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.

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