Lecture 1.

Introduction
Introduction to Economics
By Bakhtier Tukhtaev
Agenda
• About me
• About the subject
• About assessments
• Lecture 1. Introduction
ABOUT ME
• MA MARKETING
COMMUNICATIONS (LONDON, UK)

• MASTERS IN FINANCE, BANKING

AND SECURITIES (SPAIN)

• BA BUSINESS ADMINSTRATION
(WIUT, TASHKENT)

• BON!, CLARION, MAKRO,

HOFFMAN, TPS, EVO and others
About the subject
• This is an introductory course for students to understand economic
theories on demand, supply, price, profit maximization, utility
maximization, national account, inflation, unemployment, business
cycles, government policies on tax, and money. It will cover basic
theories of microeconomics and macroeconomics.

• Core textbook
Michael Parkin (2022) Economics, Global Edition, 14th edition. Pearson
Publishing
Assessment
Mid-term Final exam Attendance Assignments

30 % 40 % 10 % 20 %
 № Topic Details
1 Introduction
Subject 2 What is economics? Economic Problems

outline
3 Supply and Demand Excess demand, Excess Supply, Market equilibrium
4 The Consumer Utility, Budget, Utility Maximization
5 The Producer Cost, Profit Maximization
6 The Market Structure From Perfect Competition to Monopoly
7 The Role of Government Public Goods, Externality
8 Midterm Exam
9 What is Macroeconomics? Aggregate Demand, Aggregate Supply
10 National Income. Determination of GNP, GDP. Simple Keynesian Model
National Income 1
11 Determination of National Income 2 Y = C + I + G + (X - M)
12 Fiscal Policy Budget Deficit, Tax Cut
13 Monetary Policy Demand for Money, Supply for Money
14 Revision Revision and Questions
15 Final Exam
WHAT IS ECONOMICS?
After studying this lecture, you will be able to:
• Define economics and distinguish between microeconomics and
macroeconomics
• Explain the two big questions of economics
• Explain the key ideas that define the economic way
of thinking
Definition of Economics
• All economic questions arise because we want more than we can get.
• Our inability to satisfy all our wants is called scarcity.
• Because we face scarcity, we must make choices.
• The choices we make depend on the incentives we face.
• An incentive is a reward that encourages an action or a penalty that
discourages an action.
Definition of Economics
Economics is the social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity and the
incentives that influence and reconcile those choices.
• Economics divides in two main parts:
■ Microeconomics
■ Macroeconomics
Definition of Economics

• Microeconomics is the study of choices that individuals and businesses make,

the way those choices interact in markets, and the influence of governments.
• Two microeconomic questions:
Why are people streaming more movies?
Would a tax on online shopping effect Amazon?
• Macroeconomics is the study of the performance of the national and global
economies.
• Two macroeconomic questions:
Why does the unemployment rate fluctuate?
Can the Federal Reserve make the unemployment rate fall by keeping interest
rates low?
Two Big Economic Questions
Two big questions summarize the scope of economics:
■ How do choices end up determining what, how, and
for whom goods and services get produced?
■ When do choices made in the pursuit of self-interest also promote the social
interest?
Two Big Economic Questions
• What, How, and For Whom?
• Goods and services are the objects that people value and produce to satisfy
human wants.
• What?
• In the United States, agriculture accounts for less than
1 percent of total production, industry (manufactured goods) for 19 percent,
and services for 80 percent.
• In low-income Ethiopia, agriculture accounts for
35 percent of total production, industry goods for
22 percent, and services for 44 percent.
Two Big Economic Questions

• Figure 1.1 shows these

numbers for the
United States, China,
and Ethiopia.
• What determines
these patterns of
production?
• How do choices end up
determining the
quantity of each item
produced in the United
States and around the
world?
Two Big Economic Questions
• How?
• Goods and services are produced by using productive resources that
economists call factors of production.
• Factors of production are grouped into four categories:
■ Land
■ Labor
■ Capital
■ Entrepreneurship
Two Big Economic Questions

