Introduction to Economic Jargon – Key Concepts

Microeconomics vs Macroeconomics

Definitions & Scope

• Microeconomics studies how individual decision-makers (households, consumers, firms) allocate scarce resources and interact in specific markets.
• Key questions: How are prices determined for a particular good? What output should a firm produce? How does a tax on petrol alter consumer behaviour?
• Unit of analysis: single market or single firm/household.

• Macroeconomics studies economy-wide phenomena that affect an entire nation (or the globe).
• Topic set: inflation, unemployment, gross domestic product (GDP) growth, business cycles, fiscal policy, monetary policy, exchange rates.
• Unit of analysis: aggregate variables and national totals.

Significance & Connections

• Both sub-fields share the foundational principle of scarcity and use similar analytical tools (supply–demand, optimisation, marginal analysis) but differ in the level of aggregation.
• Micro-based decisions collectively feed into macro outcomes; conversely, macro policies feed back into micro incentives.

Active Learning Exercise – Micro or Macro Issue?

Pedagogical Purpose: Distinguishing micro vs. macro forces students to anchor each economic claim at the appropriate analytical level, preventing conceptual confusion in later, more complex models.

Scarcity & Thomas Sowell’s Quote

“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” – Thomas Sowell

Interpretation & Implications

• Scarcity forms the bedrock of all economic reasoning; it necessitates choices and trade-offs.
• Political decision-makers may promise unlimited provision, effectively ignoring resource constraints, which leads to:
• Unfunded mandates, budget deficits.
• Policy cycles where economic reality forces adjustments (higher taxes, inflation).
• Ethically, acknowledging scarcity encourages transparent prioritisation and efficient allocation; ignoring it can erode credibility and fiscal sustainability.

Numerical Reminder: Scarcity applies equally whether the item is physical (land), monetary (budgets), or temporal (time).

Positive vs. Normative Economics

Key Distinction

• Positive statements describe the world as it is; they are factual, objective, and testable.
• Normative statements prescribe how the world ought to be; they embed values, opinions, and cannot be empirically verified.

Illustrative Pair

1. Positive: “An increase in unemployment benefits increases unemployment.”
   • Empirically testable via labour-market data.
2. Normative: “The government should reduce unemployment benefits.”
   • Contains a value judgment about desirable policy.

Why the Distinction Matters

• Clarifies debate: Are we arguing about facts or values?
• Informs policy: Evidence (positive analysis) should precede recommendation (normative stance).

Active Learning Exercise – Positive or Normative?

Caveat: Some statements may appear positive but embed hidden value judgments; critical thinking is required to unpack them.

Thinking Like an Economist

• Economists employ models, assumptions, and a disciplined method of analysis to simplify reality and isolate causal relationships.
• Core toolkit: optimisation, equilibrium analysis, marginal reasoning, comparative statics.
• Emphasis on data and testable hypotheses to distinguish fact from conjecture.

Role of Assumptions & Models

Why Use Assumptions?

• Complex real-world phenomena contain countless variables; assumptions hold some factors constant to focus on a specific mechanism.
• Reduces “noise,” allowing for clear prediction and explanation.

Examples Across Disciplines

• Biology: A stylised drawing of the DNA double helix simplifies molecular detail yet conveys essential structure.
• Transportation: A railway map distorts geographic scale but clarifies station connectivity.

Economic Parallel

• Supply–demand curves assume homogeneous goods, perfect information, ceteris paribus conditions, yet still yield powerful price-quantity insights.

Philosophical Note: Good assumptions are transparent and relaxed gradually to test robustness; bad assumptions hide critical factors, leading to misleading conclusions.

The Circular Flow Model

HOUSEHOLDS  →  Markets for Goods & Services  →  FIRMS
   ↑   ↓                                    ↑   ↓
Markets for Factors of Production (labour, land, capital)

Main Components & Flows

1. Real Flow (inputs & outputs)
   • Households furnish factors of production (labour, land, capital) to firms.
   • Firms convert inputs into goods & services returned to households.
2. Monetary Flow (dollars)
   • Firms pay wages, rent, profit to households for factor services.
   • Households spend that income on firms’ outputs.

Analytical Uses

• Visualises the interdependence between production and income generation.
• Forms the backbone for national income accounting and macroeconomic leakages/injections analysis (taxes, savings, government spending, exports).

Ceteris Paribus – “Other Things Being Equal”

• Latin shorthand allowing us to isolate the relationship between two variables.
• Example: “If Coffee Bean offers a 20\% discount this week, ceteris paribus, its sales will increase.”
• Implicitly holds constant: competitor prices, consumer incomes, weather, marketing campaigns, etc.

Importance

• Makes comparative-static reasoning possible.
• Warns the analyst that real-world outcomes may differ if “other things” do change.

Ethical/Practical Dimension

• When communicating results to policymakers or the public, economists must disclose the ceteris-paribus nature of their predictions to prevent over-confidence and misapplication.

Summary of Key Takeaways

1. Economics is unified by scarcity but bifurcates into micro (individual markets) and macro (aggregate outcomes) analyses.
2. Distinguishing positive (fact-based) from normative (value-based) statements clarifies debates and guides evidence-based policy.
3. Models and assumptions, including ceteris paribus, are essential simplifications; their validity rests on clarity and empirical corroboration.
4. The circular flow ties households and firms in mutually reinforcing real and monetary exchanges, anchoring macroeconomic accounting.
5. Critical thinking exercises (classification tasks) reinforce conceptual boundaries and encourage students to practise the economist’s mindset daily.