Economics I - Introduction - ELTE PDF

Economics I 1. Introduction: Economics as a Social Science András Székely-Doby ELTE Faculty of Social Sciences, Department of Economics Course info Economics I Class format: one lecture per week Instructor: András Székely-Doby, PhD, ELTE Faculty of Social Sciences, Department of Economics,...

Economics I 1. Introduction: Economics as a Social Science András Székely-Doby ELTE Faculty of Social Sciences, Department of Economics Course info Economics I Class format: one lecture per week Instructor: András Székely-Doby, PhD, ELTE Faculty of Social Sciences, Department of Economics, room E 203 Lectures: Monday, 12:00-1:30 pm, Gróh hall (K 062) Office hours: Thursday 2:00-3:30 pm (by appointment) E-mail: [email protected] ECONOMICS I – ANDRÁS SZÉKELY-DOBY 2 Requirements Required material: everything we discuss in classes The course is finished by a written, closed-book exam In the last week of the study period (same time, same place) there will be a pre-exam for a recommended mark The pre-exam cannot be repeated or made-up There will be three additional exam opportunities in the exam period Exams are multiple choice tests for 80 points ECONOMICS I – ANDRÁS SZÉKELY-DOBY 3 Grading Grades: 0-39 points: fail (1); 40-49 points: pass (2); 50-59 points: satisfactory (3); 60-69 points: good (4); 70-80 points: excellent (5) ECONOMICS I – ANDRÁS SZÉKELY-DOBY 4 Textbook N. Gregory Mankiw: Principles of Economics, Ninth Edtion, Cengage Learning, Inc., Boston MA, 2021 Previous editions are equally good ECONOMICS I – ANDRÁS SZÉKELY-DOBY 5 Social interactions From a bird’s eye view, every society seems to be chaotic: myriads of actors interact on a daily basis with each other They make decisions, buy and sell goods, work, take part in politics, sports, arts etc. Their activities are, however, not aimless: they follow their own interests ECONOMICS I – ANDRÁS SZÉKELY-DOBY 6 The society as a system The functioning of a society is more than the sum of the actions of individual actors There is a higher level order: the society consitutes a system It is so even if the individuals do not recognize (and do not care) that they are part of a system Spontaneous order (e.g. a market) ECONOMICS I – ANDRÁS SZÉKELY-DOBY 7 The economy as a subsystem The society as a system has numerous parts Accordingly, purposes of individual actions are different as well The subsystem of a society that covers the production and distribution of goods and services is called the economic subsystem Economics deals with the economic subsystem (the economy) ECONOMICS I – ANDRÁS SZÉKELY-DOBY 8 Broader meaning of economic activity What are the different purposes of economic activities? First: goods and services are produced to meet the material needs of people Following Karl Polányi (1886-1964), Hungarian-born sociologist, we will call it the broader (or substantive) meaning of economic activity ECONOMICS I – ANDRÁS SZÉKELY-DOBY 9 Narrower meaning of economic activity Second: actors (people, enterprises, government branches etc.) make decisions to promote their own interests Facing limited options, they try to find the best alternative According to Polányi, this is the narrower (formal) meaning of economic activity, which includes rational calculations (optimization) While substantive activities characterize all societies, rational calculations became important only in market economies ECONOMICS I – ANDRÁS SZÉKELY-DOBY 10 The market mechanism Who decides in market economies? The government? The producers? The consumers? In market economies, prices are determined by the simultaneous decisions of actors both on the supply and the demand sides ECONOMICS I – ANDRÁS SZÉKELY-DOBY 11 The market economy The market economy is an economic system in which answers to the fundamental questions of economics are predominantly left to the market: What to pruduce? How to produce? How to allocate productive resources? How to distribute goods and services? The main motivations of the producers are profits Motivations of the consumers are expressed by their utilities ECONOMICS I – ANDRÁS SZÉKELY-DOBY 12 Economics and the market economy The discipline of economics studies market economies Concepts, principles, and incentives of economics are borrowed from market economies Economics assumes a well-functioning market economy, without disturbing issuses (politics, infringements) It is essential, however, to note that a well-functioning economy also assumes well-functioning systems