Economics is the study of how humans make decisions in the face of scarcity.

Scarcity means that human wants for goods, services and resources exceed what is available.

the ultimate scarce resource is time

Data is very important in economics because it describes and measures the issues and problems that economics seek to understand.

DIVISION OF LABOR

• The formal study of economics began when Adam Smith (1723–1790) published his famous book The Wealth of Nations in 1776.

• Smith introduces the concept of division of labor, which means that the way one produces a good or service is divided into a number of tasks that different workers perform, instead of all the tasks being done by the same person.

• When we divide and subdivide the tasks involved with producing a good or service, workers and businesses can produce a greater quantity of output.

  It has three reasons

• First, specialization in a particular small job allows workers to focus on the parts of the production process where they have an advantage. People have different skills, talents, and interests, so they will be better at some jobs than at others.

• Second, workers who specialize in certain tasks often learn to produce more quickly and with higher quality.

• Third, specialization allows businesses to take advantage of economies of scale, which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines.

  Instead of trying to acquire all the knowledge and skills involved in producing all of the goods and services that you wish to consume, the market allows you to learn a specialized set of skills and then use the pay you receive to buy the goods and services you need or want. This is how our modern society has evolved into a strong economy.

Why Study Economics?

• Virtually every major problem facing the world today, from global warming, to world poverty, If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.

• A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument.

• You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

Microeconomics and Macroeconomics

Economics is concerned with the well-being of all people. Economics acknowledges that production of useful goods and services can create problems of environmental pollution. It probes questions like how to tell when big businesses or big labor unions are operating in a way that benefits society as a whole and when they are operating in a way that benefits their owners or members at the expense of others.

Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses.

Macroeconomics looks at the economy as a whole. It focuses on broad issues such as growth of production, the number of unemployed people,

• In economics, the micro decisions of individual businesses are influenced by whether the macroeconomic is healthy. For example, firms will be more likely to hire workers if the overall economy is growing. In turn, macroeconomics performance ultimately depends on the microeconomic decisions that individual households and businesses make.

How Economists Use Theories and Models to Understand Economic Issues

John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking.

economics teaches you how to think, not what to think.

A theory is a simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to understand.

A good model to start with in economics is the circular flow diagram. It pictures the economy as consisting of two groups—households and firms—that interact in two markets: The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market. The direction of the arrows shows that in the goods and services market, households receive goods and services and pay firms for them. In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits.

“Economists express theories as diagrams, graphs, or even as mathematical equations”

firms produce goods and services, which they sell to households in return for revenues. Households sell their labor as workers to firms in return for wages, salaries, and benefits.

The theory of the firm,

• for example, begins with a simple assumption—firms try to maximize their profits. The theory uses this assumption to explain how firms choose the amounts of labor, capital, and raw materials that they use for production and the amount of output they produce. It also explains how these choices depend on the prices of inputs, such as labor, capital, and raw materials, and the prices that firms can receive for their outputs.

Overview of Economic Systems

There are at least three ways that societies organize an economy.

1. traditional economy, which is the oldest economic system and is used in parts of Asia, Africa, and South America. Traditional economies organize their economic affairs the way they have always done. What you produce is what you consume. Because tradition drives the way of life, there is little economic progress or development.

2. . In a command economy, economic effort is devoted to goals passed down from a ruler or ruling class. In a command economy, the government decides what goods and services will be produced and what prices it will charge for them. The government decides what methods of production to use and sets wages for workers.

3. A market is an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses. In a market economy, decision-making is decentralized. Market economies are based on private enterprise: the private individuals or groups of private individuals own and operate the means of production (resources and businesses). Businesses supply goods and services based on demand.

Regulations: The Rules of the Game

• Markets and government regulations are always entangled. There is no such thing as an absolutely free market. Regulations always define the “rules of the game” in the economy. Economies that are primarily market-oriented have fewer regulations—ideally just enough to maintain an even playing field for participants. At a minimum, these laws govern matters like safeguarding private property against theft, protecting people from violence, The government heavily regulates decisions of what to produce and prices to charge. Heavily regulated economies often have underground economies (or black markets), which are markets where the buyers and sellers make transactions without the government’s approval.

The Rise of Globalization

• globalization, which is the expanding cultural, political, and economic connections between people around the world.

• Globalization has occurred for a number of reasons. Improvements in shipping, as illustrated by the container ship in, and air cargo have driven down transportation costs. Innovations in computing and telecommunications have made it easier and cheaper to manage long-distance economic connections of production and sales.

• Exports are the goods and services that one produces domestically and sells abroad. Imports are the goods and services that one produces abroad and then sells domestically. Gross domestic product (GDP) measures the size of total production in an economy.

Basic Concepts of Microeconomics

The study of microeconomics involves several key concepts, including (but not limited to):

• Incentives and behaviors: How people, as individuals or in firms, react to the situations with which they are confronted.

• Utility theory: Consumers will choose to purchase and consume a combination of goods that will maximize their happiness or “utility,” subject to the constraint of how much income they have available to spend.

• Production theory: This is the study of production—or the process of converting inputs into outputs. Producers seek to choose the combination of inputs and methods of combining them that will minimize cost in order to maximize their profits.

• Price theory: Utility and production theory interact to produce the theory of supply and demand, which determine prices in a competitive market. In a perfectly competitive market, it concludes that the price demanded by consumers is the same supplied by producers. That results in economic equilibrium.

POSITIVE VS NORMATIVE ANALYSIS

• Positive questions deal with explanation and prediction. positive analysis: statements that describe relationships of cause and effect.

• normative questions with what ought. Normative analysis, analysis examining questions of what ought to be. Normative analysis is not only concerned with alternative policy options; it also involves the design of particular policy choices.