ECON1101_week1_lecture 1 - Intro Econ

ECON1101 Week 1 – Lecture 2: Introduction to Economics

Chapter Overview

• Covered Chapters 1, 2, and 3 of the text.

What is Economics?

• Central Themes:

  • Allocating scarce resources.

  • Study of decision-making processes.

  • Analyzing consumer choices and firm behaviors.

  • Economically analyzing problems.

Course Insight

• The study relates to personal behavior and decisions.

• Focus on:

  • Understanding your own decision-making.

  • Redefining actions using economic terminology.

  • Developing and exploring economic models.

Importance of Economics

• Understanding personal behavior patterns to enhance future decisions.

• Ability to participate in discussions regarding:

  • Policy

  • Politics

  • Society

  • Environmental issues

• Joan Robinson Quote: "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."

• Awareness of global issues:

  • Climate change

  • Plastic pollution

  • Overfishing

  • Species loss

Microeconomics vs. Macroeconomics

• Microeconomics:

  • Focuses on individual households and firm decisions.

  • Deals with small economic units.

• Macroeconomics:

  • Examines economy-wide phenomena.

  • Topics include:

    • Inflation

    • Unemployment

    • Economic growth

• Key Questions Explored:

  • Government spending allocation (roads vs. healthcare).

  • The procrastination phenomenon and solutions.

  • Discussion on military actions against nuclear threats.

  • Strategies to combat poverty in South Sudan.

  • Relationship between unemployment and inflation.

  • Central Bank interest rate policies.

Positive vs. Normative Economics

• Positive Economics:

  • Objective and factual analysis of actual economic behaviors and outcomes.

  • Statements are verifiable without value judgments.

  • Example: "Raising the minimum wage will decrease poverty."

• Normative Economics:

  • Subjective and involves value judgments about what economic agents should do.

  • Used in public policy discussions.

  • Example: "We should raise the minimum wage."

Key Economic Principles

1. People Face Trade-offs:

   • Example: Choosing between living arrangements (e.g., share house vs. on-campus housing).

   • Analysis of costs (rent, chores) versus benefits (independence, social interaction).

2. The Cost of Something is What You Give Up:

   • Opportunity Cost: The value of the best alternative foregone.

   • Example: Pursuing a university degree includes costs (tuition, lost earnings) and benefits (higher income).

3. Rational People Think at the Margins:

   • Focus on marginal changes in decisions.

   • Example: Deciding on the additional hour of study or coffee consumption.

4. People Respond to Incentives:

   • Analysis of behavior in response to incentives.

   • Example: Parking fines influencing parking behaviors.

   • Implications for policy design to avoid unintended consequences.

Summary of Economic Principles

1. Trade-offs dictate decision-making.

2. Opportunity costs must be calculated.

3. Decision-making should consider marginal analysis for optimal results.

4. Incentives shape behavior and choices.

Tools for Studying Economics

• Methodology Overview:

  • Identify the problem/question.

  • Develop a simplified model (theory).

  • Generate predictions from the model (hypothesis).

  • Collect data to test the model.

    • Experimental Economics: Collects causal data but is limited in scope.

    • Econometrics: Easier access to broader data but challenges in establishing causation.

Understanding Economic Models

• Definition of an economic model:

  • Simplification of real-world economic processes.

  • Aims to illustrate essential factors while disregarding minute details.

  • Quote by Albert Einstein: "Should be as simple as possible, but not any simpler."

Graphing in Economics

• Graphing Basics:

  • Used to illustrate relationships between two variables.

  • Types of Relationships:

    • Direct/Positive (upward slope)

    • Inverse/Negative (downward slope)

    • No association (horizontal/vertical line).

Demand and Supply Basics

• Fundamental to market economies:

  • Supply and demand drive market interactions.

  • Determine prices and allocation of resources.

Understanding Demand

• Demand is defined as the relationship between price and quantity demanded.

• Law of Demand:

  • Inverse relationship between price and quantity demanded.

  • If price rises, quantity demanded falls, and vice versa.

• Display of demand through tables, graphs, or equations:

  • Typically linear for simplicity.

Market Demand vs. Individual Demand

• Market Demand: Sum of all individual demands for a good/service.

• Individual demand curves are summed horizontally to calculate market demand.

Changes in Quantity Demanded

• Changes can occur through:

  1. Price changes (Type-1 changes: along the demand curve).

  2. Demand relationship changes (Type-2 changes: shifts in the demand curve).

Types of Demand Curve Changes

1. Movements Along the Demand Curve:

   • Driven solely by price changes.

   • Example: Price drops leading to an increase in demand.

2. Shifts of the Demand Curve:

   • Result of factors altering quantity demanded at all price levels.

   • For instance:

     • Changing incomes

     • Price movement of related goods (substitutes and complements).

     • Shifts in consumer preferences or expectations.

Conclusion

• Understanding these principles is vital for analyzing economic scenarios and decision-making processes.