Unit 1: Basic Economic Concepts

Every course in textbook starts with on attempt to define economics, definition differ but after you hear a few of them you showed have a flaw or for what economics is about. When I tell people I am economist the first thing they usually say is either wha's the stock market going yo do next for how should I invest my money? I'm always sad to hear that questions. There are two reason why:
The first reason is that I don't have answer. There is some interesting economics behind why I don't have good answer but this is not the time to talk about that.
The second reason why those questions make me sad is that economics isn't really about money or stocks. Well, it is part about money but money in the stokes and other financial subjects are only part of economics... Personally, I don't find finance to be a very interesting part of economics. Other of course does, so again what is economics? Let's see some definitions.
Greg Nunking says economics is the study of how society manages its scare resources. Altough it would be more accurate to say that economics is a study of how individuals manage scarce resources.
Courtney defined economics , as a study of human behavior, with an emphasis on human decision making. That's a pretty good definition too, although it's a worth painting out that economy is a study of human behavior not the study if human behavior.

Steven Lindosborg defines economics as one of several science that treats to explain human behavior. Bur it differ form other disciplines like psychology and sociology, but there are some like DanAriel, who are economists but heavily emphasized the ways in which peopleple engage in national behavior. Also economists crossing over into what we're once considered sociology, psychology or even demography.
The first time, I took an economics class I was given a definition something like this: Economics is a study of how people choose to allocate scarce goods and resources to satisfy their unlimited desires. Again this is a pretty good definition; it has individual, choosing and scarcity themes that will come u again in my economic course. This definition provides a god opportunity to define some other terms that are important in economics.

Goods are thing that people like to use, way say that people consume. Then bads are hings that people must be paid to acept. For example, a sandwich might be a good, if you like sandwiches and garbage is probably a bad, for most people.

To convince you to take my garbage I have to pay resources thay we use to make things layer: tools and equipment, oil, timber, iron and so on there are all resources. I've sometimes herad people use this definition as well: Economic is the study of how people respond to incentive. We'll look at some key economic concept. Once you've heard them you'll have a better idea of what economics is and gow economists think about is to do some economics.

Although they differ from text to text. I'm going to present just three key economic concepts but I'll sneak in a few additional ideas through each key concept.

Scarcity means that stuff is limited. We can't all have as much of everything as we likr. Maybe we'd all like to have big house with swimming pools and a bunch of robot to clean it for us or maybe we'd all like to get the latest electronic gadgets on the fastest can or whatever right now. However it's not posible for us all to have everything we want. Maybe we could have a big house but no if we also want toe at and have fancy electronics and so on. We have to give up something to get the thing we want. Every time resources are used to male one thing that means thay are not making something else. Therefore we have to make trade-offs. We must trade-off one thing for another. Top up in another way we must make choices. I can spend a dollar and apple but that means I can't use that dollar to buy an orange.

This holds true for everything. Every choice we make involves doing one thing instead of another. The value of the best thing we give up is called opportunity cost. So if I hoose to spend one dollar tobuy an Eden Apple and the next best thing I could have chosen was a one dollar orange, then the buy orange was the opportunity cost of that Apple. Economists focus on opportunity cost as the true cost of making a choice. The opportunity cost is not necessarily the same as the monetary cost. Notice that I did not say that opportunity cost of the Apple was one dollar.

If goods and resources are scarce then nothing is free. Everything you get requires giving up something else I sometimes have. Religious friends as students who try to argue that salvation is free as environmentalist might argue that enjoying nature is free but they're both wrong salvation cost you at least a few minutes that could be spent doing something else and it probably requires giving up lots of fun sinning. Enjoying nature isn't free either since that nice nature stuff could be used to do something else and your time enjoying it could be spent playing nature might be worth you're a while but they're not free.

We usually asume that people became rationally. By rational we means to achieve their goals. Why would we asume something that we know to be false because it's a useful lay. No, I'm serious. Economists routinely used simpliflying assumptions which are useful. Lies that make the world comprenhensible. We use these assumptions to build models which are frameworks for trying to understand a part of the world.

Without simplifying assumptions the world is too complicated to understand. For example, of you want to understand how flight works you don't build a complete airplane form the ground up woth ailerons and flaps you build a simple little, fixed wing and then you blow arrow over it to see what happens. Once you understand the simple model then you can make it more complicated. Economists asime rationally because it is a useful lie it is a useful assumption because it predicts so well in so many circumstances, particularly the sorts of circumstances economists have traditional studied. We know it's not, always correct, but rationality is a powerfully useful simpliflying assumption. People who choose rationally, change. Their decissions when circumstances change. They respond to change in incentives an incentive is just a reason for doing something if the vost of doing something goes up people do more of it, for example, hamburgers become cheap people eat more of them.

