Economic Principles Full Lecture notes
10 Principles
Tuesday, 22 September 2020
14:17
Read chapter 1
A. What is economics ?
Three questions any economy faces…
• What goods and services should be produced ?
• How should these goods and services be produced?
• Who should get the goods and services produced ?
• scarcity (unlimited desires + Limited resources)
Relates to sociology, psychology and philosophy
• Scarcity: fewer resources which we desire to use; scarce items = value
Naturally limited: land, labour, capital
Supply + demand: to deal with resources in most effective way
• Introduction
How individuals + society as whole manage scarce resources
Allocated by consumer producer interactions through market systems
• Decision making process (business owners, consumers…)
• Interactions between consumers and producers
• Regulation of markets and economy as whole; productive efficiency (no one worse off
at least one person better off)
Economic modelling; abstraction from reality; changeable
B. 10 principles: basis of modern economics
1. People face trade-offs
• Scarcity produces trade offs; cant do everything; choose action with most benefits
(efficiency v equity)
2. Efficiency: the property of society getting most from scarce resources (maximum from
well structured limited resources)
3. Equity: the property of distributing economic prosperity/output fairly among society
WHY DO YOU THINK THIS EXISTS ?
2. Opportunity cost !!
• Def: value of benefits you are foregoing to do something else (if I do X I miss out on Y)
Nothing free; hidden costs
3. Rational people think in the margin
• Consumer theory basis; economic agent interactions and decision making
• Thinking at the margin; choosing action where marginal cost = marginal benefit
• Marginal change: small incremental adjustment to existing plan (most meaningful)
• Marginal benefit: benefit incremental adjustment reaps
• Marginal cost: cost of incremental adjustment
• Comparing costs + benefits of one incremental adjustment; only way to ensure benefit
outweighs cost; most 'profitable' thinking
• Marginal analysis; assume economic agents seeking to maximise/minimize outcomes
when making decisions
• Economic agents; an individual, firm or organisation that has some impact on the
economy
,Hours Total Total Marginal Marginal Net
studied Benefit cost Benefit Cost Benefit
1 £9 £5 £9 £5 £4
2 £17 £11 £8 £6 £6
3 £24 £19 £7 £8 £5
4 £30 £27 £6 £8 £3
•Net benefit: total benefit - total cost
•Economic models relying on assumptions of rational behavior; different outcome if
assumptions relaxed
4. People respond to incentives
• Decisions made comparing costs and benefits
• Policy makers change behaviours by altering costs and benefits; predicted reaction not
guaranteed- incentives undermine 'moral sentiments'
• Can be 'unintended consequences' of incentives
5. Trade can make everyone better off
• nationally and globally; allows specialisation; do what best at and enjoy low costs
• Market Economy: economy allocates resources through decentralised marketplace
decisions; decisions guided by prices and self interest; common framework for all
trades
• Consumers/ firms buy and produce what they want; free interactions at will
• Centrally planned economy: gov plans how much produced
• Can damage local economy
6. Markets can be a good way to organise economic activity
• PRICE of good reflects VALUE and COST OF PRODUCTION (signal to buyers/sellers)
• Economic system: the way in which resources are organised and allocated to provide
for the needs on an economy's citizens
• Capitalist economic system: private ownership of factors of production to produce
goods and services exchanged through a price mechanism and where production in
operated primarily for profit; 'answer' to economic problem; raise standard of living
but not equitable; inherantly unstable (boom to bust)
• Standard of living; income people have allowing them to purchase goods and services
needed to survive and enjoy life. Usually measured by the inflation-adjusted (real)
income per head of population
• Free market economies: an economy addressing the three key questions of the
economic problem by allocating resources through decentralised decisions of many
firms and households as they interact in markets for goods and services
• price determines by interactions between buyers and sellers
• Resulting price: very good reflection of cost of good production and how much society
values it (everyone can participate)
• Centrally planned economy/ comunist/ command economies: gov estimates societies
value of good and cost of production; gov (central planners) organises economic
activity in way promoting economic national well-being and more equitable outcome;
• Price doesn’t impact supply and demand; not enough quantity to supply
7. Governments can sometimes improve market outcomes
• Market failure: scarce resources allocated inefficiently; gov intervene to increase
efficiency (reducing market power), facilitate trade agreements/increase trade value;
Pure market economy doesn’t consider wellbeing of whole society
Causes of market failure:
, • Externality; cost or benefit of one persons decisions on the well-being of a by-stander
(third party) which the decision maker fails to account for.
