Introduction to Economics

Introduction to Economics

• The presentation introduces key concepts in economics, focusing on macroeconomics.

Outline of Topics

• The following topics are central to an overview of economics:
• The definition of the economy
• Economic activity, resources, and scarcity
• Mixed economic systems and economic fluctuations
• Branches of economics
• Economic goals and policies
• Economic models and mathematical tools

The Economy Defined

• Knowledge of the economy is vital for businesses, politicians, and consumers.
• An economy is an area where production, exchange, distribution, and consumption occur.
• Economies can be place-based, like the Leyte vs Cebu examples
• Economies can be defined by the medium and type of work involved, such as the underground, internet, digital, or "gig" economies
• Economies are systems where resources are obtained and distributed, influenced by factors like geography, culture, politics, laws, environment, and technology.
• Examples of influencing factors include landlocked economies vs. coastal ones, rural vs. urban settings, religious affiliations, and regulated vs. black markets.

Economic Activity

• Most economic activities involve the exchange of commodities for money.
• Activities that foster the exchange of resources, with or without monetary exchange, are part of the economy and are now studied in economics, including:
• Caring for the sick
• Housework
• Gifts

Resources and Scarcity

• Resources are inputs used to provide material benefit or utility, including:
• Physical and intellectual labor
• Land
• Natural resources
• Physical and financial capital
• Entrepreneurial skills
• Economic activity revolves around exchanging resources through beneficial trade.
• Commodities or resources in a market economy are valued relative to their scarcity.
• Diamonds are more valuable than water because water is abundant in most modern economies.
• The Scarcity Theory of Value states that a resource is valued higher when it is scarce.
• Agricultural commodities become expensive when supply is short.
• Few skilled laborers may lead to migration to areas with higher wages.
• Scarcity of public funds should lead to government policies that maximize public benefits relative to costs.

Mixed Economic System

• A mixed economic system integrates capitalism and central planning.
• Capitalism is an ideology where an economy functions best with people left to pursue their self-interest, without government control or intervention.
• Private ownership of resources and means of production is a feature of capitalist systems.
• The free-market system efficiently allocates goods and services, ensuring resources are used to their highest value.
• Mixed economic systems show government control to address market inefficiencies due to institutional constraints, like poverty and pollution.
• Government planning and control is expressed through taxation, business laws, environmental regulation, minimum wages, and cash subsidies.

Economic Fluctuations

• Human well-being has improved dramatically in the last 3 centuries due to industrialization.
• Advancements like oil-fueled engines, medicine, selective breeding of agricultural commodities, the internet, and computers have improved lives.
• Modern economies are affected by changes in:
• Supply and demand
• Capital availability
• Future expectations
  • These factors cause natural growth and downturn cycles.
• Calamities such as COVID-19, adversely affect economic output, demonstrating the significant impact of natural events.
• Recurrent economic ups and downs form business cycles.
• Troughs occur when employment and output are lowest; peaks are the opposite.
• A recession is a period leading to a trough, with a prolonged recession being considered as a depression.
• Governments aim to minimize business cycle fluctuations to achieve stability.
• Trend growth represents the potential output when all labor resources are fully used.
• Short-run output is less than potential when resources are unemployed.
• Short-run output exceeds potential when people work overtime and use machinery excessively.

Economics Defined

• Economics is the study of the economy.
• Lionel Robbins defined economics as the study of human behavior in meeting needs with limited resources.
• Economics views social behavior through rationality, where individuals aim to maximize net benefits with full information
• Scarcity is acknowledged that resources are limited, yet human wants are unlimited.
• Contemporary definitions, such as those from the CORE-Econ group, describe economics as how economic agents gain resources interacting with others and the natural environment and change behavior over time.
• This definition acknowledges the environment as the primary source of raw inputs and the largest waste repository, recognizing behavior changes based on situations.

Branches of Economics

• Economics is divided into microeconomics and macroeconomics.
• Microeconomics deals with individual behavior and choices:
  • Firms maximize profits or minimize costs.
  • Consumers maximize utility or minimize budgets.
• Macroeconomics studies the broader economy and aggregate behavior of macroeconomic variables.
• Understanding both helps in formulating suitable responses to key economic events.

Economic Goals

• Economic growth
• Full employment
• Stable prices
• Efficient resource distribution
• Freedom to conduct business with minimal regulation
• Income equality
• Poverty alleviation
• Broad access to social goods, such as healthcare and education
• A healthy local economy

Economic Policy

• Economic policymaking includes steps to follow:
  • Define specific, measurable goals.
  • Identify and assess options and related costs and benefits.
  • Evaluate effectiveness by analyzing data and revise if required.

Nature of Economic Models

• Economies are complex, so economic models is an attempt to study their patterns.
• Simplify reality to highlight key economic phenomena
• Economic models are mathematical constructs used to explain economic behavior.
• The simplicity of many economic models often brings criticism.
• Effective economic models are judged by their predictive power, provided their assumptions remain practical and valid.
• A common assumption in models is ceteris paribus, isolating the impact of one variable on another by holding other variables constant.
• Macroeconomic models can hypothesize that countries with higher physical capital, human capital, and natural resources grow faster, but must consider government, institutions, and cultural norms.
• Economic models should represent aspects of the economy, not replace economic reality.

Mathematical Tools in Economics

• A basic macroeconomic model is the consumption function.
• An increase in disposable income leads to an increase in consumption.
• The consumption function is expressed as:
  • C = a + mcYd
• C is consumption expenditure
• Yd is disposable income
• The notation shows that aggregate consumption expenditure is dependent on aggregate disposable income.
• In a linear consumption function:
  • C = a + mcYd
    • "a" is independent consumption when "Yd "is zero
  • "mc" is the marginal propensity to consume, an indicator of the relationship between the two variables
  • "a" and "mc" are behavioral parameters
• Economists apply the concept of equilibrium, borrowed from physics, to model economic phenomena, where forces are balanced, and no change occurs without external variables.
• The supply and demand model in microeconomics illustrates equilibrium where the price and quantity are determined by sellers and buyers.
• In macroeconomics, the Keynesian cross is a fundamental model, showing income determination by the equality of aggregate expenditure, national income, and aggregate production.