New information becomes available showing that burgers will kill you, people eat fewer of them,,, these changes and incentives changes behaver economist talk a lot of about rational people seeking decisions at the margin. What they really mean is that people decide whether to do a little bit more of something or a little bit less of something. For example if you run a business growing and selling potatoes, you might consider growing little bit more to figure out if that's a good idea, you'd wnat to compare the marginal benefit. The benefit of marking a bit more money, from growing a few more potatoes. If stuff that could have been done with the resources you use to grow a few more potatoes, if not then the marginal benefit is created in the marginal cost, you grow a few more potatoes, if not then you don't. We'll explore this topic in excruciating detail later.

We got a bit sidetracked there but now we're back to the key economic concepts. Compared to the general public, economist are much more supportive of the idea that things work out When people are allowed to buy and sell things to each other in particular economist. Overwhelmingly believe that people in different countries are made wealthier when they are allowed to trade with each other without any tariffs, quotes or other government restrictions on trade. Trade is just what If sounds, like the exchange of goods and resources between people or between geographic areas. So Japan sells cars to the US and the US sells financial services to Japan, that's trade.
When economists talks about the market for apples, he or she means all those apple buyers and apple sellers talking to each other trading money and apples to each other. Economist again differ from the general public in that they tend to believe, with some disagreement, that when people buy and sell things at whatever prices they want, they tend to be made happier. This is not to suggest that markets always work, there is a large literature on market failure.

When markets fail, governments might be able to improve the situations those should be considered special cases however before you learn how markets fail, you need to understand how they succed. We will do a lot of this particulary using the supply and demand model. There are other important ideas that some textbook state as fundamental economic concepts, for example: maybe the fact that inflation is caused by government money too quickly is an important economic concept or perphaps the idea that economists try to look for hidden secondary effects of a policy change, something important to economics. I don't think so, however these and other concepts are important implications of the ideas discussed above but up to this point, I wanted to focus only on the absolutely most important, most fundamental economic ideas.

There are many sub disciplines with in economics that can be roughly grouped  into microeconomics and macroeconomics. Microeconomics concers itself with economic decision-marking on a small scale. If focuses on consumer's workers businesses, usually called firms and how they interact through markets. Microeconomics might even consider the interaction of a couple different markets at the same time. When one gets much bigger than that however one starts to get into macroeconomics. Macroeconomics concers itself with economic aggregates. Wich are measures of how the economy overall is doing. Examples of economic aggregates are GDP which are measures the value of stuff produced. Inflation wich is measure of how prices go up over time. In unemployment which is how many people are not employed isn't it and now.

Something that is worth remembering but not big enough to countas a key principle. Keter asparagus is a latin phrase that means other things the same or other things equal. As I said before, economists use models to describe the world. When we are construing an economic model, we have to assume away some complications. By assuming that other things are the same we mean that we're only going to change one little thing ans see what our model predicts. So, for example, if we want to know how consumers will react if the price of bananas goes up we will assume that the price of bananas is the only thing changing. Incomes aren't changing the prices of other fruits.
Once we are comfortable with our basic model, we might be able to change more than one thing at a time and see what happens. Always start simple however. You'll see what I mean when we see the production possibilities frontier, our first model, let me say a little bit more about economic models. Most economics classes are really a series of models designed to describe a particular situations. You go from model to model learning how they work and when they should be applied. The veers model we'll see is the production possibilities frontier.








Concepts:
Economic definitions: Economics is the study of how society momages it's score resources
Economics as a study of human behaviour with an emphasis is human decision making.

Goods and bads: Goods are things that people like to use. Bads are things that people must be pend to accept.

Resources: Resources are what we use to make things, labor tools and equipment.

Scarcity: Scarcity means that stuff is limited.

Opportunity cost: The value of the best thing we give up to get something.
This holds true for everything every choice we make involves doing one thing instead of another, the value of the best thing we give up is called opportunity cost.

Rationally: To achieve their goals, which implies that they respond to incentives.

Economic model: A simple framework for understanding an economic phenomenon, which unnecesary complications assumed away.

Incentive: A reason for doing something

Margin: Marginal benefit- Marginal cost: Is the benefit, satisfaction, pleasure or happiness that a person receives by the comsumption of an additional unit of good or service.

Markets: The set of buyers and sellers, and their interactions with each other.

Trade: The trade is just what it sounds like the exchange goods and resources between people or between geographic areas. So Japon sells cars to the US and the US sell financial services to Japon that's trade when economist talk about markets.

Microeconomics: Concerns itself with economic decision-making on a small scale it focuses on consumer's workers.

Macroeconomics: Concerns itself with economics aggrefates which are measures of how the economy overall is doing.