Eg. Externality cost; pollution
• mmarket power; refers to ability of single economic agent (or small group of agents)
to hae substantial influence on market prices/output; significant price control, little
competition
Policy levellers aid society: create equity (redistribute wealth)
• Mandate maximum price
• Promote competition
• Minimum standard of service
Great markets need gov intervention creating EQUITY/ enhance economic efficiency; gov
intervention not always have intended effect (benefits politically powerful/uninformed leaders
creating policy)
8. An Economy's standard of living depends on its ability to produce
• Economic growth: percentage increase in the amount of goods and services in an
economy over a period of time; expressed over a quarter and annually
• Gross domestic product (GDP) per capita; total value of all goods and services
produced in country divided by population size; average income of country residents
• Productivity: determines country's GDP per capita; number goods/services produced
per hour of workers time
• Also review health + education; money positively impacts
• Human development index: considers; education, life expectancy, GDP per person,
collective country score
• Policy effect on living standards key consideration; how will it effect our ability to
produce goods and services.
9. Prices rise when the government prints too much money
• Inflation: increase in overall price levels in economy
• Often caused by growing money supply
• Cost: more money = less valuable
• benefit; supply work more efficiently (believe it is an increase in wage)
• Purchase more fuelling economy
10. Society faces a trade-off between inflation and unemployment
• Increasing money supply stimulates economy= reduced unemployment
• Philips curve: shows Short term trade-off (inflation + unemployment);negative
relationship; crucial to understand BUSINESS CYCLE; High inflation = low
unemployment
• Business cycle: fluctuations in economic activity such as employment and production
Reading
Interactions related to exchange usually with medium of money or direct exchange of services.
Firms buy land labour and capital to produce products and services
Economy: all the production and exchange activities that take place
Economic activity: amount of buying and selling that takes place in economy over period of
time
The economic problem
• What goods and services should be produced ?
• How should these goods and services be produced ?
• Who should get the goods and services that have been ?
These questions satisfied by resources…
• Land: all the natural resources on the earth
, • Labour: the human effort both mental and physical that goes in to production
• Capital: the equipment and structures used to produce goods and services
Scarcity and Choice
Scarcity: the limited nature of societies resources; Demands for wants/needs greater than ability to
satisfy them
Decisions must be made about allocation of incomes and resources to meet needs and wants
Economics: study of how society manages its scarce resources and consequences of its decision
making
Thinking like an economist
Tuesday, 22 September 2020
14:17
Read chapter 2 and appendix
Introduction
• Hidden costs/benefits may cause outcome(s) different to policy's
designed intentions
Economic methodology
Neo classical: 'mainstream economics'
• Market central feature in generating well-being and answering the
three questions all societies face
• Assumes: decisions based on rationality + economic agents
autonomous and act in self-interest
• Prevents Heterodox economics (against mainstream) progress
Feminist: economic well-being through both unpaid housework and market exchange
• argue value-free analysis and research into economic issues
impossible
• Assuming only 'work' valuable betrays a value judgement relegating
analysis of unpaid work bellow paid work
Marxist: developed by Karl Marx 19th C work different explanation for same
phenomena
• Analyse + understand capitalist system
• Explain how + why production takes place
• Circumstances which different societal groups have economic
power
• Competition between capitalists to control means of production
generates boom and bust of capitalist economies
Austrian school: narrative analysis so claims untestable originated uni of Vienna 19th C
• Economic well-being maximised when markets not intervened by
government
• Gov have minimal role 'liassez-faire'
• Explain business cycles in supply side not demand
• Excess supply drives economic recession
• The Economist as a scientist
• Goal of economics: Describe + Predict behaviour of consumers, firms,
markets and whole economy
10 Principles
Tuesday, 22 September 2020
14:17
Read chapter 1
A. What is economics ?
Three questions any economy faces…
• What goods and services should be produced ?
