Economics is the social science that examines how individuals, institutions, and society make choices under conditions of scarcity. Scarcity is a basic but important concept to understand in an intro to economics discussion.
The economic resources needed to make goods and services are in limited supply. This scarcity restricts options and requires choices. Because we can't have it all, we must decide what we will have and what we must forgo.
Central to economics is the idea of opportunity cost: the value of the good, service, or time forgone to obtain something else. For example, you have $100 that you can spend on a pair of jeans or shoes. The opportunity cost of buying the shoes is the jeans you could have purchased, and vice versa.
Economics assumes that human behaviour reflects rational self-interest. Utility is a term that refers to the satisfaction a person gets from consuming a good or service. People allocate their time, energy and money to maximise their satisfaction.
Consumers are purposeful in deciding what goods and services to buy. Business firms are purposeful in deciding what products to produce and how to produce them. Government entities are purposeful in deciding what public services to provide and how to finance them.
Individuals and institutions make rational decisions based on comparisons of marginal (extra or additional) benefits and marginal costs. Most choices or decisions involve a change in the status quo, for example: Should you study an extra hour for an exam? Should government increase or decrease health care funding?
An intro to economics will surely include the difference between these two terms:
Microeconomics is the part of economics concerned with decision making by individual customers, workers, households, and business firms. At this level of analysis, we observe the details of their behaviour under a figurative microscope.
Microeconomics measures the price of a specific product, the number of workers employed by a single firm, the revenue or income of a specific household, or the expenditures of a specific firm, government entity or family. It's like examining the grains of sand, the rocks and the shells, but not the beach.
Macroeconomics examines the performance and behaviour of the economy as a whole. It focuses on economic growth, the business cycle, interest rates, inflation and the behaviour of major economic aggregates such as the government, household and business sectors.
Macroeconomics seeks to obtain an overview or general outline of the structure of the economy. Very little attention is given to the specific units that make up the various aggregates. Going back to the illustration, macroeconomics looks at the the beach, not the grains of sand, the rocks and the shells.
The micro-macro distinction doesn't mean that every topic is either one or the other, many topics and subdivisions of economics are rooted in both. For example, while the problem of umemployment is usually treated as a macroeconomic topic, economists recognize that the decisions made by individual workers on how long to search for jobs, and the ways in which specific labour markets encourage or impede hiring are also crucial in determining the unemployment rate.
Both microeconomics and macroeconomics contain elements of positive economics and normative economics.
Positive economics focuses on facts and cause-and-effect relationships. It tries to establish scientific statements about economic behaviour and avoids value judgements.
Economic policy, on the other hand, involves normative economics, which incorporates value judgements about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal.
Positive economics concerns what is, wheras normative economics embodies subjective feelings about what ought to be. For example, a positive statement would be "The unemployment rate in France is higher than that in Canada." A normative statement would be "France ought to undertake policies to make its labour market more flexible to reduce umemployment rates."
Economic systems can be classified by the degree to which they rely on decentralized decision making based on markets and prices or centralized government control based on orders and mandates.
At one extreme lies laissez-faire capitalism, in which government intervention is at a very minimum, and markets and prices are allowed to direct nearly all economic activity.
At the other extreme lie command systems, in which governments have total control over all economic activity.
The vast majority of national economies lie somewhere in the middle, using some mixture of centralized government regulation and decentralized markets and prices. These economies are said to have market systems or mixed economies.
In his 1776 book The Wealth of Nations, Adam smith noted that the operation of a market system creates an interesting unity between private interests and social interests.
The invisible hand is a concept that describes the tendency of firms and resource suppliers to further their own self-interest in competitive markers to also promote the interest of society as a whole.
Businesses seeking to make higher profits and to avoid losses, and resource suppliers pursuing greater monetary rewards, negotiate changes in the allocation of resources and end up with the output that society wants. The invisible hand ensures that when firms maximise their profits and resources suppliers maximize their incomes, these groups also help maximize society's output and income.
That's a summary of major concepts to learn when looking at an intro to economics!
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