LECTURE 1

3. The key economic problem is to reconcile the conflict between peoples virtually unlimited
demands and societys limited ability to produce goods and services to fulfil these demands.
Goods are physical commodities, such as ateel. Services are activities su as live concerts,
consumed or enjoyed only at the instant they are produced.
. !conomics is today divided into two major subfields, microeconomics and
macroeconomics. "dam Smith is usually considered the founder of microeconomics, the
branch of economics which is concerned with the behavior of individual entities such as
markets, firms, and households. #n The Welth of Nations $%&&'(, Smith considered how
individual prices are set, studied the determination of prices of land, labor, and capital, and
in)uired into strengths and weaknesses of the market mechanism.
The other major branch of our subject is macroeconomics, which is concerned with the
overall performance of the economy. *acroeconomics did not even e+ist in its modern form
until %,3', when -ohn *aynard .eynes published revolutionary General Theory of
Employment, Interest and Money.
'. /ositive economics studies how the economy actually behaves. 0ormative economics
recommends what should be done. The two should be kept separate. Given sufficient research,
economists could agree on issues in positive economics. 0ormative economics involves
subjective value judgements. There is no reason why people should agree about normative
statements.
1.
%. society must determine how much of each of the many possible goods and services it
will make and when they will be produced. 2ill we produce pi33as or shirts today.
2ill we use scarce resources to produce many consumption goods $like pi33as(4 5r
will we produce fever consumption goods and more investment goods $like pi33a6
making machines(, which will boost production and consumption tomorrow4
7. " society must determine who will do the production, with what resources, and what
production techni)ues they will use. 2ho farms and who teaches4 #s electricity
generated from oil, from coal, or from the sun4 2ill factories be run by people or
robots4
3. 2ho gets to eat the fruit of economic activity4 #s the distribution of income and wealts
fair and e)uatable4 "re many people poor and a few rich4
,. !conomic life is organi3ed either thorugh hierarchical command or decentrali3ed voluntary
markets. Today most decisions in high income countries are made in the market 8place. 9ut
the government plays and important role in overseeing the functioning of the market:
governments pass laws that regulate economic life, produce educational and police services,
and control pollution. *ost societies today operate mi+ed econimies.
%;. /rices coordinate the decisions of producers na consumers. <igher prices tend to reduce
consumer purchases and encourage production. =ower prices encourage consumption and
discourage production. /rices are the balance wheel of the market machanism. !+ample with
fruing pans and pots.
%%.
=and 8 or, more generally, natural resources6 represents the gift of nature to our societies. #t
consists of the land used for farming or for underpinning houses, factories, and roads: the
energy resources that fuel our cars and heat our homes: and nonenergy resources like copper
or iron.
=abor consists of the human time spent in production 8 working in automobile factories,
writing software, teaching school.
>apital resources form the durable goods of an economy, produced in order to produce yet
another goods. >apital goods include machines, roads, computers, software, trucks, and
buildings.
%7. Specialisation and trade are the key to high living standards. 9y speciali3ing, people can
become highly productive in a very narrow field of e+pertise. /eople can then trade their
speciali3ed goods for others products, vastly increasing the range and )uality of consumption
and having the potential to raise every6ones living standards. !+ample with productions of
needles.
%3. *oney is the medium of e+change. /roper management of the financial system is one of
the major issues for government macroeconomic policy in all countries.
%. !conomic activity involves forgoing current consumption to increase our capital. !very
time we invest6building a new factory or road, increasing the stock of useful technical
knowledge6 we are enhancing the future productivity of our economy and increasing future
consumption.
%?.
5ne serious deviation from and efficient market comes from imperfect competition or
monopoly elements. 2hereas under perfect competition no firm or consumer can
affect prices, imperfect competiton occurs when a bayer of seller can affect a goods
price.
!+ternalities $or spillover effects( occur when firms or people impose costs or benefits
on others outside the market place.
/ublic goods are commodities which can be enjoyed by everyone and from which no
one can be e+cluded. The classic e+ample of a public good is national defense.
*arkets do not necessary produce a fair distribution of income. " market economy
may produce ine)ualities in income and consumption that are not acceptable to the
electorate.
%'. !conomics trains you to@ $%( Think in terms of alternatives: $7( !valuate the cost of
individual and social choices: $3( !+amine and understand how certain events and issues are
related.
%&. !conomists use models to simplify reality in order to improve our understanding of the
world. Two of the most basic economic models include@ $%( The >ircular Alow Biagram: $7(
The /roduction /ossibilities Arontier.
7%. 5portunity cost of 7;; new computers on Aigure 7 is %;; new cars.