• The “gifts of nature” that we use to produce goods and services are land.
• The work time and work effort that people devote to producing goods and
services is labor.
• The quality of labor depends on human capital, which is the knowledge and
skill that people obtain from education, on-the-job training, and work
experience.
• The tools, instruments, machines, buildings, and other constructions that
businesses use to produce goods and services are capital.
• The human resource that organizes land, labor, and capital is
entrepreneurship.
Two Big Economic Questions

• Figure 1.2 shows a

measure of the
growth of human
capital in the United
States since 1900:
• The percentage of the
population that has
completed different
levels of education.
• Economics explains
these trends.
Two Big Economic Questions
• For Whom?
• Who gets the goods and services depends on the incomes that people earn.
■ Land earns rent.
■ Labor earns wages.
■ Capital earns interest.
■ Entrepreneurship earns profit.
Two Big Economic Questions
• Do Choices Made in the Pursuit of Self-Interest also Promote the
Social Interest?
• Every day, 328 million Americans and 7.9 billion people in other countries
make economic choices that result in what, how, and for whom goods and
services are produced.
• These choices are made by people who are pursuing their self-interest.
• Are they promoting the social interest?
Two Big Economic Questions
• Self-Interest
• You make choices that are in your self-interest—choices that you think are
best for you.
• Social Interest
• Choices that are best for society as a whole are said to be in the social
interest.
• Social interest has two dimensions: efficiency and fair shares.
Two Big Economic Questions
• Efficiency and Social Interest
• Resource use is efficient if it is not possible to make someone better off
without making someone else worse off.
• Fair Shares and Social Interest
• The idea that the social interest requires “fair shares” is a deeply held one.
• But what is a fair share?
Two Big Economic Questions
• Questions about the social interest are hard ones to answer and they
generate discussion, debate, and disagreement.
• Four topics that generate discussion and that illustrate tension between self-
interest and social interest are:
■ Globalization
■ Information-age monopolies
■ Climate change
■ The Covid pandemic
Two Big Economic Questions
• Globalization
• Globalization means the expansion of international trade, borrowing and
lending, and investment.
• Globalization is in the self-interest of consumers who buy low-cost imported
goods and services.
• Globalization is also in the self-interest of the multinational firms that
produce in low-cost regions and sell in high-price regions.
• But is globalization in the self-interest of low-wage workers in other countries
and U.S. firms that can’t compete with low-cost imports?
• Is globalization in the social interest?
Two Big Economic Questions
• Information-Age Monopolies
• The technological change of the past forty years has been called the
Information Revolution.
• The information revolution has clearly served your self-interest: It has
provided your smartphone, laptop, loads of handy applications, and the
Internet.
• It has also served the self-interest of Bill Gates of Microsoft and Gordon
Moore of Intel, both of whom have seen their wealth soar.
• But did the information revolution serve the social interest?
Two Big Economic Questions
• Climate Change
• Climate change is a huge political issue today.
• Every serious political leader is acutely aware of the problem and of
the popularity of having proposals that might lower carbon emissions.
• Burning fossil fuels to generate electricity and to power airplanes,
automobiles, and trucks pours a staggering
28 billion tons—4 tons per person—of carbon dioxide into the
atmosphere each year.
Two Big Economic Questions
• Two thirds of the world’s carbon emissions comes from the United
States, China, the European Union, Russia, and India.
• The fastest growing emissions are coming from India and China.
• The amount of global warming caused by economic activity and its
effects are uncertain, but the emissions continue to grow and pose
huge risks.
Two Big Economic Questions
• Every day, when you make self-interested choices to use electricity
and gasoline, you contribute to carbon emissions.
• You leave your carbon footprint.
• You can lessen your carbon footprint by walking, riding a bike, taking a cold
shower, or planting a tree.
• But can each one of us be relied upon to make decisions that affect the
Earth’s carbon-dioxide concentration in the social interest?
• Can governments change the incentives we face so that our self-
interested choices are also in the social interest?
Two Big Economic Questions
• The Covid Pandemic
• Covid-19 spreads through close contact and social interaction.
• With no social isolation, one infected person infects more than one
other person, each infected person infects more than one other,
