Introduction to economics
Lecture 01 – The scope and methods of economics
Principles of economics:
Economics: The study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided.
Economics has three fundamental concepts: Opportunity cost, marginalism and
efficient markets
To learn a way of thinking
The opportunity cost (the full cost): The best alternative that we forgo, or give
up, when we make a choice or a decision. Nearly all decisions involve trade-offs.
Example: cost of a movie: ticket-price, time.
Scarce: opportunity costs arise because resources are scarce; this means limited.
One of our most important resources is time.
Marginalism: The process of analyzing the additional or incremental cost or
benefits arising from a choice or decision.
Example: An airplane is about to take off with empty seats. The marginal
costs of an extra passenger are essentially zero. Sell those seats at big
discounts is profitable, even if the fare for those seats is far below the
average cost per seat of making the trip.
Efficient market: A market in which profit opportunities are eliminated almost
instantaneously.
Example: hot tip on the stock market => if a particular tip is valid, there will
be an immediate rush to buy the stock => will quickly drive up its price.
The study of economics teaches us a way of thinking and helps us make decisions.
To understand society
Industrial revolution: The period in the late eighteenth and early nineteenth
centuries in which new manufacturing technologies and improved transportation
gave rise to the modern factory system and a massive movement of the population
from the countryside to the cities. In this time period the discipline of economics
began to shape.
The scope of economics
,Microeconomics: looks at economy more individually it is the branch of
economics that examines the functioning of individual industries and the behavior
of individual decision-making units.
So, it looks at the individual unit for example, the firm, the industry and
household. It sees and examines the “trees”.
Macroeconomics: Looks at the economy as a whole. The branch of economics
that examines the economic behavior of aggregates: income, employment, output,
and so on (on a national scale).
Macroeconomics looks at the whole, the aggregate. It sees and analyzes the
“forest.”
The method of economics
,positive economics: An approach to economics that seeks to understand behavior
and the operation of systems without making judgments. It describes what exists
and how it works.
normative economics: An approach to economics that analyzes outcomes of
economic behavior, evaluates them as good or bad, and may prescribe courses of
action. Also called policy economics.
Theories and models
Model: A formal statement of a theory, usually a mathemati- cal statement of a
presumed relationship between two or more variables.
Variable: A measure that can change from time to time or from observation to
observation.
Ockham’s razor: The principle that irrelevant details should be cut away.
All else equal:
ceteris paribus, or all else equal: A device used to analyze the relationship
between two variables while the values of other variables are held unchanged. It is
part of the process of abstraction. In formulating economic theory, the concept
helps us simplify reality to focus on the relationships that interest us.
Cations and pitfalls:
post hoc, ergo propter hoc: Literally, “after this (in time), therefore because of
this.”
A common error made in thinking about causation: If Event A happens before Event
B, it is not necessarily true that A caused B.
testing theories and models: empirical economics
empirical economics: The collection and use of data to test economic theories.
Example: Firms like Google and Amazon have an enormous amount of data
about individual consumers that they analyze to understand consumers’
buying behavior and improve profitability.
Economic policy
four criteria that are important in judging economic outcomes:
Efficiency: In economics, “efficiency” means “allocative efficiency.” An efficient
economy is one that produces what people want at the least possible cost.
, Equity: Fairness. This is subjective.
Economic Growth: An increase in the total output of an economy.
Stability: A condition in which national output is growing steadily, with low inflation
and full employment of resources. Macroeconomics studies the causes of instability
and tries ways to stabilize these.
Reading and understanding graphs
Graph: A two-dimensional representation of a set of numbers or date.
Time series graphs:
Time series graph: A graph illustrating how a variable changes over time.
Positive relationship: A relationship between two variables, X and Y, in which
a decrease in X is associated with a decrease in Y, and an increase in X is
associated with an increase in Y.
Negative relationship: A relationship between two variables, X and Y, in which
a decrease in X is associated with an increase in Y and an increase in X is
associated with a decrease in Y.
Slope: A measurement that indicates whether the relationship between variables is
positive or negative and how much of a response there is in Y (the variable on the
vertical axis) when X (the variable on the horizontal axis) changes
A positive slope indicates that increases in X are associated with increases in Y
and that decreases in X are associated with decreases in Y.
A negative slope indicates the opposite. When X increases, Y decreases; and
when X decreases, Y increases.
