Intro to Economics 01-07-2013
What is economics?
The study of the use of scarce resources to satisfy unlimited human wants
Preferred definition: a way of thinking about all human behavior
Application: how interest rates are determined by the Bank of Canada, the causes of unemployment, financial markets,
What is the appropriate distribution of income and wealth in society?
How can we manage our scarce resources and the environment?
Should there exist institutions to help those in need?
Positive vs. Normative Issues
Positive statements – statements of fact
o When interests rates go up, people save more
o Can be evaluated by appeal to facts
Normative statements – value judgments
o Tax revenue should be used to develop programs and institutions to help those in need
Cannot be settled by appeal to facts … arguments persist forever
What is the Economy?
An inconceivably complex system of interactions between individuals for the purpose of exchanging commodities
How is such a complex system organized and by whom?
o No one. Economic transactions are the result of mutually beneficial and voluntary exchanges between
individual entities (persons, firms, the government)
o These uncoordinated interactions are remarkably effective at facilitating the exchange of goods and services
(the invisible hand, Adam Smith)
o Yet the economy is not an unregulated free-for-all (ie. Hobbes’ State of Nature)
How are we supposed to make any sense out of something so complicated?
Basic Functions of the Government (to regulate economic transactions)
Rule of Law and Enforcement of Property Rights
Provision of Public Goods (ex. pub