Flashcards in Week 1 Deck (26)
Scarcity refers to the limited nature of society’s resources.
For example, Hasan wished he had more time to study but his time was a scarce resource.
We encounter scarcity in every decision we make.
For example, a household must decide who does the chores and how to allocate its scarce resources.
Likewise, society must decide what jobs will be done and who will do them. It must also allocate the goods and services that are produced.
Examples of society resourced
capital (physical and human)
labour (how we allocate our time)
and in a market economy add entrepreneurship
What levels does scarcity exist at
Scarcity exists at individual level, firm level, government level, societal level
Why is Management of society’s resources important
Management of society’s resources is important because we cannot produce all the goods and services people wish to have.
Hence decisions need to be made. These decisions are economic decisions.
Economics is a social science about decision making in the face of constraints (scarcity constraints)
Economics is the study of how society manages its scarce resources.
For example, economics helped Jing to understand the production, consumption and transfer of wealth.
Economics: Resource allocation
In most societies, resources are allocated through the combined choices of millions of households and firms.
Forces of demand and supply (that you learn about in Prices and Markets)
Price signals guide decision making processes
What do economists study
Economists study how people make decisions: how much they work, what they buy, how much they save and how they invest their savings.
Economists also study how people interact with one another.
For instance, economists examine how the buyers and sellers of a good interact to determine the price at which the good is sold and the quantity that is sold.
Opportunity cost is the best alternative that must be given up to obtain some items.
For example, my opportunity cost of sitting through this lecture is reading a book and enjoying an espresso at a local café.
The cost of something is what you give up to get it
• Decisions require comparing costs and benefits of alternatives.
– Whether to go to university or to work?
– Whether to go to lectures or sleep in?
• The opportunity cost of an item is what you give up to obtain that item (it seems that this way of thinking about cost is only applicable in economics)
Opportunity cost formula
the value of the best alternative foregone when an action is chosen
(Opp.Cost=what you give up/what you gain)
Efficient decision making involves weighing up the alternatives and minimising opportunity cost by choosing what provides you the greatest benefit relative to cost
Economics and incentives
it is of interest to consider how behaviour is impacted when incentives people (or economic agents) face change (e.g. how does cutting the corporate tax rate affect corporate behaviour? Does it create more jobs? What is the evidence?)
The economist as a scientist
Economists try to approach problems with a scientist’s objectivity.
Observations inspire economic theory. In turn, economic theory is tested by comparing theoretical predictions against data gathered in the real world.
While it is difficult to conduct economic experiments, events in the real world give rise to natural experiments that can be studied by economists.
Are assumptions used in economics
Many economic models involve simplifying assumptions (or abstractions).
For instance: economists might ‘assume’ that there are only two goods in the world, or that the firms and consumers in a market are only concerned with what they buy and sell today.
The role of assumptions in economics
Assumptions help us to simplify complex situations, focusing our attention on the details that are most relevant to the problem at hand.
Using assumptions we can construct economic models to learn about the world. Our models, (especially those we will use in Macro1) typically consist of diagrams and equations.
The circular flow diagram
Let’s consider a simple model in the form of a diagram to explain a 2 sector economy that ‘assumes’ households and firms are the only economic agents in the economy
Photo in favourites 19/7/18
Microeconomics is the study of how households and firms make decisions and how they interact in markets.
For example, microeconomics focuses on individual markets, examining how incentives and trade-offs influence buyer and seller behaviour.
Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment and economic growth.
Macroeconomics is a branch of economics dealing with the performance, structure, behaviour, and decision-making of an economy as a whole. This includes national, regional, and global economies.
For example, the setting of monetary policy depends primarily on macroeconomic factors.
Macroeconomics can help us understand some important issues like
Why are some countries rich and others are poor?
Why do prices change quickly in some periods, but are more stable in others?
Why do jobs grow in some years, but stagnate in other years?
Economists are experts and are used in government and business
Economists are experts. (But they don’t always make accurate predictions and they may disagree with each other)
In government, the advice of economists can have a significant impact on the development of public policy.
In business, the advice of economists is important for formulating corporate strategy.
The economist as policy advisor
Economists may be asked to explain the causes of economic events, or to recommend policies to improve economic outcomes.
In the first instance the economist is taking a positivist approach, in the second the economist may be more normative.
Both positive and normative approaches are valid and which approach used depends upon what the task at hand is that is economist is contributing to.
Positive statements are claims that attempt to describe the world as it is.
An example of a positive statement is ‘minimum wage laws create unemployment’.
This can be tested.
Normative statements are claims that attempt to prescribe how the world should be.
An example of a normative statement is ‘the minimum wage should be raised’.
This is subjective and can’t be tested. There will be arguments for and against this propostion.
Why economists disagree: normative
Economists do disagree about facts from time to time. These are disagreements about scientific judgement used in obtaining facts.
Normative statements depend on both facts and values.
It is in normative areas economists most often disagree (e.g free market economists in the Austrian tradition versus Keynesian economists)