Introduction

What is Economics

• A Social Science
• The study of how individuals and societies choose to allocate scarce resources among alternative uses in an attempt to satisfy their unlimited wants

Why study Economics

1. Learn a way of thinking which enables us to make the best possible choice
2. Understand society
3. Understand global affairs
4. Be an informed voter
5. Approach problems in a logical manner, replacing assertion with analysis

Approach to studying Economics

1. The languages used
2. The definitions and explanations
3. The diagrams and tables

A unified approach to thinking about the world

Scope of Economics

• 2 Major divisions: Micro and Macro
• Microeconomics: Deals with the functioning of individual industries and the behaviour of individual economic decision-making unit
• Macroeconomics: Deals with the functioning of the whole economy
• 2 kinds of questions: Positive and Normative

Positive vs Normative Economics

Positive Economics

• Describe and explain economic facts and events observed objectively
• Explain the mechanism of an economic phenomenon
• Deals with “what is, what was and what will be”
• Statement of fact: May be verified

Normative Economics

• Looks at outcomes of economic behaviour
• Questions whether these are good or bad
• State the way the economy should operate
• Value judgement: Cannot be proved or disproved by only looking at facts

The Marginalist Principle

• Economic choice usually involves adjustment to the existing situation or status quo
• Economic choice is based on a comparison of the expected marginal cost and the expected marginal benefit of the action under consideration
• Marginal: Incremental, additional, extra; refers to a change in an economic variable
• Rational decision maker will change the status quo as long as expected Marginal Benefit > Marginal Cost
• Change is typically small, but can involve major economic adjustment
• Allows economists to cut analysis to manageable size: begin with marginal choice then see how it affects particular market and shapes the whole economic system

Summary

1. Economics is a social science that studies how individuals and societies allocate limited resources to the production of goods and services so as to satisfy consumers’ unlimited wants
2. Macroeconomics is the branch of economics that studies economic aggregates
3. Microeconomics is the branch of economics that studies individual units
4. Positive statements are value-free statements that can be tested by using facts
5. Normative statements contain value judgement concerning what ought to be