ECN 201

Principles of Microeconomics
Lecture 1
7/09/2014
Topic: What is Economics?

What is Economics: Definition

Economics studies the choices that individuals, businesses,
governments and entire societies make as they cope with scarcity
and incentives which influence those choices (Parkin 2008).
Economics is the study of how societies use scarce resources to
produce valuable goods and services and distribute them among
different individuals (Samuelson and Nordhaus 2010)

Some basic concepts

2 Key Ideas: Goods are scarce and the society must use its resources efficiently
Scarcity: Situation in which goods are limited relative to desires
Faced with scarcity we must choose among different alternatives
The choices we make in turn depends on incentives we face

Incentive: A reward/penalty that encourages/discourages an action

Efficiency: Effective use of societys resources in satisfying peoples wants and needs

Two Major Subfields

Microeconomics: Concerned with individual entities (firms, markets,
households)
Eg: Why are people buying more DVDs and fewer movie tickets?
How individual prices of land/labor/capital are determined?
How would a tax on e-commerce affect eBay?
Macroeconomics: Concerned with overall performance of the economyaggregate behaviour
Eg: How central banks manage money supply and interest rate?
How interest rate affects inflation?
How inflation affects unemployment in an economy?

The Three Big Questions

Every society must have a way of determining What commodities are produced and in what quantities? What Trade-off.
How these commodities are produced? How Trade-off. Who will do the production with what
resources and with what production techniques: land, labor, capital, entrepreneurship.
For whom these goods are produced? For whom Trade-off. Buying power can be redistributed.
Eg. voluntary payments, theft, taxes and government benefits.

Positive vs. Normative statements

Positive statement: Describes facts of an economy. These are testable statements
about cause and effect. (answers what is, why)
Eg: Global warming is the reason for massive storms, flood, earthquakes in recent
times.
Free trade agreements can raise or lower the income of countries involved.
Normative statement: Involves value judgement. Cannot be tested. (what ought to be)

Eg: We should reduce our use of carbon based fuels such as coal and oil to tackle
global warming.
Should unemployment be raised to lower inflation?

Circular Flow Diagram

Visual model of the economy that shows how
money circulates through markets among firms and
households.

Fallacies in Economics
Fallacy of composition: what holds true for part of a system is also true for the
whole. is not always true. Eg: stadium crowd, one farmer having bumper
crop etc.
The post hoc fallacy: because one event occurred before another event, the
first event caused the second event.... is not always correct.
Cause and effect relationship. Eg: shopping causes holiday season.or holiday season
causes shopping?

Failure to hold other things constant:

House price = land price + total sft. + no. of rooms + no. of balconies +
other amenities