What Economics is About?

Transcription

1 What Economics is About? Ch 1, Economics 11e, Roger A. Arnold Scarcity Economics is a social science And every society faces the problem of scarcity Unlimited wants (of humans) VS Limited resources (e.g. fossil fuels, fresh water, time)...results in scarcity Hence we define economics as the science of scarcity; how the society and individuals tackle the problem of scarcity A society that seeks to tackle this problem is called an economy And an economy is made up of economic actors (consumers/households, firms/businesses, government) In Microeconomics we study the behaviour of these economic actors separately (e.g. one household, one business). In macroeconomics we focus on the aggregate or total economy. 1

2 Goods and Bads Human wants are unlimited. We all want goods (e.g. food, clothes, home, education) i.e. things that make us happy or gives us satisfaction Good Anything from which individuals receive utility or satisfaction Hence, we are willing to pay for goods Bad - Anything from which individuals receive disutility or dissatisfaction Hence, we are willing to pay for removal of bads (we pay the garbage man) Who makes the goods? Using what? Resources / Inputs / Factors of production Goods (and services) are made by firms/businesses. They are made using resources/ inputs/ factors of production. Which are: Land All natural resources, e.g. minerals, forests and water Labour Physical and mental talents of workers in the production process Capital Produced goods that can be used as inputs in the production process, e.g. factories, machines, computers Entrepreneurship The talent for organizing the above mentioned resources to produce goods. E.g. the manager, CEO or chairman 2

3 Scarcity s Effects Scarcity occurs when wants are greater than the resources available to satisfy those wants. The following are some effects of scarcity: 1) The need to make choices (every choice has an opportunity cost). We need to choose between alternatives since the resources available to us (our time and income) is limited. We can t have everything we want. 2) Rationing device A means of deciding who gets what of available resources and goods (which are limited). E.g. price is a rationing device. Only those people who can pay the price of a good will get that good. 3) Competition (for goods and the rationing device). E.g. you are competing for a good grade with your class-mates. And people compete for a good job after graduation. Opportunity Cost and Behaviour Opportunity cost is the next best alternative forgone (given up). If you were not reading this lecture slide, what would you be doing? That is the opportunity cost of reading this lecture slide. Changes in opportunity cost affect behaviour The higher the opportunity cost of doing something, the less likely it will be done. E.g. Case A Opportunity cost of missing a lecture is 1% of total mark. Case B Opportunity cost of missing a lecture is 0.1% of the total mark. Then students are less likely to miss lectures in Case A. 3

4 Decisions Made at the Margin Many decisions are made at the margin (one unit changes). For example, a student may think whether to study one more hour, or a business may have to decide whether to hire one more employee. How are these decisions made? Ans: By comparing marginal benefits and costs Marginal Benefits (MB) The benefits obtained from the consumption of an additional unit of a good or undertaking one more unit of activity. E.g. the benefit obtained from studying one more hour is the marginal benefit of studying. Marginal Costs (MC) The costs incurred due to the consumption of an additional unit of a good or undertaking one more unit of activity. Decisions at the Margin Decision making based on weighing the MB and MC. If MB > MC then a rational individual will decide to consume/ undertake an activity. IF MB < MC then the individual will not consume/undertake an activity. Hence, if the MB of studying > MC of studying then a student will study for one more hour. Efficiency In economics/business or in daily life we often want to know the optimal, efficient or right amount of something (or we want to take the best decision). For example, how many hours should a student study? The right/optimal/efficient amount occurs when marginal benefits equal marginal costs (MB = MC). Hence a student should study until MB = MC. And that will be the optimum study hours. Incentive Something that encourages or motivates a person to undertake an action. E.g. an employee might work hard for a promotion. The promotion is the incentive for working hard. Like opportunity costs, incentives can also affect behaviour of the economic actors. 4

5 Exchange/Trade The giving up of one thing for something else E.g. we may give up 6 taka for a cup of tea at a tea-stall. Every trade has two sides. The buying side and the selling side. People engage in trade/exchange because they expect to be better-off (happier or more satisfied) after the trade Trade if the benefit from the trade > cost of the trade Ceteris Paribus Means All other things constant or Nothing else changes This assumption is essential when we want to study and determine the correct relationship between two variables. For example, someone may say that if the price of pen increases then the number of pens people buy will decrease. But this is only true if we assume ceteris paribus. Since, we are assuming that price of pencil, income of people are remaining constant. Otherwise the statement may not be true. E.g. if the price of pen increases and the income of people increases as well then the number of pens that people buy might not decrease. 5

6 Theory/Model An abstract (simple) representation of the real world designed with the intent to better understand it or explain it Emphasizes only on the variables that the theorist believes are the main or critical ones needed to explain an activity or event A good theory accurately predicts real world phenomenon. When a theory becomes widely accepted (or it is very accurate at predicting real word events) it may become a law. E.g. the law of demand and supply which we study in ch 3. 6