leading to an exponential spread of the disease?
• A person who socially isolates avoids infection, but also avoids infecting
others. People choose their degree of social isolation in their self-
interest.
• Do individual choices serve the social interest?
Economic Way of Thinking
• Six key ideas define the economic way of thinking:
■ A choice is a tradeoff.
■ People make rational choices by comparing benefits and costs.
■ Benefit is what you gain from something.
■ Cost is what you must give up to get something.
■ Most choices are “how-much” choices made at the margin.
■ Choices respond to incentives.
Economic Way of Thinking
• A Choice Is a Tradeoff
• The economic way of thinking places scarcity and its implication, choice, at
center stage.
• You can think about every choice as a tradeoff—an exchange—giving up one
thing to get something else.
• On Saturday night, will you study or have fun?
• You can’t study and have fun at the same time, so you must make a choice.
• Whatever you choose, you could have chosen something else. Your choice is a
tradeoff.
Economic Way of Thinking
• Making a Rational Choice
• A rational choice is one that compares costs and benefits and achieves the
greatest benefit over cost for the person making the choice.
• Only the wants of the person making a choice are relevant to determine its
rationality.
• The idea of rational choice provides an answer to the first question: What
goods and services will be produced and in what quantities?
• The answer is: Those that people rationally choose to buy!
The Economic Way of Thinking
• How do people choose rationally?
• The answers turn on benefits and costs.
• Benefit: What you Gain
• The benefit of something is the gain or pleasure that it brings and is
determined by preferences
• Preferences are what a person likes and dislikes and the intensity of
those feelings.
The Economic Way of Thinking
• Cost: What you Must Give Up
• The opportunity cost of something is the highest-valued alternative that must
be given up to get it.
• What is your opportunity cost of going to a live concert?
• Opportunity cost has two components:
• 1. The things you can’t afford to buy if you purchase the concert ticket.
• 2. The things you can’t do with your time if you attend the concert.
The Economic Way of Thinking
• How Much? Choosing at the Margin
• You can allocate the next hour between studying and instant
messaging your friends.
• The choice is not all or nothing, but you must decide how many
minutes to allocate to each activity.
• To make this decision, you compare the benefit of a little bit more
study time with its cost—you make your choice at the margin.
The Economic Way of Thinking
• To make a choice at the margin, you evaluate the consequences of making
incremental changes in the use of your time.
• The benefit from pursuing an incremental increase in an activity is its
marginal benefit.
• The opportunity cost of pursuing an incremental increase in an activity is its
marginal cost.
• If the marginal benefit from an incremental increase in an activity exceeds its
marginal cost, your rational choice is to do more of that activity.
The Economic Way of Thinking
• Choices Respond to Incentives
• A change in marginal cost or a change in marginal benefit changes the
incentives that we face and leads us to change our choice.
• The central idea of economics is that we can predict how choices will change
by looking at changes in incentives.
• Incentives are also the key to reconciling self-interest and the social interest.
Economics: A Social Science and Policy Tool
• Economist as Social Scientist
• Economists distinguish between two types of statement:
• Positive statements
• Normative statements
• A positive statement can be tested by checking it against
facts.
• A normative statement expresses an opinion and cannot
be tested.
Economics: A Social Science and Policy Tool
• Unscrambling Cause and Effect
• The task of economic science is to discover positive statements that are
consistent with what we observe in the world and that enable us to
understand how the economic world works.
• Economists create and test economic models.
• An economic model is a description of some aspect of the economic world
that includes only those features that are needed for the purpose at hand.
Economics: A Social Science and Policy Tool
• A model is tested by comparing its predictions with the facts.
• But testing an economic model is difficult, so economists also use:
■ Natural experiments
■ Statistical investigations
■ Economic experiments
Economics: A Social Science and Policy Tool
• Economist as Policy Adviser
• Economics is a toolkit for advising governments and businesses and for
making personal decisions.
• All the policy questions on which economists provide advice involve a blend
of the positive and the normative.
• Economics can’t help with the normative part—the goal.
• But for a given goal, economics provides a method of evaluating alternative
solutions—comparing marginal benefits and marginal costs.
Questions?