Lecture 01 – The scope and methods of economics
Principles of economics:
Economics: The study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided.
Economics has three fundamental concepts: Opportunity cost, marginalism and
efficient markets
To learn a way of thinking
The opportunity cost (the full cost): The best alternative that we forgo, or give
up, when we make a choice or a decision. Nearly all decisions involve trade-offs.
Example: cost of a movie: ticket-price, time.
Scarce: opportunity costs arise because resources are scarce; this means limited.
One of our most important resources is time.
Marginalism: The process of analyzing the additional or incremental cost or
benefits arising from a choice or decision.
Example: An airplane is about to take off with empty seats. The marginal
costs of an extra passenger are essentially zero. Sell those seats at big
discounts is profitable, even if the fare for those seats is far below the
average cost per seat of making the trip.
Efficient market: A market in which profit opportunities are eliminated almost
instantaneously.
Example: hot tip on the stock market => if a particular tip is valid, there will
be an immediate rush to buy the stock => will quickly drive up its price.
The study of economics teaches us a way of thinking and helps us make decisions.
To understand society
Industrial revolution: The period in the late eighteenth and early nineteenth
centuries in which new manufacturing technologies and improved transportation
gave rise to the modern factory system and a massive movement of the population
from the countryside to the cities. In this time period the discipline of economics
began to shape.
The scope of economics
,Microeconomics: looks at economy more individually it is the branch of
economics that examines the functioning of individual industries and the behavior
of individual decision-making units.
So, it looks at the individual unit for example, the firm, the industry and
household. It sees and examines the “trees”.
Macroeconomics: Looks at the economy as a whole. The branch of economics
that examines the economic behavior of aggregates: income, employment, output,
and so on (on a national scale).
Macroeconomics looks at the whole, the aggregate. It sees and analyzes the
“forest.”
The method of economics
,positive economics: An approach to economics that seeks to understand behavior
and the operation of systems without making judgments. It describes what exists
and how it works.
normative economics: An approach to economics that analyzes outcomes of
economic behavior, evaluates them as good or bad, and may prescribe courses of
action. Also called policy economics.
Theories and models
Model: A formal statement of a theory, usually a mathemati- cal statement of a
presumed relationship between two or more variables.
Variable: A measure that can change from time to time or from observation to
observation.
Ockham’s razor: The principle that irrelevant details should be cut away.
All else equal:
ceteris paribus, or all else equal: A device used to analyze the relationship
between two variables while the values of other variables are held unchanged. It is
part of the process of abstraction. In formulating economic theory, the concept
helps us simplify reality to focus on the relationships that interest us.
Cations and pitfalls:
post hoc, ergo propter hoc: Literally, “after this (in time), therefore because of
this.”
A common error made in thinking about causation: If Event A happens before Event
B, it is not necessarily true that A caused B.
testing theories and models: empirical economics
empirical economics: The collection and use of data to test economic theories.
Example: Firms like Google and Amazon have an enormous amount of data
about individual consumers that they analyze to understand consumers’
buying behavior and improve profitability.
Economic policy
four criteria that are important in judging economic outcomes:
Efficiency: In economics, “efficiency” means “allocative efficiency.” An efficient
economy is one that produces what people want at the least possible cost.
, Equity: Fairness. This is subjective.
Economic Growth: An increase in the total output of an economy.
Stability: A condition in which national output is growing steadily, with low inflation
and full employment of resources. Macroeconomics studies the causes of instability
and tries ways to stabilize these.
Reading and understanding graphs
Graph: A two-dimensional representation of a set of numbers or date.
Time series graphs:
Time series graph: A graph illustrating how a variable changes over time.
Positive relationship: A relationship between two variables, X and Y, in which
a decrease in X is associated with a decrease in Y, and an increase in X is
associated with an increase in Y.
Negative relationship: A relationship between two variables, X and Y, in which
a decrease in X is associated with an increase in Y and an increase in X is
associated with a decrease in Y.
Slope: A measurement that indicates whether the relationship between variables is
positive or negative and how much of a response there is in Y (the variable on the
vertical axis) when X (the variable on the horizontal axis) changes
A positive slope indicates that increases in X are associated with increases in Y
and that decreases in X are associated with decreases in Y.
A negative slope indicates the opposite. When X increases, Y decreases; and
when X decreases, Y increases.
