Unit 1: Introduction to Economics

Conceptual understandings

• Economics is a social science characterized by interdependence, which focuses on how people interact with each other to improve their economic well-being, influenced and enabled by their values and their natural surroundings.

• The economic world is dynamic in nature and constantly subject to change.

• Economic theories are based on logic and empirical data, using models to represent and analyse this complex reality. Individual and collective motivations and behaviours are complex and diverse, and their understanding entails the interaction of a variety of disciplines such as philosophy, politics, history, and psychology.

• Economic decision-making impacts the relative economic well-being of individuals and societies.

• The central problems of economics are scarcity and choice. This forces societies to face trade-offs, opportunity costs and the challenge of sustainability.

• Debates exist in economics regarding the potential conflicts between economic growth and equity and between free markets and government intervention.

• Endless economic growth, based on the consumption of finite resources, cannot continue indefinitely. New economic models and social movements have challenged mainstream opinion about the purpose of growth and how the economy could be redesigned to support long-term prosperity.

• Key concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention.

1.1 What is economics?

• Economics as a social science

  • The social nature of economics

  • The basis of the study of economics: microeconomics and macroeconomics

  • Introduction to the nine central concepts: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence, intervention

• The problem of choice

  • Factors of production—land, labour, capital and entrepreneurship

  • Scarcity

    • Unlimited human needs and wants to be met by limited resources

    • Scarcity and sustainability

  • Opportunity cost

    • The cost of choice

    • Free goods

  • The basic economic questions

    • What/how much to produce, how to produce and for whom to produce?

  • Means of answering the economic questions

    • Market versus government intervention

    • Economic systems: free market economy, planned economy and mixed economy

• The production possibilities curve model (PPC)

  • Assumptions of the model

  • Increasing versus constant opportunity cost

  • Features of the model: opportunity cost, scarcity, choice, unemployment of resources, efficiency, actual growth and growth in production possibilities

• Diagram: PPC illustrating choice and opportunity cost, unemployment of resources, actual growth and growth in production possibilities

• Diagram: PPC showing increasing versus constant opportunity cost

• Modelling the economy

  • The circular flow of income model

  • Interdependence between economic decision-makers interacting and making choices in an economy: households, firms, the government, the banks and financial sector, and the foreign sector (foreign firms and households)

  • Leakages and injections

• Diagram: circular flow of income model, with leakages and injections

1.2 How do economists approach the world?

• Economic methodology

  • The role of positive economics

    • The use of logic

    • The use of hypotheses, models, theories

    • The ceteris paribus assumption

    • Empirical evidence

    • Refutation

  • The role of normative economics

    • Value judgments in policy making

    • The meaning of equity and equality

• Economic thought

  • Origin of economic ideas in a historical context

    • 18th century: Adam Smith and laissez faire

    • 19th century: classical microeconomics (utility); the concept of the margin; Classical macroeconomics (Say’s law); Marxist critique of classical economic thought

    • 20th century: Keynesian revolution; rise of macroeconomic policy; monetarist/new classical counter revolution

    • 21st century: increasing dialogue with other disciplines such as psychology and the growing role of behavioural economics; increasing awareness of the interdependencies that exist between the economy, society and environment and the need to appreciate the compelling reasons for moving toward a circular economy

Theory of knowledge questions

• How realistic are economic models? How can we know what to include or exclude in a model?

• What assumptions do economists make when they apply economic theories to the real world?

• Many economists argue that economics as a social science is in its infancy, and that with time, as empirical testing methods and the quality of data improve, it will become more reliable in making accurate predictions. Do you agree with this statement?

• To what extent does the distinction between positive and normative statements exist in other academic disciplines?

• To what extent have individuals shifted the paradigms of economics?