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 Smiths 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
Ockhams 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 semesters 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?