Rebecca Reaburn Lecture Notes Economics
o Happiness economics
What makes people happy?
For global happiness to improve we need to raise the income of the poorest people
o Everyone wants more than what is possible!
o How do we decide what we want to do with these finite resources and how do we distribute
o Ensure the best outcome is what economists strive to do
o Humans have restricted time
o Governments have a restricted budget
o How do we choose
Decision making framework - decisions are best
Humans = utility and happiness
Government = welfare
Economists assume this is their aim
Business = profit
o Economy is not about money and values are different to accountants etc
o For example making a hospital, you need $. There is only a certain amount of $ but the aim
of a hospital is to make people better - this is the benefit side of the formula. Sometimes
they will put a money value on each live saved because of this hospital. Money values make
it easier in an equation because you can get a negative or positive amount
o We will produce - so do we want policy decisions to benefit us now or our kids in the future
o People make decisions about what's important and whose important everyday
o Sometimes there is NO answer
o Make decisions to maximise gain
KEY ECONOMIC CONCEPTS
Drives cost down which keeps consumers happy
Each participant acts selfish for personal gain
Adam Smith formulized competition
Something is driving them to do this but they don't know why
EXAMPLE: Apple - what was the sole motivator for Apple? It wasn't the happiness of
others with their products. It was competition and revenue.
Each seller is scared another seller will take their business therefore they lower costs
to near cost price
Prices ensure that individuals do what they do best to maximise their profit and
Competition needs lots of buyers and lots of sellers
o Functioning Markets
One seller for a particular product/service the government has to regulate
EXAMPLE: Petrol and carbon Tax - Fuel goes us, people will use less which is the aim
to help the environment. People will use public transport which will look cheaper
because petrol has gone up
1 Rebecca Reaburn Lecture Notes Economics
o Homo Economicus
A utility maximising individual - SELFISH
economic system is an equilibrium when it's not possible for anyone/anything to
Trying to get to the equilibrium means you are constantly anticipating events
tend towards producing more cheaply (optimal size)
EXAMPLE: Roman empire was too big
EXAMPLE: British empire was too big
constant change because there is an equilibrium
o Creative Destruction
How economists think we move forward
The driving engine of economic prosperity
Old ways are destroyed to make way for new ways
o economists try to help us overcome scarcity
o What is scarce?
Land - everything we get from mother earth (gold, iron, water, fish)
Labour - things people perform. The work of the people. Time and labour
Capital - equipment we have to produce goods (machinery etc)
Enterprise - knowledge and ideas of the people and organisers
o all goods are important/valuable not just the scarce ones
o Air is a free good - unlimited for everyone
o economic goods are those that are scarce
o economists look at capital that can produce things, not just money
o poor countries look poorer because they use a lot of home production
o different points of view economists ask: is it fair? are they doing this well? do we get value
o economics is not only about scarcity but about choice
o can we can more out of the alternative
o trade off - the option we can't use
o let's make policies so that people make the good choices
o taxation policy - makes people decide to work more or less
Week 2 Tutorial
o What is the main observation made by economists?
Scarcity - limited resources for unlimited wants and needs
o If a government increases funding for health, what are the 'costs' of this policy from an
Resources for health will need to be taken from somewhere else.
Opportunity Cost - value of the next best alternative you are foregoing
o Explain in your own words what economists mean when they talk about the 'invisible hand'?
When individuals are maximising their own self wealth
EG: Milk - we go and buy milk from the cheapest place. Other sellers will bring their price
down to compete.
o What is the role of prices in the market?
Signalling scarcity of that object
2 Rebecca Reaburn Lecture Notes Economics
o Why are rules important in a free competitive market?
The market is all about trying to have competition because that is the only way for the
invisible hand to work
o What are economies of scale?
If you start producing more than price goes down. Lower cost to produce one, more efficient
o Explain the concept of creative destruction
Occurs from the continuing search for new. Out with the old and in with the new
EG: Walkman to CD to MP3 to Ipod
o Models represent reality and allow us to make predictions
o We assume buyers and sellers are both price takers
o Demand curve - how many things you will buy at a set price
o The more you have of a good the less you want of that good
Week 3 Tutorial
1. Four reasons why wants and needs are considered virtually unlimited?
a. Goods eventually wear out and need to be replaced
b. New or improved products become available
c. People get fed up with what they already own
d. The more you have, the more you want
2. What are the four factors of production?
a. Labour - the work of the people. Physical and Mental work of people.
b. Capital - All manmade tools and machines.
c. Enterprise - Managers and organisers and their networks.
d. Land - anything we take from the land. Air, Fish, Iron, Gold.