Introduction to Economics I - Lecture Notes PDF

Introduction to Economics I - Dr. Aashita Dawer Economics: What and Why?  The first two questions facing us are: (i) What is economics? (ii) Why should we (would be lawyers) study economics?  The answer to the first question is important because: (a) We need to know what is it...

Introduction to Economics I - Dr. Aashita Dawer Economics: What and Why?  The first two questions facing us are: (i) What is economics? (ii) Why should we (would be lawyers) study economics?  The answer to the first question is important because: (a) We need to know what is it that we are studying. (b) We need to know what is it that we are not studying, as long as we are focusing our attention to mainstream economics.  Why should lawyers study economics?  Among the more direct concerns: without a grasp on some details on economics we would not understand mergers, acquisitions, or tort.  There are many concepts in economics like opportunity costs, incentives etc., which has found it's way into other disciplines, and everyday life. We need to have a grasp on what these concepts are, and also what an application of any of these concepts entail for given situations.  Without a baseline knowledge of economics we would not have any understanding of many events happening around us nationally and globally. That would make us not just ill informed lawyers, but ill informed citizens. What is economics?  Economics is the study of efficient allocation of scarce resources  Mankiw: “Economics is the study of how society manages its scare resources.”  Courtney et al: “Economics is the study of human behaviour, with an emphasis on human decision making.”  Stephen Landsberg: “Economics is one of several sciences that tries to explain human behaviour, but differs in that it emphasizes rational decision making.”  Standard textbooks: “Economics is the study of how people choose to allocate scare goods and resources to achieve their unlimited desires.”  Anonymous: “Economics is the study of how people respond to incentives.” What is economics? Usually people think of the following when they hear economics:  Demand and supply  Production, distribution and consumption  Allocation of scarce resources  Free markets  Utility  Growth  Poverty and inequality  Opportunity cost Key Concepts  Scarcity: Term used to describe the limited availability of resources, so that if no price were charged for a good or service, the demand for it would exceed its supply.  Trade-offs: The amount of one good (or one desirable object) that must be given up to get more of another good (or to attain more of another desirable object).  Opportunity Cost: The cost of a resource, measured by the value of the next best alternative use of that resource.  Rational Choice: A process in which individuals weigh the costs & benefits of each possibility and in which the choices made are those that maximizes net benefits. Free Market  Usually free market comes to mind when talking about economics. What is a market?  In ancient times, it would be adequate to say it is a place, where buyers and sellers meet, or where demand and supply interact to determine key variables price and quantity.  It is more appropriate to think of market as a social institution which brings together buyers and sellers, with a host of factors constituting it - information dissemination system, laws (see why lawyers need to study economics!) regulating labour markets, and ensuring smooth functioning and upholding of property rights etc.  No State Intervention Efficiency  Usual definition that most of us have when we think efficiency:  minimum value of resources used to achieve a desired level of output or maximum value of output produced from a given input.  No one can have a problem with the above definition, so then why is there some debate about efficiency and equality?  Because efficiency is defined for two cases:  Thus, free market outcomes are always efficient in allocation(not equality), state intervention leads to inefficiecy in this sense. Conclusion  We are going to learn some of the tools of mainstream economics, and learn how to apply them.  Before that, we take a step back and try to understand what kind of questions can be asked when we operate within the domain of mainstream economics.  We are going to state the assumptions and the workings of the models as clearly and explicitly as possible.  Then we are going to subject some of the assumptions and the underlying philosophy behind them to critical scrutiny.  Towards the end of the semester, we will step outside the bounds of mainstream economics, and ask certain questions we could not ask using simply the tools of mainstream economics.