Topic 01a Principles of Economics PDF

EC4101 Topic 1a: First principles Choice: The Heart of Economics… She must choose. And her choice affects others. 1. Choices are necessary as resources are scarce… 1. Resources are scarce A resource is anything that can be used to produce something else e.g. lan...

EC4101 Topic 1a: First principles Choice: The Heart of Economics… She must choose. And her choice affects others. 1. Choices are necessary as resources are scarce… 1. Resources are scarce A resource is anything that can be used to produce something else e.g. land, labour, capital Resources are scarce – the quantity available isn’t large enough to satisfy all productive uses e.g. oil, lumber, intelligence 1. Resources are scarce NB: “nature” is scarce! Since the 1960s, the human race has become a ‘deficit ecological spender’ Ecological footprint = what humans extract from the planet Biocapacity = what the planet can provide Ecological deficit = gap between the quantity of nature we “consume” and how much nature we have  Ireland’s ecological footprint If everyone in the world consumed like the average Irish person, we would need no fewer than three planet Earths to supply their aggregate consumer habits and support their lifestyles 2. Trade-offs and opportunity cost To get one thing, we usually have to give up another thing The real cost of an item is its opportunity cost: what you must give up in order to get it Opportunity cost is crucial to understanding choices Leisure time v. work Food v. clothing Efficiency v. equity Output v. environment Relative earnings of tertiary-educated workers by level of tertiary education (2020) (25-64 year olds with income from employment; 100 = upper secondary education) Source: Education at a Glance, OECD, 2022 2. Trade-offs and opportunity cost Output v. environment: almost universal agreement that climate change is/will have a significant global impact on people’s lives in near future However, tackling the issue and implementing policies that help mitigate climate change may mean a decrease in standards of living Concepts of degrowth and decoupling are key here 3. “How much?” is a decision at the margin You make a trade-off when you compare the costs with the benefits of doing something Decisions about whether to do a bit more or a bit less of an activity are marginal decisions Each bite of the bar has costs and benefits… 4. People respond to incentives An incentive is anything that offers rewards to people who change their behaviour e.g. price of petrol rises … people buy more fuel-efficient cars If there are more well-paid jobs available for college graduates with economics degrees … more students major in economics People respond to these incentives Sustainable economics question: What is the objective of a carbon tax? 5. There are gains from trade In a market economy, individuals engage in trade: They provide goods and services to others and receive goods and services in return There are gains from trade: people can get more of what they want through trade than they could if they tried to be self- sufficient “I hunt and she gathers – otherwise we couldn’t make ends meet.” But is trade equal? Are the benefits of trade equally distributed? 6. Markets move toward equilibrium An economic situation is in equilibrium when no individual would be better off doing something different Any time there is a change, the economy will move to a new equilibrium e.g. what happens when a new checkout line opens at a busy supermarket? 7. Resources should be used efficiently An economy is efficient if it takes all opportunities to make some people better off without making other people worse off Should economic policy makers always strive to achieve economic efficiency? Equity means that everyone gets his or her fair share. Since people can disagree about what’s “fair,” equity isn’t as well- defined a concept as efficiency  8. Markets usually lead to efficiency. People normally take opportunities for mutual gain 8. Markets usually lead to efficiency The incentives built into a market economy already ensure that resources are usually put to good use Opportunities to make people better off are not wasted Exceptions: market failure, the individual pursuit of self- interest found in some markets makes society worse off In such cases the market outcome is inefficient 9. Market failure and government intervention When markets don’t achieve efficiency, government intervention can improve society’s welfare e.g. regulation of monopolistic firms, banks, heavy polluters etc. e.g. state provision of certain goods (rail transport, electricity etc.) Economy-wide interactions Principles that underlie economy-wide interactions: 1. One person’s spending is another person’s income 2. Overall spending sometimes gets out of line with the economy’s productive capacity 3. Government policies can change spending Above are macroeconomic principles that you will cover in detail next semester