LECTURE 1:

WHAT IS ECONOMICS?

Crystal Lau

WHY STUDY ECONOMICS?

fascinating, mind-expanding and lots of fun

Not just happen in classrooms, but everywhere &

influence everything we do & see.

It can explain some of lifes most intriguing enigmas, eg.

Why is milk sold in rectangular containers, while soft
drinks are sold in round ones?

Why are petrol caps on the drivers side of some cars
but on the passengers side of others?

Why so taxi drivers stop working early on rainy days?
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TODAYS LEARNING OUTCOMES

Upon completing this lecture, you should be

able to:

understand the concept of scarcity and ceteris

paribus assumption.

distinguish between "macro" and "micro.

list the factors of production: land, labor, and

capital.

distinguish between "positive" and "normative"

economic analysis.

know pitfalls of economic reasoning

know how theories (model) can be expressed.

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EXAMPLES OF ECONOMIC WAY OF THINKING



Why do 24-hour convenience stores

have locks on their doors?

Why would you purchase more CocaCola when the price increases?

Why are aluminium soft-drinks cans

more expensive to produce than
necessary?
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WHICH ONE WORTH BUYING IF THEY COST THE

SAME?

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WHAT ARE THE 3 BUILDING BLOCKS IN

THE ECONOMIC WAY OF THINKING?

scarcity
model

& choice

building

pitfalls

of economic
reasoning
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WHAT IS THE ECONOMIC PROBLEM?

Providing for peoples

unlimited wants and
needs in a world of
scarcity
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WHAT IS MEANT BY SCARCITY?

The condition in which wants

are forever greater than the
available supply of time,
goods, and resources.

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WHAT DOES SCARCITY FORCE US TO DO?

It forces us to make
CHOICES.
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WHAT ARE RESOURCES

(OR FACTORS

OF PRODUCTION)?

The basic categories of

inputs used to produce
goods and services
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WHAT ARE THE 3 CATEGORIES

OF RESOURCES?

Land
Labor
Capital
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WHAT IS A LAND RESOURCE?

A shorthand expression for any
natural resource provided by
nature, eg. forest, gold, copper,
oil, wildlife, rivers, lakes, air,
seas, the sun, the moon, etc.
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WHAT IS LABOR?
The mental and physical
capacity of workers to produce
goods and services, eg. lawyer,
accountant, economist, farmer,
welders, constructors, etc.

Entrepreneurs
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WHAT IS CAPITAL?

The

physical plants, machinery,

and equipment used to produce
other goods

They

do not directly satisfy

human wants.
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WHAT IS FINANCIAL CAPITAL?

The money
capital

used

to

purchase

Financial capital by itself is not

productive; it is a paper claim on
capital such as bonds, stocks or a
deed.

$$ is not a capital & is therefore

not a resource.
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WHAT IS ENTREPRENEURSHIP?
Creative ability of individuals
that enables them to seek
profits by combining resources
& taking risks

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Land

Labor

Capital

Entrepreneurship organizes
resources to produce goods
and services
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WHAT IS ECONOMICS?
The study of how society
chooses to allocate its scarce
resources in order to satisfy
unlimited wants and needs

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WHAT IS MACROECONOMICS?
The branch of economics that
studies decision-making for the
economy as a whole,
eg. inflation, unemployment,
economic growth, etc.

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WHAT IS MICROECONOMICS?
The branch of economics that
studies decision-making by a
single individual, household,
firm, industry, or government

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EXAMPLE OF ECONOMIC NEWS

Food crisis: It's a moral issue for all of us
(New Straits Times, 8 mar 2011)

In less than a year, the prices of several basic staple

foods have risen alarmingly: rice by 74 per cent, soya by
87 per cent and wheat by 130 per cent.

The major conflict confronting the world today is no

longer between nations and peoples, but spreading food
shortages and rising food prices that threaten our global
future.

Estimates suggest that 25,000 people die daily from

hunger, a crisis exacerbated by food prices that have hit
their highest level since 1945.

Climate change, speculation, competing uses, such as

the dash for biofuels and soaring demand from emerging21
markets, especially in East Asia, are causing food
shortages and rocketing prices -- sparking riots in major
Crystal
Lau
cities.

Food will become too expensive, resulting in

dramatically high morbidity and mortality rates, and
political unrest.

In the long term, soaring food prices and scarcity, in

particular affecting the most vulnerable, must be dealt
with by addressing growing consumption patterns.

The impact of global warming and biofuel production

on food supply and prices needs to be assessed indepth
and measures instituted nationally and globally to
ameliorate its effects on food accessibility.

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WHAT IS AN ECONOMIC MODEL?

A simplified description of reality
used to understand and predict the
relationships between variables

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WHAT IS THE PURPOSE OF AN

ECONOMIC MODEL?
To forecast or predict the
results of various changes in
variables

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MODEL BUILDING
Identify the problem

Develop a model based

on simplified assumptions

Collect data & test the model

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WHAT CONCLUSION

CAN WE MAKE?

If the evidence supports the

model, the conclusion is to
accept the model. If not, the
model is rejected.

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WHAT ASSUMPTION IS ALWAYS

MADE WHEN TESTING A MODEL?

ceteris paribus

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WHAT IS CETERIS PARIBUS?

A Latin phrase that means that
while certain variables can
change, all other things remain
unchanged.
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EXAMPLES OF CETERIS

PARIBUS

If the price of new Ford cars decrease, and everything

else stays the same, consumers will buy more. But if
other variables change, we cannot make a prediction.

The demand for apples will fall if the market price

increase, other variables held constant. Without ceteris
paribus assumption, the model of apple may collapse.

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WHAT IS THE DIFFERENCE BETWEEN

ASSOCIATION AND CAUSATION?
cannot always assume that
when one event follows another,
the first causes the second.

We

model is valid only when a

cause-and-effect relationship is
staple over time.

A

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WHAT ARE THE TWO COMMON

PITFALLS OF ECONOMIC REASONING?

 failing

to understand the
ceteris paribus assumption

 confusing

causation

association with

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WHAT CONCLUSION

CAN WE MAKE?

A theory (model) cannot be

tested legitimately unless its
ceteris paribus assumption is
satisfied.

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WHY DO ECONOMISTS FORECASTS

DIFFER?
Because using the same methodology,
economists can agree that event A causes
event B, but disagree over the assumption
that event A will occur.

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WHY DO SOME ECONOMISTS

DISAGREE?

The answer lies in understanding

the difference between positive
and normative economics.

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WHAT IS POSITIVE ECONOMICS?

An analysis, based on facts,
limited to statements that are
verifiable

if

event A occurs, then event B

follows is considered as a
conditional positive statement.

Eg.

Government control of rent

decreases the number of new
apartments constructed.

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WHAT IS NORMATIVE ECONOMICS?

An

analysis based on value of

judgment (opinions or views)
words such as good, bad,
need, should and ought to are always
employed in normative statements.

Certain

Eg.

Government control of rent is a

fair way to help poor people afford
housing.
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WHAT CONCLUSION

CAN WE MAKE?

When opinions or points of view

are not based on facts, they are
scientifically untestable.

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REFERENCE
B. Tucker, Economics for
Todays World, 6th Ed, Chapter 1

Irvin

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