Introduction to Economics

• Economics studies human behavior.
• It uses the book "Principles of Economics" by N.G. Mankiw for chapters 4, 5, and 7.
• Topic outline includes objectives, economics/markets, economics as science, circular-flow of income model, microeconomics, and macroeconomics.

Objectives of Economics

• Introduce the concept of Economics.
• Understand the difference between a market economy and a planned economy.
• Determine if Economics is a scientific discipline.
• Define what an economic model is and its variables.
• Study a first economic model.
• Identify the main parts economic theory is divided into.

Economics and Markets

• Economics derives from the Greek word "oikonomia," combining "oikos" (house) and "nomos" (custom/law), translating to household management.
• Micro comes from the Greek, mikros, meaning small.
• Microeconomics involves managing a small house.
• Macro comes from the Greek, makros, meaning large.
• Macroeconomics involves managing a nation.
• Economics emerges due to unlimited needs versus limited resources.
• People try to meet some needs through production.
• Economics studies how societies manage resources to produce and distribute goods and services.

Aspects Examined

• What to produce and how much
• Production methods
• Purpose of production
• Decision-makers

Economic Systems

• Market economy: Resources are allocated through the decentralized actions of firms and households in the market.
• Centrally planned economy: Resources are allocated by a central authority, dictating production and distribution.

Market Defined

• Mechanism where buyers and sellers interact to set prices for exchanging goods and services.
• The price system addresses consumption, production, and distribution challenges.
• Market prices indicate product value to consumers along with resource costs.
• Adam Smith noted in "The Wealth of Nations" (1776) that households and firms are guided by an "invisible hand" in markets.
• Selfish decisions of households and firms produces maximizing economic welfare of society
• The invisible hand works through the price system, and interaction determines prices that reflect value and production costs.
• Efficiency occurs when the market system is able to achieve the most output from scarce resources.

Government Intervention

• Governments intervene to correct and support free interaction in markets, leading to a mixed economy.
• Reasons for intervention include redistribution of income, addressing market failures, and implementing macroeconomic policies.

Economic Models

• Economists act as scientists by explaining the world and as consultants by improving it.
• The scientific method involves developing theories through observation, collecting data to verify or refute them, and ensuring repeatability.
• Evaluating theories with data is more complex in economics compared to physics.
• Economists often use existing data and use history to contrast economic theories.
• Economic theory presents organized ideas creating a model which is a simplified description of reality.
• Scientific thinking involves using assumptions
• Feasibility is determined by testing assumptions empirically.

Economic Model Characteristics

• Understandable and manageable
• With reasonable and realistic assumptions
• Testable through empirical analysis
• Most economic models use diagrams and equations
• These models use economic variables representing economy aspects or agent actions like production, income, or pricing.
• Economists collect historical data to assess economic models.

Types of Variables

• Endogenous: Value determined within the model, like consumption.
• Exogenous: Value determined outside the model, like population.
• Flow: Measured over a time period, such as income.
• Stock: Measured at a specific point in time, such as wealth.
• Nominal: Expressed in current year prices, like current GDP.
• Real: Expressed in constant terms using a base year to adjust for price-level changes, like real GDP.

Types of Analysis

• Positive: Economic consequences of implementing a policy using assumptions, without considering their desirability.
• Normative: Whether a policy should be used, considering both consequences and subjective characteristics of the economic system.

Circular-Flow Model

• Circular-flow models represent transactions in an economy and illustrates the ways money flows within an economy.

Micro and Macroeconomics

• Economics divides into microeconomics and macroeconomics.
• Microeconomics studies decisions of households and firms in individual markets, focusing on individual agents and how much to consume or produce and about pricing.
• Macroeconomics studies economy-wide phenomena like unemployment, price levels, economic growth, and government policies.
• Microeconomics looks at economic agents and markets.
• Macroeconomics focuses consumption, investment, production on the whole economy.