UNIT 1: INTRODUCTION TO ECONOMICS

Unit 1: Introduction to
Economics
Chapter 1

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
What is Economics?
 Economics is the study of human behaviour and choice:
‒ What choices do people make?
‒ What factors influence those choices?
‒ What are the consequences of those choices for the person making them?
‒ What are the consequences of those choices for others?

 Opportunities and choices are limited by scarce resources:

‒ We have limited money.
‒ We have limited time.
‒ We have limited materials.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
What is Economics?
 We consider three perspectives:

1. Consumers

2. Managers

3. Government
Policymakers
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024
UNIT 1: INTRODUCTION TO ECONOMICS
Assumptions about Human Behaviour
 We making three main assumptions about human behaviour:

1. People are rational

‒ People make decisions they believe will make them happy or better off.
‒ People will act in their own self-interest.
‒ We will return to this assumption in Unit 6.

2. People respond to incentives

‒ When a particular option becomes more attractive, people will be more likely
to select it.

3. People use Cost-Benefit Analysis

‒ People compare the Marginal Benefit (MB) and Marginal Cost (MC) of each
option before making a decision.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
The Economic Problem
 All societies face a basic economic problem:

Societies have Limited Resources,

but People have Unlimited Wants.

 When we devote resources to one type of activity, those same

resources cannot be used for a different type of activity.

 Societies face trade-offs.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
The Economic Problem

 Our three main economic questions:

1. What goods and services will be produced?

2. How will the goods and services be produced?

3. Who will receive the goods and services produced?

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
Three Economic Models

1. Market Economy

2. Centrally-Planned Economy

3. Mixed Economy

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
A Market Economy
Advantages Disadvantages
 Resources are usually allocated  They underproduce some types
efficiently with respect to production. of goods that are beneficial to
individuals and to society as a
whole.
 Market economies foster innovation
and entrepreneurship.
 They can generate substantial
levels of inequality – resources
 People are free to choose, and the are often not allocated efficiently
government does not have to with respect to consumption.
choose for them.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
A Centrally-Planned Economy
Advantages Disadvantages
 Rationing reduces inequality.  Production is usually not efficient.

 Can allocate societal resources  It is difficult for the government to

more efficiently than a free market choose the right targets and
in times of national emergency. allocate resources.

 Lack of innovation.

 Underperforms market economies

in overall production.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
A Mixed Economy
 A mixed economy combines elements of both market economies
and central-planning.

 In mixed economies most types of goods are provided by the

private sector – by businesses owned by individuals. However,
the government may influence or regulate some aspects of the
market.

 The public sector – the government – also provides some types

of goods and services directly, such as through state owned
enterprises.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024
UNIT 1: INTRODUCTION TO ECONOMICS
A Mixed Economy
 Mixed economies attempt to obtain the advantages of both free
markets and central-planning while avoiding the disadvantages of
either type.

 But, in practice we will face trade-offs which mean we cannot fully

capture all the benefits or avoid all the consequences of each type.

 Most economists and policymakers agree that a mixed economy is

best, but they disagree on how much or how little the government
should be involved. In democracies, citizens can decide through
voting.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024
UNIT 1: INTRODUCTION TO ECONOMICS
How Economists Work
 To study how economic decisions are made and the outcomes
these decisions produce, economists develop theories, also called
models. We follow these five steps:

1. Decide on the assumptions to use in developing the model.

2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain the economic data well.
5. Retain the revised model to help answer similar economic
questions in the future.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
Positive vs. Normative Analysis
 Positive analysis concerns facts or logic. It is simply focused on
what “is” and what “could be”.

 Normative analysis makes value judgments about whether what

“is” or what “could be” is desirable or not.

 Many economists tend to focus on positive analysis, simply stating what

we observe to be happening in the real world, and what could happen
when a new decision is made. Business managers, government
policymakers, journalists, and others may interpret our findings in
different ways and argue for or against different decisions based on
whether they believe the predicted outcomes are desirable or not.
ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024
UNIT 1: INTRODUCTION TO ECONOMICS
Microeconomics vs. Macroeconomics
 Microeconomics:
‒ Focuses on individual agents and markets.
‒ Considers the behaviour of individual consumers, workers, and firm managers.
‒ Examines production and efficiency for individual goods and services.
‒ Examines how the government can impact the market for specific goods and
services.

 Macroeconomics:  ECON 1BB3 “Introductory Macroeconomics”

‒ Focuses on the whole economy in aggregate, particularly economic growth, total
income, inflation, and unemployment.
‒ Considers the overall outcome of all household consumption decisions.
‒ Examines overall business activity and employment without differentiating by
sector or product.
‒ Examines the overall impact of government actions on the whole economy.

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024

UNIT 1: INTRODUCTION TO ECONOMICS
How to do economics
 All aspects of economics can be explained in one of three ways:

1. With words

2. With graphs

3. With equations

ECON 1B03: Introductory Microeconomics © Dr. Colin Mang, 2024