Overview
This lecture introduces the foundation of economics, key terminology, and the distinction between microeconomics and macroeconomics. It covers how economists think, basic economic systems, assumptions, and the difference between positive and normative statements.
Introduction to Economics
- Economics is the study of how people allocate limited resources to satisfy unlimited wants.
- The economic way of thinking involves using structured principles and rules to analyze and solve problems.
Decision-Making & Economic Concepts
- Economics examines how individuals and societies make choices due to scarcity.
- Examples include how much to study, which courses to take, and how much pollution to allow.
- Economic terminology may differ from everyday language; definitions are precise and important for understanding.
Microeconomics vs. Macroeconomics
- Microeconomics focuses on individuals, households, and firms (e.g., consumer choices, production decisions).
- Macroeconomics studies economy-wide aggregates like inflation, economic growth, and unemployment.
Economic Systems & Resource Allocation
- Economic systems answer three basic questions: What and how much to produce? How to produce? For whom to produce?
- Centralized (command and control) systems involve decisions made by authorities, often causing inefficiencies.
- Market (price) systems rely on buyers and sellers interacting, with prices conveying scarcity and abundance.
Rationality, Incentives, and the Invisible Hand
- Economics assumes people are rational and self-interested—they do not intentionally make themselves worse off.
- The "invisible hand" suggests personal self-interest leads to beneficial economic outcomes.
- People respond to incentives, both positive (rewards) and negative (punishments).
Bounded Rationality & Decision-Making Limits
- Bounded rationality acknowledges psychological limits; people use rules of thumb instead of always maximizing information.
- Models simplify reality to focus on essential variables, using ceteris paribus (all else equal) assumptions.
Wants vs. Needs
- "Wants" refer to all desirable goods/services a person would buy if income were unlimited.
- "Needs" are not clearly defined in economics and are less relevant than wants.
Positive vs. Normative Statements
- Positive economics describes "what is" and relies on objective, testable statements.
- Normative economics involves value judgments and statements about "what should be."
Key Terms & Definitions
- Economics — study of how people allocate limited resources to satisfy unlimited wants.
- Microeconomics — study of individual, household, and firm decision-making.
- Macroeconomics — study of aggregate economic variables for the whole economy.
- Resources — things used to produce other things to satisfy people's wants.
- Market System — economic system where prices coordinate resource allocation.
- Command and Control — system with centralized decision-making by authorities.
- Rationality Assumption — people do not intentionally make themselves worse off.
- Invisible Hand — self-interest guides resources to their most valued uses.
- Bounded Rationality — limits on decision-making due to psychological factors.
- Ceteris Paribus — "all else equal"; only one variable changes at a time.
- Positive Statement — objective description of what is.
- Normative Statement — subjective statement about what ought to be.
Action Items / Next Steps
- Review and memorize key definitions and distinctions between micro and macroeconomics.
- Read Chapter 1 of the textbook for deeper understanding.
- Be prepared to identify positive vs. normative statements in class discussion.