• How should these goods and services be produced?
• Who should get the goods and services produced ?
• scarcity (unlimited desires + Limited resources)
Relates to sociology, psychology and philosophy
• Scarcity: fewer resources which we desire to use; scarce items = value
Naturally limited: land, labour, capital
Supply + demand: to deal with resources in most effective way
• Introduction
How individuals + society as whole manage scarce resources
Allocated by consumer producer interactions through market systems
• Decision making process (business owners, consumers…)
• Interactions between consumers and producers
• Regulation of markets and economy as whole; productive efficiency (no one worse off
at least one person better off)
Economic modelling; abstraction from reality; changeable
B. 10 principles: basis of modern economics
1. People face trade-offs
• Scarcity produces trade offs; cant do everything; choose action with most benefits
(efficiency v equity)
2. Efficiency: the property of society getting most from scarce resources (maximum from
well structured limited resources)
3. Equity: the property of distributing economic prosperity/output fairly among society
WHY DO YOU THINK THIS EXISTS ?
2. Opportunity cost !!
• Def: value of benefits you are foregoing to do something else (if I do X I miss out on Y)
Nothing free; hidden costs
3. Rational people think in the margin
• Consumer theory basis; economic agent interactions and decision making
• Thinking at the margin; choosing action where marginal cost = marginal benefit
• Marginal change: small incremental adjustment to existing plan (most meaningful)
• Marginal benefit: benefit incremental adjustment reaps
• Marginal cost: cost of incremental adjustment
• Comparing costs + benefits of one incremental adjustment; only way to ensure benefit
outweighs cost; most 'profitable' thinking
• Marginal analysis; assume economic agents seeking to maximise/minimize outcomes
when making decisions
• Economic agents; an individual, firm or organisation that has some impact on the
economy
,Hours Total Total Marginal Marginal Net
studied Benefit cost Benefit Cost Benefit
1 £9 £5 £9 £5 £4
2 £17 £11 £8 £6 £6
3 £24 £19 £7 £8 £5
4 £30 £27 £6 £8 £3
•Net benefit: total benefit - total cost
•Economic models relying on assumptions of rational behavior; different outcome if
assumptions relaxed
4. People respond to incentives
• Decisions made comparing costs and benefits
• Policy makers change behaviours by altering costs and benefits; predicted reaction not
guaranteed- incentives undermine 'moral sentiments'
• Can be 'unintended consequences' of incentives
5. Trade can make everyone better off
• nationally and globally; allows specialisation; do what best at and enjoy low costs
• Market Economy: economy allocates resources through decentralised marketplace
decisions; decisions guided by prices and self interest; common framework for all
trades
• Consumers/ firms buy and produce what they want; free interactions at will
• Centrally planned economy: gov plans how much produced
• Can damage local economy
6. Markets can be a good way to organise economic activity
• PRICE of good reflects VALUE and COST OF PRODUCTION (signal to buyers/sellers)
• Economic system: the way in which resources are organised and allocated to provide
for the needs on an economy's citizens
• Capitalist economic system: private ownership of factors of production to produce
goods and services exchanged through a price mechanism and where production in
operated primarily for profit; 'answer' to economic problem; raise standard of living
but not equitable; inherantly unstable (boom to bust)
• Standard of living; income people have allowing them to purchase goods and services
needed to survive and enjoy life. Usually measured by the inflation-adjusted (real)
income per head of population
• Free market economies: an economy addressing the three key questions of the
economic problem by allocating resources through decentralised decisions of many
firms and households as they interact in markets for goods and services
• price determines by interactions between buyers and sellers
• Resulting price: very good reflection of cost of good production and how much society
values it (everyone can participate)
• Centrally planned economy/ comunist/ command economies: gov estimates societies
value of good and cost of production; gov (central planners) organises economic
activity in way promoting economic national well-being and more equitable outcome;
• Price doesn’t impact supply and demand; not enough quantity to supply
7. Governments can sometimes improve market outcomes
• Market failure: scarce resources allocated inefficiently; gov intervene to increase
efficiency (reducing market power), facilitate trade agreements/increase trade value;
Pure market economy doesn’t consider wellbeing of whole society
Causes of market failure:
, • Externality; cost or benefit of one persons decisions on the well-being of a by-stander
(third party) which the decision maker fails to account for.
