Overview
This lecture introduces economics as the study of choices, focusing on key concepts such as scarce resources, opportunity cost, optimization, equilibrium, and empiricism. It also explains differences between microeconomics and macroeconomics and outlines how economists use the scientific method and data to answer important questions.
The Scope and Definition of Economics
- Economics is the study of how agents choose to allocate scarce resources and how those choices affect society.
- Scarce resources are things people want, where wants exceed available supply.
- An economic agent can be an individual or group making choices.
- Economics analyzes both the choices themselves and their impact on others.
Types of Economic Analysis
- Positive economics describes what people actually do, using objective, testable statements.
- Normative economics recommends what people or society ought to do, involving subjective value judgments.
- Microeconomics studies individual and group choices and their effect on prices and resource allocation.
- Macroeconomics examines the economy as a whole, focusing on aggregate measures like GDP, inflation, and unemployment.
Three Principles of Economics
- Optimization: People try to pick the best feasible option, considering trade-offs, budget constraints, and opportunity cost.
- Equilibrium: Economic systems tend toward a state where no agent benefits by changing their behavior, given others’ choices.
- Empiricism: Economists use data to test theories, evaluate policies, and determine causes of observed phenomena.
Key Economic Concepts
- Trade-offs require giving up one thing to get another; budget constraints define what is feasible.
- Opportunity cost is the value of the best alternative forgone when making a decision.
- Cost-benefit analysis helps identify the best option by comparing total benefits and costs in common units (e.g., dollars).
Scientific Method and Economic Models
- Economists use the scientific method: developing models and testing them with data.
- Models are simplified descriptions of reality used to make predictions (hypotheses) that can be tested empirically.
- Experiments and natural experiments help establish causation rather than just correlation.
Causation vs. Correlation
- Correlation means variables move together; causation means one variable directly affects another.
- Omitted variables and reverse causality can lead to false interpretations of data.
Practical Application and Everyday Relevance
- Economics helps make everyday decisions (e.g., value of time spent on social media, choosing where to live).
- Using economic reasoning can improve decision-making in personal and public contexts.
Key Terms & Definitions
- Scarce resources — items where wants exceed available supply.
- Opportunity cost — value of the next-best forgone alternative.
- Optimization — trying to choose the best feasible option.
- Equilibrium — state where no one can benefit by changing behavior, given others’ choices.
- Empiricism — using data/evidence to test ideas.
- Positive economics — objective description/prediction of economic behavior.
- Normative economics — recommendations on what should be done.
- Microeconomics — study of individual/resource allocation decisions.
- Macroeconomics — study of the economy as a whole.
Action Items / Next Steps
- Practice applying opportunity cost and cost-benefit analysis to personal decisions.
- Review definitions and distinctions between positive vs. normative economics.
- Begin reading Chapter 1 and complete the end-of-chapter questions and problems for further understanding.