UGBS 003
ECONOMICS
Session 1: Introduction to Economics
DR ABEL FUMEY
• We often do not get everything that we want.
More often than not, our wants are unlimited but
the resources we have to satisfy these unlimited
wants are scarce. This is the problem of scarcity.
Session All economic questions arise because scarcity
Overview exists. As economics is a social science, this
section also discusses the tools for analyzing
economic problems
• At the end of the session, the student will
– Understand why we study Economics
– Understand the Nature of Economics
Objectives – Understand Macroeconomics and Microeconomics
– Understand the ten (10) Principles in Economics
• The fundamental problem in economics is scarcity .
A. •Scarcity
• Scarcity is when your resources are not able to meet
Introduction your needs.
– what • Scarcity requires that we make choices among available
Economics is • options.
all about • This will mean that we will have to arrange all our wants in
order of preference. This is what we call scale of preference
• All economic questions and problems arise because
human wants exceed the resources available to satisfy
them.
A. •Scale of preference
• Scale of preference is the list that contains all available
Introduction wants in order of importance.
– what • Because you cannot have everything you want, you would
Economics is have to make a choice in your attempt to pursue one goal.
In making a choice to pursue one goal you would have to
all about forgo another.
• Opportunity cost is the cost of forgoing all the
other alternatives.
These ten (10) Principles of Economics can
be grouped under three questions which
Principles of Economists seek to answer.
Economics A. How people/households make decisions
B. How people interact
C. How the economy as a whole works
B. How People
Make Decisions
PRINCIPLE 1: • There is nothing like Free Lunch!
People Face • All decisions involve tradeoffs.
Tradeoffs Examples:
• Attending college/university or working
• Studying Economics more hours or Mathematics
• Saving more today means consuming less today
• Making good grades requires spending more time studying
• Watching that football match or attending a lecture
• Having more money to buy stuff requires working longer hours,
which leaves less time for leisure.
• Etc.
• At the society level, one tradeoff can be between
efficiency and equality
• Efficiency: when society gets the most from its scarce
resources
• i.e., the size of the economic pie
• Equality: when prosperity is distributed uniformly among
society’s members
PRINCIPLE 1: • i.e., how fairly the economic pie is divided among society’s
members
People Face Example:
Tradeoffs • Tradeoff: the use of progressive taxation to redistribute
income from the rich to the poor to achieve greater
equality;
• But this reduces incentive to work and produce,
shrinks the size of the economic “pie.”
• Other examples of tradeoffs:
• “Guns and butter”
• Clean environment and high level of income
• Making decisions requires comparing the
costs and benefits of alternative choices.
PRINCIPLE 2:
The Cost of • Costs do not only imply financial
Something Is expenditures but everything that must be
What You Give sacrificed to get something
• E.g., time
Up to Get it
• The opportunity cost of any item is
whatever must be given up to obtain it.
• It is the relevant cost for decision making.
• Examples:
PRINCIPLE 2: The opportunity cost of…
The Cost of … going to college for a year includes tuition, books,
etc., and the wage foregone if working
Something Is
What You Give … studying an hour more of Economics means you
sacrifice an hour of studying e.g., Sociology
Up to Get it
…seeing a movie is not just the price of the ticket,
but the value of the time you spend in the theater (or
from your laptop).
• Rather, rational people
• systematically and purposefully do the best they can to
achieve their objectives.
• make decisions by evaluating costs and benefits of marginal
PRINCIPLE 3: changes, incremental adjustments to an existing plan.
• In making decisions, the options are not normally widely
Rational different to simply make a choice. The options are
rather close!
People Think Example:
at the Margin • When exam is near, the decision you face is NOT whether to
abandon it or study 24 hrs a day.
• **Rather, it is whether/not to spend an extra time (e.g., extra 1 hour) to
study or watch that TELENOVELA/Football match
• A rational decisionmaker takes action iff the MB > MC
• Incentive: something that induces/encourages a person to
act, i.e. the prospect of a reward or punishment.
PRINCIPLE 4: • Rational people respond to incentives
People
Respond to Examples:
• When the charges on electronic money transfer
Incentives increase, momo (e.g., e-levy), people declined the use
of electronic transactions.
• When communication tax increase,
spend less time on phone calls.
How People Interact
• Rather than being self-sufficient, it is more efficient to
specialize in producing a good or service, and then
PRINCIPLE 5: exchange it with other people for the things they
produce
Trade Can Make
Everyone Better • Trade between countries can make each country better
off off:
• Get better/cheaper prices for goods produced abroad
• Enjoy varieties of goods and services
• The benefits from trade can be at many different levels –
individuals, households, businesses, countries, etc.
• Markets bring together buyers and sellers of goods and
services
• Need not be in a single location
PRINCIPLE 6:
• “Organise economic activity” means determination
Markets are • What goods to produce
Usually a good • how to produce them
Way to Organise • how much of each to produce
Economic Activity • who gets them
• A market economy is “decentralized,” – i.e.,
• No government committee that makes the decisions about what
goods to produce and so forth.
• Rather, allocates resources through the decentralized decisions
of many households and firms as they interact in markets
PRINCIPLE 6:
Markets are
• Decisions by households and firms are “led by an
Usually a good invisible hand” which eventually promote
Way to Organise economic well-being.
Economic
• Adam Smith’s The Wealth of Nations (1776)
Activity
• The price system acts as an instrument with
which the invisible hand directs economic activity
• Governments can enforce property rights
• Sometimes, the market on it own may fail to allocate
PRINCIPLE 7: resources efficiently
Governments • Reasons for market failure:
Can Sometimes • Market power
Improve Market • Externalities
• Public goods
Outcomes • Information asymmetry
• Moral hazard
• Adverse selection
• Government may intervene to promote equity/fairness
by using tax or other welfare policies
How the Economy As A
Whole Works
PRINCIPLE 8: A
Country’s • Almost all variation in living standards is attributable to
Standard of differences in countries’ productivity.
• Productivity is the amount of goods and services produced
Living Depends from each unit of labor.
on Its Ability to • Key determinants of productivity include:
Produce Goods • Equipment, skills, technology, etc.
and Services
• The growth rate of a nation’s productivity therefore
determines the growth rate of its average income/standard
of living
PRINCIPLE 9:
Prices Rise
When the • Inflation: persistent rise in the general price level
Government • In the long run, inflation is almost always caused by
Prints Too excessive growth in the money supply
• Inflation leads to decline in the value of money.
Much Money
• The faster the govt creates money (more than growth in
productivity), the greater the inflation rate.
• In the short-run, many economic policies push inflation and
PRINCIPLE 10: unemployment in opposite directions.
Society Faces a • Example:
• An expansionary fiscal policy (e.g., increase in
Short-run government expenditures) may cause people’s
Tradeoff Between incomes and spending to rise, which causes prices to
rise, which induces firms to produce more goods and
Inflation and services, which requires that they hire more workers.
Unemployment • Activity (question)
• With this argument, think about the short run
implication of contractionary fiscal/monetary policy!!!
• Other factors can make this tradeoff more or less favorable,
but the tradeoff is always present.
• Mankiw, G. (2012). Principles of
Economics (6th Edition), South Western.
Reference • Begg. D., Vernasca, G., Fischer, S. &
Dornbusch, R. (2011), Economics, 10th
Edition, McGraw-Hill.