of legislation, jurisdiction and government ECONOMICS I – ANDRÁS SZÉKELY-DOBY 13 Economics is a social science Economics assumes that fundamental institutions (rules, norms and laws) of a market economy are given This (political or legal) framework, however, sometimes (more often than one may think) breaks down In this case, economics must be complemented by other social sciences (multidisciplinary approach is needed) You must not forget that economics is a social science, and the economy is embedded into the society ECONOMICS I – ANDRÁS SZÉKELY-DOBY 14 What kind of methodology? Most economic processes can be measured and expressed by numbers This is why mathematics has become the most important language of the discipline Myriads of models and econometric (statistical) methods have been developed to analyse economic issues We will learn some basic models during our introductory course ECONOMICS I – ANDRÁS SZÉKELY-DOBY 15 Models Economics uses models Models are abstratctions which are used to ”understand” our observations or experience, and to express principles which can be applied to different problems Examples: physical laws (trajectory of a ball) The power of a model stems from its simplicity, and depends on how it can capture the essence of the problem ECONOMICS I – ANDRÁS SZÉKELY-DOBY 16 Modelling A model cannot be good or bad Its suitability depends on the purpose it is used for Assumptions must be tailored to the purposes Example: Newton’s laws vs. the theory of relativity Why should we understand the world around us? Because in doing so we may be able to form the world according to our needs (e.g. economic policy) ECONOMICS I – ANDRÁS SZÉKELY-DOBY 17 Social sciences are not natural sciences While in natural sciences one may design experiments, and verify or falsify theories according to the results of the experiments Such tools are not available in social sciences People, enterprises, or governments are net molecules or atomic particles (which are also impossible to perfectly detect), so in social sciences, the degree of freedom of the processes is higher than in nature ECONOMICS I – ANDRÁS SZÉKELY-DOBY 18 Laws in economics During our studies, we will encouter several laws Law of demand Law of supply Law of diminishing returns etc. These laws, however, are not laws in the sense of natural sciences: they do not predict perfectly what will happen Laws in social sciences (as well as all of the models) are like rules of thumbs: they provide us only with orientations what to expect in different situations ECONOMICS I – ANDRÁS SZÉKELY-DOBY 19 The mainstream Since no models can vindicate exclusivity in social sciences, we must conform ourselves to the multiplicity of approaches Yet, some models and approaches seem to be more useful than others, have more predicting power, or can explain situations more accurately The body of these approaches and models, appearing on the pages of widely used textbooks, is called mainstream Our course is an introduction to mainstream economics ECONOMICS I – ANDRÁS SZÉKELY-DOBY 20 Microeconomics and macroeconomics The two main branches of economics are Microeconomics, which deals with the behavior, incentives and choices of different actors of the economy, and Macroeconomics, which examines the functioning of the economy as a whole The current course will offer you an introduction to microeconomics ECONOMICS I – ANDRÁS SZÉKELY-DOBY 21 Roadmap of the course Part One: Introduction Week One: Economics as a social science Week Two: Ten principles of economics. Thinking like an economist Week Three: Interdependence and the gains from trade ECONOMICS I – ANDRÁS SZÉKELY-DOBY 22 Roadmap of the course Part Two: How markets work? Week Four: The market forces of supply and demand Week Five: Elasticity and its Applications Week Six: Supply, demand, and government policies ECONOMICS I – ANDRÁS SZÉKELY-DOBY 23 Roadmap of the course Part Three: Markets, welfare, and the economics of the public sector Week Seven: Consumers, producers and the efficiency of markets Week Eight: Externalities, public goods, and common resources ECONOMICS I – ANDRÁS SZÉKELY-DOBY 24 Roadmap of the course Part Four: Firm behavior, the organization of industry, and topics for further study Week Nine: The costs of production, firms in competitive markets Week Ten: Monopoly Week Eleven: Economics of information, game theory Pre-exam (Week Twelve) ECONOMICS I – ANDRÁS SZÉKELY-DOBY 25 Thank you for the attention! András Székely-Doby [email protected]