ECONOMICS

Chapter 1 What is Economics?

 contents

1.1 Basic Nature of Economics

1.2 Rational Choice
1.3 Economic Resources and Commodities
1.4 Basic Structure of National Economy
1.5 Market and Price
1.6 Microeconomics and Macroeconomics
1.7 Economic Ways of Thinking
 1.1 Basic Nature of Economics

economics subjects of interest in economics

various economic phenomena such as
unemployment, inflation, economic growth,
poverty, exchange rate, labor relations,
competition, environmental pollution

Why should we learn economics?

basic knowledge of economics is a prerequisite
for those who live in this modern world
 1.1 Basic Nature of Economics

economics : a field of study which explores the

economics ways to utilize economic resources efficiently to
science of meet material needs of human beings
choice we can say that economics is a science of choice.
anything that is related to choice can be the
subjects of exploration for economists
ex) economics of family, economics of crime and
punishment, economics of arts, economics of
sports etc.
 1.2 Rational Choice

rationality basic assumption of economics : all

economic agents are rational
in rationality in economics means rationality
economics in means, not in purpose
How can we achieve a certain purpose
most efficiently?
example of a rational choice: Should I go
to college or not? (benefits and costs of
going to college)
 1.2 Rational Choice

Opportunity Cost and Sunk Cost

opportunity accounting cost and opportunity cost

the concept of accounting cost only includes
cost what is actually spent
for a rational choice, however, something that
has the characteristic of cost must be counted
as cost even though it is not actually spent
the concept of opportunity cost
the opportunity cost of some decision is the
value of the next best alternative that must be
given up because of that decision
 1.2 Rational Choice

Opportunity Cost and Sunk Cost

a cost that has already been incurred and
sunk cost cannot be recovered by any means is called
sunk cost
since there is no way of recouping it, we should
not take this into consideration when we make
a decision
an irrational choice could be made if we fail to
ignore this
in actuality, however, many irrational choices
are made when sunk cost is involved
ex) Concorde fallacy
 1.2 Rational Choice

Revenue and Cost of Running a Restaurant

Mr. Park, Master Chef of the Shangri-La Hotel, decides to open his own restaurant
presently, his annual salary is $90 thousand
expected revenue and cost from his restaurant

<accounting cost> <opportunity cost>

If he quits his present position, he has to give up $90 thousand of annual

salary. Even though this is not actually spent, it should be counted as part of
cost
 1.3 Economic Resources and Commodities

broad sense : anything that we should use

economic economically
resources narrow sense : factors of production
labor, capital, land
entrepreneurial efforts
 1.3 Economic Resources and Commodities

anything that is traded in the market is called a

commodities commodity
include goods that we can see and services
that we cannot see
free goods vs. economic goods
 1.4 Basic Structure of National Economy

3 Major Economic Agents

collect taxes and
demand for provides various public
commodities and services
supply of the
factors of
production

supply of commodities
and demand for the
factors of production
 1.4 Basic Structure of National Economy

households
and firms
 1.4 Basic Structure of National Economy

Three Major Tasks of National Economy

efficiency in resource allocation what, how, for whom?

the process (1) what to produce?
of resource (2) how to produce?
allocation (3) for whom to produce?
 1.5 Market and Price

market and market

any institution or social relation whereby
gains from parties engage in trade can be called a
exchange market
some markets can be invisible

gains from exchange

even though there is no change in other
conditions, all the people engaged in
trade can enjoy higher material well-
being thanks to the gains from exchange
 1.5 Market and Price

Market Economy

economic system in which markets play

market critical roles
economy prices of all commodities are determined
in the markets
establishment of property rights
free competition
free trade : division of labor and
specialization
 1.5 Market and Price

Market Economy

command economic system in which the

economy is controlled by
economy government mandates

mixed economy economic system in which both

government and markets play
important roles
 1.5 Market and Price

Price Mechanism

price price mechanism efficiency of the market economy

mechanism A. Smith Invisible Hands

two main (1) transmission of signals

the level of price of a certain commodity
roles price conveys information about how eagerly it is
wanted or how much it costs to produce it
plays (2) provision of incentives
if the price of a certain commodity goes up,
producers get the incentive to produce more
 1.6 Microeconomics and Macroeconomics

two ways of observing a mountain

1) you stand at a long distance, and observe the outline of the
entire mountain
2) you walk into the mountain, and closely observe trees, plants
and soil in it
likewise, there are also two ways of observing an economy
we can focus on either the overall workings of national economy or
the particular movements of components of national economy
 1.6 Microeconomics and Macroeconomics

(1) macroeconomics
focus is on the overall workings of national economy
main variables of interest : aggregate production, aggregate
employment, price level, balance of payments

(2) microeconomics
focus is on the choices of individual economic agents and the
movements of individual markets
main variables of interest : choices of consumers and firms, price of an
individual commodity and its amount of transaction
 1.7 Economic Ways of Thinking

(1) There is no free lunch

if a certain cost is invisible, people fail to recognize it as cost
from the viewpoint of opportunity cost, nothing is costless

(2) All those who participate in exchange can get gains

everyone who participate in exchange voluntarily can get gains
 1.7 Economic Ways of Thinking

(3) It is difficult to repeal the laws of supply and demand

paradox of water and diamond
examples of price ceiling and price floor

(4) It is important to think at the margin

marginal utility, marginal cost, marginal revenue

(5) People respond to incentives sensitively

government policies try to utilize this characteristic
ex) energy tax, tax on tobacco
 1.7 Economic Ways of Thinking

(6) Markets are efficient, but not perfect

social costs of monopoly, environmental pollution
inadequate supply of national defense or police services

(7) Government can be helpful,

but sometimes its intervention make things worse
no guarantee that government intervention makes the situation better
occurrence of government failure
 1.7 Economic Ways of Thinking

(8) Trade-off between efficiency and equity

a compromise is necessary between the two objectives

(9) Trade-off between inflation and unemployment

fundamental dilemma of national economic policy
which objective should get more attention?
 ECONOMICS

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