld do the same work in 40 hou rs. If Am y

can make $80 per hour seeing patients, shou ld she

hire the assistant at $10 an hou r?

2. Do you make the food that you consume and the

clo th ing you wear for you r self? Would modern l iv ing

standards be possib le withou t trade?


32/32

References

1. Dom inick Salvatore (DS): Principles of

Microeconomics, 5th edn., Oxford Higher Education.2. Chapters 1 and 2 in Wil l iam Boyes and Michael Melvin

(2009), Textbook of Economics, 6thedit ion, Biztantrapubl icat ions.

1czczxcxzc

Documents