Introduction to Economics Lecture Notes

Adam Smith and "The Wealth of Nations"

• Adam Smith, a Scottish philosopher, is considered one of the first real economists.
• Famous work: The Wealth of Nations (1776), same year as the American Declaration of Independence.
• Invisible Hand Concept:
  • Individual actors pursuing self-interest can unintentionally benefit society.
  • This principle underlies capitalism, suggesting self-interested actions often lead to societal benefits.
  • Not always intuitive; self-interest can sometimes be more beneficial than intentional societal benefit actions.
• Adam Smith's perspective:
  • Self-interest can lead to innovation, better investment, increased productivity, and more wealth.

Microeconomics vs. Macroeconomics

• Microeconomics:
  • Focuses on individual actors: firms, people, households.
  • Studies decision making and allocation of scarce resources.
  • Scarce resources include food, water, money, time, labor.
  • Examines effects on prices and markets.
• Macroeconomics:
  • Studies the economy in aggregate, involving millions of actors.
  • Focuses on policy-related questions (e.g., taxes, regulation).
  • Examines top-down decisions and their impact on productivity.

Mathematical Approach in Economics

• Economics uses mathematical rigor to clarify thinking and prove assumptions.
  • Involves simplifying complex human behaviors and interactions.
  • Emphasizes the need for caution due to oversimplification risks.
• Value of Mathematical Models:
  • Helps visualize economic scenarios with charts and graphs.
  • Facilitates understanding of market behaviors and predictions.
• Risks of Overreliance on Math:
  • Simplified assumptions may lead to misleading conclusions.
  • Important to maintain intuition and critical thinking.

Quotes on Economic Analysis

• Alfred Knopf: "An economist is a man who states the obvious in terms of the incomprehensible."
  • Suggests that economics can overcomplicate common sense.
  • Importance of ensuring comprehensibility and intuition.
• Lawrence J. Peter: "An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today."
  • Highlights the unpredictability and subjectivity, especially in macroeconomics.
  • Emphasizes that economics is not as precise as physics due to subjective assumptions.

Key Takeaways

• Maintain a balance between mathematical models and intuitive understanding.
• Recognize the limitations and potential errors in economic predictions.
• Economics involves both scientific and subjective elements.