Introduction to
Economics
CLASS 1
Scarcity
Economics is the study of how society manages its
scarce resources.
“Scarcity – since there are limited resources all of
societies needs cannot be produced”
◦ Even Rich Countries have scarcity issues.
Time is the scarcity, and it's the commodity we can't create
any more of.
Jim Mitchell
Factors that changed the world we live in
Democracy
The Limited Liability Company
Patent Rights
Literacy and Education.
Education is the most powerful weapon which you can use to
change the world.
Nelson Mandela
The factors of production
Land – Natural resources
Labor – the mental and physical skills of individuals in society
Capital – tools that are used in production.
Economics answers the following 3 questions
◦ What to produce?
◦ How to produce?
◦ For whom to produce?
Macroeconomics vs
Microeconomics
Microeconomics is a branch that studies how individuals, households
and firms make decisions to allocate scarce resources.
Macroeconomics is a branch of economics that deal with the
performance, structure, and behavior of national and regional
economies as a whole.
Economics is extremely useful as a form of employment for
economists.
John Kenneth Galbraith
Ceteris paribus
Is Latin for “all other things held constant”
In constructive models, economists make assumptions to eliminate
unnecessary details to reduce the complexity of behaviour.
Positive vs normative
economics
Positive economics
◦ Descriptive statements, claims how the world is. (Scientists)
Normative economics
◦ Prescriptive statements claims how the world ought to be. (Policy Advisors)
Forces at play in the real
world.
Economic – Supply and Demand
Social – Religion and Culture
Political – Governments.
10 principals of economics
Principal 1 – People Face Trade Offs
Efficiency – Getting the maximum benefit of scarce resources
Equality – Benefits are distributed equally amongst the population.
A family is a risky venture, because the greater the love, the
greater the loss... That's the trade-off. But I'll take it all.
Brad Pitt
2: the cost of something is what you gave up to get it.
Opportunity Cost – The next best alternative that is given up when you
choose something.
In economics, one of the most important concepts is 'opportunity cost' the idea that once you spend your money on something, you can't
spend it again on something else.
Malcolm Turnbull
3: Rational people think on the
margin.
Rational people – people who systematically and purposefully do the
best they can do to achieve their objectives.
Marginal changes – small incremental adjustments to a plan of action.
Marginal Benefit > Marginal Cost = decision will be made.
4: People respond to
incentives.
Incentive – something that induces people to act.
Unintended consequences.
Call it what you will, incentives are what get people to work harder.
Nikita Khrushchev
5: Trade can make everyone
better
Country X produces 10 apples and has $100
Country Y produces 10 oranges and has $100
Both apples and oranges cost $10 each
Country X wants 3 oranges
Country Y wants 7 apples.
Everyone benefits with trade.
6: Markets are usually a good way to organize
economic activity.
Market economy
◦ Competitive market
Command economy
◦ Soviet style economics
◦ Government decides what/how/to whom
7: Governments can sometimes improve
market outcomes.
Market failure – a situation in which a market left to its own fails to
allocate resources efficiently.
Government's first duty is to protect the people, not run their
lives.
Ronald Reagan
8: a country’s standard of living depends on its ability
to produce goods and services.
Productivity: the quantity of goods and services produced by each
output of labor.
The only way to increase the standard of living is through increasing
productivity.
The productivity of work is not the responsibility of the
worker but of the manager.
Peter Drucker
On my desk I have three screens, synchronized to form a
single desktop. I can drag items from one screen to the
next. Once you have that large display area, you'll never
go back, because it has a direct impact on productivity.
Bill Gates
9: Prices rise when the government
prints too much money.
Inflation: An increase in the overall levels of prices in the economy.
Inflation is when you pay fifteen dollars for the ten-dollar
haircut you used to get for five dollars when you had hair.
Sam Ewing
10: society faces a short run trade off
between unemployment and inflation.
Inflation occurs when the government prints money.
When money is created there is a need to spend it which thereby
increase demand.
Higher demand means that firms can charge more, and in the short run
encourages firms to higher more employees.
More hiring = lower unemployment.
Thank you
See you next week!