I. What is Economics? 1
Need a careful definition — people often have misconceptions about what it is. II. Where does economics come from?
Not the study of how to run a business or accounting or stock market analysis.
Adam Smith (Scottish philosopher) –1776 with publication of The Wealth of Nations
What does economist study? Tries to fi gure out what factors determine: Smith was curious how commodity buyers wishes met by firms i.e. why the
what goods get bought and sold, how much of these goods get bought and sold economy functions with no controls – might expect chaos but order existed . This
and why the price of the good is what it is paradox prodded his curiosity and economics was born. For Smith prices did
Economics – the study of the prices and quantities of goods produced and consumed everything – they changed until amount firms wished to sell was approximately
equal to what buyers wished to buy. ∴Microeconomics often called price theory.
Not as narrow as first seems — many possible aspects of prices and quantities Smith analyzed with careful use of logic and as did most other famous economists
how goods distributed among people – why rich and poor (even Karl Marx). Economists examine prices and quantities using logic.
how much labor is used – what is the wage
could more of a good be produced – if so at what cost III. How are Price and Quantity Determined?
Textbook definition: “Economics is the science that studies the choices that people In markets primarily (at least in countries like Canada and U.S.)
make when wants exceed the available resources —when resources are scarce.” Market – the process by which buyers and sellers negotiate the exchange of some
so there is: “Scarcity, therefore choice, therefore opportunity cost” commodity. A market need not be defined by a geo graphic area (although
often is) e.g. market for autos in Canada is not “Canada” but that autos are
Opportunity cost is the real cost of any commodity. It is what is given up to get the sold (or not sold). So a market is a process – communication and signals
commodity and is the real price paid (e.g. suppose a textbook costs $80 are important, as is the manner in which these are transmitted.
and a movie costs $20 then the real cost of a textbook is 4 movies, not $80) Who participates in determining prices and quantities in markets? Who are the buyers
Example: “Paradise island” where everything is readily available. You just sleep and
and sellers? We’ll focus on the role each decision-maker plays in the market
eat coconuts. Seems neither sun, sleep or coconuts scarce. BUT Must give up sun negotiation process using just enough detail to explain price and quantity.
and sleep to get coconuts and vice versa. One is opportunity cost or price of other.
So they really are scarce. SO: 1. Households – treat household as a single-minded family unit. Ignore decisions
made within household. W e want “just enough” detail for price and quantity .
Price means scarcity (in example, choice must be made because time is limi ted) 2. Business Firms – single-minded unit – “it” has goals, acts as unit to achieve goals
Scarcity means price (if something is limited we must make choice) Ignore managerial structure
so words price and scarcity almost interchangeable (business administration discusses how to set up business to achieve goals)
e.g. firm wants to increase sales or profit – ignore what it does “inside”– it appears
An economic good is anything which is relatively scarce , (i.e. has an opportunity on market trying to do it, then we see what effect is on price and q uantity
cost (price)). Coconuts in the example are an economic good. A free good has 3. Government (central authority) – single-minded unit – “it” has goals, acts
no opportunity cost so not scarce (e.g. air – no opportunity cost to breathing).
Political Science, not Economics, looks at internal structure of govt.
By knowing what price really is, we’ve said same thing in our definition as book’s.
Simple Definition helps us avoid unnecessary aspects of problems for economics. Which are buyers, which are sellers? (we’ll look at three types of markets).
1. Final product markets
1. Household – description of household may seem too simplistic BUT only need Firms are producers and sellers (suppliers) and households are buyers (demanders)
2. Labor markets – firms cannot produce without labor
just enough to explain how it chooses particular quantity at particular price Households are sellers of labor (suppliers) firms are buyers of labor (demanders)
2. Firm – Avoid many aspects of firm which people think are important. We only 3. Factor markets: Factor – anything used in production process . So labor is a factor,
want to explain the outcome for price and quantity when firm responds to some but type 3 looks at non-labor factors (materials, equipment, buildings, energy )
change in business environment. Simplest description of firm which works is best
a. Managerial structure may be very important to those working in a firm but Government’s roles in markets (five types of roles)
1. As buyer simplest role – negotiates like other buyers (e.g . buying autos or paper)
it doesn’t help us understand price and quantity better ∴ignore it
b. Advertising sometimes effects price and quantity, sometimes not 2. As rule-maker truth in lending, no false advertising, control monopolies
3. As price OR quantity setter pr