By way of introduction

The nature, scope, methodology and rationale of Economics.

Defining Economics

• Economics is the study of how individuals and societies

choose to use the scarce resources that nature and

previous generations have provided.

• The crucial components to this definition are scarcity and

choice.

• If resources were not limited, there would be no such

thing as economics.

• That economics involves human choices makes it a

behavioral (social) science.

Where scarcity, choice and unlimited human wants come together.

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Thinking Economically

• Studying economics allows us to understand society,

understand world affairs, and become an informed voter.

• This is because what economics teaches us is a way of

thinking about how decisions are made...

...by being more aware of trade-offs.

...by thinking at the margin.

...by having a “template” in mind of how the world works.

It takes some getting used to, but is a very powerful way of looking at things.

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Trade-Offs

• When making decisions, we often think about the costs

associated with whatever we choose.

• However, the full cost of a choice is not just captured by its

“cost” in the conventional sense but also by its opportunity

cost.

• Opportunity cost: the best alternative to a decision that

is foregone when that decision is made.

When we make one decision, we forgo others.

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Marginalism

• Average cost

• Total cost divided by number of units

• Sunk costs:

• Costs that cannot be avoided, regardless of what is done

in the future, because they have already been incurred.

• Marginal cost

• The incremental cost arising from a particular decision.

Economists tend to “think at the margin”.

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Efficient Markets

• “There is no such thing as a free lunch.”

• Homo economicus is a rational, utility-maximizing agent.

• Economists argue that markets work efficiently ceteris

paribus.

• If people are able to engage in transactions voluntarily or

compete with one freely, then profit opportunities are

eliminated immediately.

One of many simplifying approximations in economics.

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

The Scope of Economics

• Economics is divided into a wide range of fields, each with

its own specific area(s) of interest.

• The simplest dividsion of economics, however, is in terms

of microeconomics and macroeconomics.

• Micro: Focuses on the behavior of individual decision-

making units: business firms and households.

• Macro: concerned with the economic behavior of the

aggregate -- income, employment and output -- and

thereby the economy as a whole.

One economics or many?

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Economics as Social Science

• Descriptive: collecting data to describe economic

phenomena and facts.

• Theoretical: generalizing and interpreting data to make

inferences about the relationship between variables.

• Stock vs. Flow Variables

• Endogenous (Dependent) vs. Exogenous (Independent)

• Causality vs. Correlation

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

To describe or explain.

Model-Building

• Economic models are formal statements of theories and

can be explained in words, graphs or equations.

• For instance:

“Consumption depends on a household’s wealth and

some proportion of its income.”

C = a + bY

A large of economics entails studying and testing economic models.

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Consu

mption

Income

A Consumption Function

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Types of Economic Analyses

• Positive

• Examines economic outcomes without making

judgments whether these are good or bad.

• Concerned with “what is” or “what happens when”.

• Normative

• Prescriptive in orientation

• Delves into questions of policy and “what ought to be”.

Conceptually, we can distinguish between two kinds of economic analyses.

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation

Criteria for Policy Evaluation

• Efficiency: Does it allocate more of what is already available

to society in accordance with its wants and at the least

possible cost?

• Equity: Is it fair?

• Growth: Does it result in producing more of those goods

that society desires?

• Stability: Does it achieve high growth, low inflation and high

employment?

How can we discern whether an economic policy is good or bad?

Defining Economics

Why Study Economics?

Trade- Offs

MarginalismEfficient Markets

ScopeDescriptive/ Theoretical

Positive/Normative

Policy Evaluation