Eg. Externality cost; pollution
• mmarket power; refers to ability of single economic agent (or small group of agents)
to hae substantial influence on market prices/output; significant price control, little
competition
Policy levellers aid society: create equity (redistribute wealth)
• Mandate maximum price
• Promote competition
• Minimum standard of service
Great markets need gov intervention creating EQUITY/ enhance economic efficiency; gov
intervention not always have intended effect (benefits politically powerful/uninformed leaders
creating policy)
8. An Economy's standard of living depends on its ability to produce
• Economic growth: percentage increase in the amount of goods and services in an
economy over a period of time; expressed over a quarter and annually
• Gross domestic product (GDP) per capita; total value of all goods and services
produced in country divided by population size; average income of country residents
• Productivity: determines country's GDP per capita; number goods/services produced
per hour of workers time
• Also review health + education; money positively impacts
• Human development index: considers; education, life expectancy, GDP per person,
collective country score
• Policy effect on living standards key consideration; how will it effect our ability to
produce goods and services.
9. Prices rise when the government prints too much money
• Inflation: increase in overall price levels in economy
• Often caused by growing money supply
• Cost: more money = less valuable
• benefit; supply work more efficiently (believe it is an increase in wage)
• Purchase more fuelling economy
10. Society faces a trade-off between inflation and unemployment
• Increasing money supply stimulates economy= reduced unemployment
• Philips curve: shows Short term trade-off (inflation + unemployment);negative
relationship; crucial to understand BUSINESS CYCLE; High inflation = low
unemployment
• Business cycle: fluctuations in economic activity such as employment and production
Reading
Interactions related to exchange usually with medium of money or direct exchange of services.
Firms buy land labour and capital to produce products and services
Economy: all the production and exchange activities that take place
Economic activity: amount of buying and selling that takes place in economy over period of
time
The economic problem
• What goods and services should be produced ?
• How should these goods and services be produced ?
• Who should get the goods and services that have been ?
These questions satisfied by resources…
• Land: all the natural resources on the earth
, • Labour: the human effort both mental and physical that goes in to production
• Capital: the equipment and structures used to produce goods and services
Scarcity and Choice
Scarcity: the limited nature of societies resources; Demands for wants/needs greater than ability to
satisfy them
Decisions must be made about allocation of incomes and resources to meet needs and wants
Economics: study of how society manages its scarce resources and consequences of its decision
making
Thinking like an economist
Tuesday, 22 September 2020
14:17
Read chapter 2 and appendix
Introduction
• Hidden costs/benefits may cause outcome(s) different to policy's
designed intentions
Economic methodology
Neo classical: 'mainstream economics'
• Market central feature in generating well-being and answering the
three questions all societies face
• Assumes: decisions based on rationality + economic agents
autonomous and act in self-interest
• Prevents Heterodox economics (against mainstream) progress
Feminist: economic well-being through both unpaid housework and market exchange
• argue value-free analysis and research into economic issues
impossible
• Assuming only 'work' valuable betrays a value judgement relegating
analysis of unpaid work bellow paid work
Marxist: developed by Karl Marx 19th C work different explanation for same
phenomena
• Analyse + understand capitalist system
• Explain how + why production takes place
• Circumstances which different societal groups have economic
power
• Competition between capitalists to control means of production
generates boom and bust of capitalist economies
Austrian school: narrative analysis so claims untestable originated uni of Vienna 19th C
• Economic well-being maximised when markets not intervened by
government
• Gov have minimal role 'liassez-faire'
• Explain business cycles in supply side not demand
• Excess supply drives economic recession
• The Economist as a scientist
• Goal of economics: Describe + Predict behaviour of consumers, firms,
markets and whole economy
