Economics Issues and Concepts

We start by thinking about an economy as a self-organizing system. Compare that to a human body. This system is (rather) efficient. Could you give an example when it’s not? "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 self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."   --  Adam Smith

There is a considerable variety in what/how economists do but there’s also some stuff that makes them belong to the same gang. Here’s a basic set = the economist’s paradigm: The wants are unlimited. The resources are scarce. Scarcity implies choice. Homo economicus = one making smart choices. Economics studies how the choices are made. So it is a particular way of looking at (any) behaviour.

Definitions: Resources = factors of production: Land = unmanufactured + used to produce Labour = human resources Capital = manufactured + used to produce Vineyard = land + capital? Engineer = labour + capital? Goods = satisfy our wants + tangible Services = satisfy our wants + intangible Consumption = wants + goods and services What else is there?

Scarcity implies choice. Choice implies cost. Cost is what an economist thinks about 24/7. Opportunity cost = the value of the best alternative. Cost of your studies Production Possibility Frontier Scarcity on the PPF Choice on the PPF Cost on the PPF

One way to think about microeconomics and macroeconomics: Micro: decisions by individuals (firms, households) about what to do; Macro: what determines the aggregates (GDP, price level, unemployment rate); Another way is to reflect on the PPF The PPF is the aggregates, so macroeconomics is about what determines its shape and position. And also whether our true position is on the PPF. Growth Idle resources How that stuff is split is a microeconomist’s concern: What’s produced? How? By whom? What is consumed? By whom?

How does homo economicus make decisions: She compares the alternatives; She picks the best one = she maximizes; Individuals maximize utility (assumption) Firms maximize profits (implication) Why? An economist’s way to think about maximizing behaviour is to think about choices on margin Marginal cost Marginal benefit Marginal revenue Marginal surplus and marginal profit

The circular flow models Many demand are derived The markets are interdependent Money is important

Observations that matter: Specialization ** by an individual; Division of labour ** within a firm; Money ** facilitate trade Better than barter Money and specialization Globalization Transportation costs Information Is it good?

What would a government do? The economic Systems: Traditional economy; Command economy; Market economy; Mixed economy; Which one is better? What would a government do? Keep order Rules (laws) Enforcing the rules Fix market failures Efficiency Distribution