Lecture 1- Nature and Scope of Economics PDF

NATURE AND SCOPE OF ECONOMICS Colin Luckie [email protected] WHAT IS ECONOMICS?  Economics is generally defined as the study of how individuals and societies use limited resources to satisfy unlimited wants.  Your MIND and Pocket are in disagreement.  Economics i...

NATURE AND SCOPE OF ECONOMICS Colin Luckie [email protected] WHAT IS ECONOMICS?  Economics is generally defined as the study of how individuals and societies use limited resources to satisfy unlimited wants.  Your MIND and Pocket are in disagreement.  Economics is seen everywhere. NOW WHAT?  Economists argued that the fundamental economic problem is scarcity. Since there are not enough resources available to satisfy everyone’s wants, individuals and societies have to choose among available alternatives. SOME KEY TERMS  Opportunity Cost: The cost of not selecting the “next-best” alternative.  Eg. Suppose that you own a building that you use for a retail store. If the next best use of the building is to rent it to someone else, the opportunity cost of using the building for your business is the rent you could have received.  Choice: These are options available that can be selected.  eg,. Country A has three choices : Produce good X or good Y or a combination  Ceteris paribus: all other things remaining constant. SOME KEY TERMS  Economic good: A good which people want more of it than would be available if the good were available for free. It has a benefit to society(utility). Eg. Food, clothing etc.  Economic Bad: A good is said to be an economic bad if people are willing to pay for it to avoid the item. Eg. Garbage  Free good: A good which can be consumed in as much quantity as needed without reducing its availability to others. It is a good with zero opportunity cost. Eg. Air Economic Resources  These are goods which are used to produce other goods or services. Also called inputs or factors of production.  Categories of Economic resources:  Land – Payment is Rent  Labour- Payment is Wage  Capital- Payment is Interest  Entrepreneur- Payment is Profit RATIONAL SELF-INTEREST  A behavioural assumption that economists make about how people act under certain conditions. Acting in an economically rational way entails taking actions that reduce costs and increased benefits for the individual. ECONOMIC METHODOLOGY  Economic discussion may involve both positive and normative analysis. Also known as positive and normative economics.  Positive Economics: Attempts to describe how the economy works. It can be tested or proven by facts. These statements are objective. Eg. A fall in income will lead to a fall in demand for a normal good.  Normative Economics: These are subjective statements of opinion rather than a fact that can be tested by looking at the available evidence. Normative economics relies on value judgements to evaluate or recommend alternative policies. Eg. Pollution is the most serious economic problem. LOGICAL FALLACIES  Fallacy : A mistaken belief, especially one based on unsound arguments.  Fallacy of composition: occurs when one incorrectly attempts to generalize from a relationship that is not true for each individual, but is true for the whole group.  Example: Any person can get a better view at a concert by standing(regardless of the actions of those in front of him/her) but it is not true to state that everyone can get a better view if everyone stands.  Post Hoc Fallacy(ergo propter hoc: One event is said to be the cause of a later event simply because it occurred earlier.  Example:  Event B immediately happens after event A. Therefore, event A is the cause of event B.  What other fallacies exist? MICROECONOMICS v/s MACROECONOMICS  Microeconomics: Examines small economic units, the components of the economy. Eg. Individuals, household, firms, industries.  Macroeconomics: Looks at economic aggregates. Eg. National Output, overall price level, aggregate unemployment. ALGEBRA  2x + 3y - x + 4y -6z  Group the like terms:  2x – x + 3y + 4y – 6z  X + 7y – 6z  Here are some for you to do:  (4x2 – 3x + 5) – (2x2 + 5x – 12)  2(x + 4) + 3(x – 5)  2(x + 4)  SLOPE OF AN EQUATION(Differentiation)  Traditional way to find the slope is to find the gradient of a line:  m = (Y2 – Y1 / X2 - X1 )  Calculus tells us to differentiate(find the derivative) when finding the slope and some rules should be followed.  Product Rule  Quotient Rule  Sum Rule  Difference Rule  Note : the derivative of a constant is equal to zero Example: What is x3 ? The question is asking "what is the derivative of x3 ?" We can use the Power Rule , where n=3: xn = nxn−1 x3 = 3x3−1 = 3x 2  Example 1 Example: What is 5x3 ? the derivative of cf = cf’ the derivative of 5f = 5f’ We know (from the Power Rule): x3 = 3x3−1 = 3x2 So: 5x3 = 5 x3 = 5 × 3x2 = 15x 2 SIMULTANEOUS EQUATIONS Solve the two simultaneous equations: 2y + x = 8 1 + y = 2x from y = 2x -1 ← subtract 1 from each side Substituting this value for y into gives: 2(2x – 1) + x = 8 4x – 2 + x = 8 ← expand the brackets 5x – 2 = 8 ← tidy up 5x = 10 ← Add 2 to each side x = 2 ← By dividing both sides by 5 the value of x is found. Substitute the value of x into y = 2x – 1 gives y=4-1=3 So x = 2 and y = 3 Graphical Analysis in Economics  Graphs are extensively used in economics to represent the relationships that exist among economic variables. Two simple types of relationships that may exist are:  Direct relationship(Positive relationship)  Inverse relationship(Negative relationship) DIRECT RELATIONSHIP A direct relationship is said to exist between two variables X and Y if an increase in X is always associated with an increase in Y and a decrease in X is associated with a decrease in Y. INVERSE RELATIONSHIP An inverse relationship is said to exist between the variables X and Y if an increase in X is always associated with a decrease in Y and a decrease in X is associated with an increase in Y. Equation of Straight Line Graph of a Straight Line QUESTIONS  What linkage exist between scarcity, choice and opportunity cost?  How do we apply gradient in economics?  What relationship exist between economic variables? Video Links  https://youtu.be/12ZlNwgxsOI  https://youtu.be/1UxA6JzoT-4