Introduction to Economics

Key Terms

• Economics involves understanding concepts such as economy, resources, scarcity, demand, opportunity cost, and tax.

Learning Objectives

• Economics can be defined and its components identified.
• Economists use economic reasoning in various ways.
• Real-world events are explainable through economic, social, and political forces.
• Economic insights are developed and applied.
• Clear distinctions exist between positive economics, normative economics, and the art of economics.

Economy Defined

• An economy is the state of a country regarding the production, consumption of goods and services, and supply of money.
• Economy describes the structure and conditions of economic life within a country.

Economics Defined

• Economics studies how people coordinate their desires, considering decision-making mechanisms, social customs, and political realities.
• Coordination is a key concept in economics.

Coordination in Economics

• Coordination addresses three central problems any economy faces.
• The problems include what and how much to produce, how to produce it, and for whom to produce it.

Scarcity

• Scarcity arises when available goods are insufficient to satisfy individuals' desires.
• Scarcity is shaped by wants and the means to fulfill them.
• Wants can change and are influenced by society
• The level of scarcity is constantly in flux.

Trade-offs

• Making choices requires giving up something.
• Trade-offs encompass all available options or considered alternatives.

Opportunity Cost

• Opportunity cost is the most desirable alternative forgone when making a choice among trade-offs.
• It represents the potential benefit of the next best alternative.

Branches of Economics

• Microeconomics focuses on economic reasoning from the perspective of individuals and firms, building up to an analysis of the whole economy.
• Macroeconomics begins with the aggregate/whole, breaking it down into components.
• Microeconomics analyzes from the parts to the whole.
• Macroeconomics analyzes from the whole to the parts.

Microeconomics Specifics

• Microeconomics studies individual choice and how economic forces influence it.
• Studies encompass firms' pricing policies, household decisions on purchases, and how markets allocate resources.

Macroeconomics Specifics

• Macroeconomics studies the economy as a whole.
• Macroeconomics considers inflation, unemployment, business cycles, and growth.
• Macroeconomics focuses on aggregate relationships like how household consumption relates to income and how government policies can affect growth.

Marginal Costs and Benefits

• Relevant costs and benefits in economic reasoning are the expected incremental costs incurred.
• Expected incremental benefits are the outcome of a decision.
• Economists use "marginal" to refer to additional or incremental aspects.

Marginal Costs Defined

• A marginal cost represents the additional expense beyond costs already incurred.
• It reflects the change in total production cost resulting from making or producing one more unit.

Marginal Benefits Defined

• A marginal benefit is the extra benefit above what you've already gained.
• Marginal benefit captures the added satisfaction a consumer gets from an additional product or service unit.

The Economic Decision Rule

• Proceed if the marginal benefits of an activity exceed the marginal costs.
• Do not proceed if the marginal costs of an activity exceed the marginal benefits.

Economic Forces

• Scarce goods must be rationed.
• Rationing mechanisms are economic forces responding to scarcity.
• Societies decide whether to allow these forces to operate freely or to control them.

Market Forces

• A market force is an economic force that society allows to operate relatively freely through the market.
• Market forces ration by adjusting prices.
• Prices increase during shortages and decrease during surpluses.

Invisible Hand

• The invisible hand is the price mechanism.
• It is the rise and fall of prices that guide actions in a market.
• In a market economy, the price mechanism efficiently allocates resources.
• Economic Efficiency is achieving goals as cheaply as possible.

Social Forces

• Social forces guide individual actions, even when those actions do not appear to be in an individual’s selfish interest.

Political Forces

• Political forces are legal directives that influence whether market forces can operate.
• Economic reality is a contest between opposing forces.

Using Economic Insights

• An economic model puts theory into a specific context.
• An economic principle is a belief stated as a law.
• Experimental economics studies the economy through controlled experiments.

Economic Policies

• Economic policies are actions or inaction by the government to affect economic activities.
• Policies function within institutions, but also can affect those institutions.

Objective Policy Analysis

• Good economic policy analysis is objective.
• Objective analysis keeps the analyst's values away from the analysis.
• Objective analysis describes what is, not what should be.

Economic Categories

• Positive economics is a study of what is, and how the economy works.
• Normative economics examines what the goals of the economy should be
• Art of economics applies knowledge from positive economics to achieve goals set in normative economics.

Positive Economics Detail

• Positive economics explores economic theory and discovers empirical facts.
• Economic theorists connect their theories to these facts.

Normative Economics Detail

• Normative economics studies what the goals of an economy should be.
• Economists combine normative judgments with positive economics insights to decide on policy.

Art of Economics Detail

• It applies knowledge from positive economics to achieve normative economics goals.
• A consideration of how to achieve societal goals given the workings of the economy.

Key Points to Remember

• Any economy must solve what to produce, how to produce it, and how to distribute production.
• Economics can be divided into microeconomics and macroeconomics.
• Economic reasoning is based on a cost/benefit framework.
• Economic reality is influenced by social, political, and economic forces.
• Economics can be divided into positive, normative, and the art of economics.
• Positive economics studies what is and normative economics studies what should be.
• The art of economics relates positive to normative economics.