Economic Principles I

Lecture 1: What is economics all about?

Preliminaries Staff:

Peter Midmore (Course teacher); room F19; pxm@aber.ac.uk

Lectures and Classes: 22 lectures (Wed 1310, Thu 1210) 10 classes (one of: Mon 1110, Tue 1000, 1510, Thu

1000) Texts:

Begg, D., Dornbusch, R. and Fischer, S. (2008). Economics, (9th Edition), Maidenhead: McGraw-Hill.

Lipsey, R.G. and Chrystal, K.A. (2004). Economics, (10th Edition), Oxford: Oxford University Press.

Others: Krugman and Wells, Mankiw, Parkin, Sloman

Economics is …

“The study of the allocation of scarce resources amongst competing ends” (Robbins)

An Oikos in classical Greece: a sort of housekeeper Good housekeeping means getting

the most out of a limited amount of ingredients (Margaret Thatcher)

Some central ideas

The market Scarcity Choice Opportunity cost

The Market Markets are usually a good way to

organise economic activity Markets are decentralised and make the most

efficient use of information Adam Smith’s “invisible hand”

Governments can sometimes improve market outcomes Market failures: externalities and monopolies Inequality

Scarcity

Consumers’ wants are (theoretically) unlimited, whereas resources are not

‘Resources’ are: Land Labour Capital Entrepreneurship

Choice

People face trade-offs e.g.: defence spending or hospitals? e.g.: clean air/water or higher living

standards? Efficiency versus equity?

Opportunity cost The cost of something is what you give

up to get it What will it cost you to study at

Aberystwyth for three years? “Conventional” measures of cost include

costs that would be incurred anyway (food and accommodation)

“Conventional” measures of cost exclude the value of your time

Opportunity cost adjusts for these

Is Economics a science?

Economists try to use scientific method Deductive reasoning: working from

principles and assumptions Inductive reasoning: the process of

observing patterns in data and drawing generalisations from them

But experiments are difficult, though not impossible, to conduct in economics

Two types of question Positive economics seeks to describe

behaviour without making value judgements: “If the government raises interest rates then …”

Normative economics judges whether outcomes are good or bad: “The government should raise interest rates because….”

But even “positive” statements may contain the economists own value judgements about which assumptions should be made.

Models and assumptions Economics, in common with the sciences, uses

models – formal statements of economic theories

Models entail assumptions – assumptions make models simpler and therefore easier to understand Ockham’s razor – simple is preferred to

complex Another device used by economists is ceteris

paribus (Latin: all other things equal) Helps to focus on the economic relationships

in which we are particularly interested

The Production Possibility Frontier

2000

3000

Metres of cloth

Barrels of wine

0

800

1200

.B

1500

2000

C

1400

2200

A

.D

At point A the opportunity cost of 100 metres of cloth = 200 barrels of wine

Point B is inefficient

Point D is infeasible

Application to future topics

These key ideas recur in many ways throughout this semester’s course; although they may not be referred to directly

Using them will help you to think like an economist – but never accept them uncritically because all can be challenged!

Economic Principles I

Lecture 1: What is economics all about?