Welcome to the Wonderful World of Economics

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The word economics has its origin in the Greek "oikonomiks" (relating to household management), from "oikos" (house). Economics studies how society manages its scarce resources:
1. How people make decisions: How much they work What they buy How much they save or invest... 2. How people interact with each other: How buyers and sellers together determine the price and quantity of goods sold... 3. How the Economy as a Whole Works: Analyze the forces and trends that affect the economy Growth in average income, unemployment, inflation etc... 1A. Four Principles of Individual Decision-Making 1. People Face Trade-offs Guns or Butter? Efficiency or Equity? Good decisions made when options known

2. Cost is What You Give-Up Not all costs are perceived Some costs are ignored Opportunity Cost is whatever must be given up to obtain some item 3. Rational People Think at the Margin Decisions are rarely black and white Marginal changes are small incremental adjustments to a plan of action Marginal costs and marginal benefits are compared to make decisions 4. People Respond to Incentives Behaviour changes, as costs or benefits change There are direct and indirect costs and benefits Incentives and opportunity costs are compared in decision making

2A. Three Principles of Individual Interaction 1. Trade Makes Everyone Better Off Competition and Trade is not a Win-Lose Affair Isolation to Specialisation Partners in Progress

2. Markets Usually Organize Economic Activities Efficiently Market Economy: Resource allocation with decentralised decision making as individual and firms interact for goods and services Adam Smith: Invisible Hand leads to desirable outcomes Communism: Controls prevent self-correction and affect welfare of society as a whole

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Governments Can Sometimes Improve Market Outcomes Market failure is the failure of efficient allocation of resources Externality: the impact of one persons actions on the well being of another Market Power: The ability of a single entity (or group) with substantial influence

3A. Three Principles of the Economy as a Whole 1. 2. 3. A Countrys Standard of Living Depends on Ability to Produce Goods and Services Standard of living is linked to productivity Keys: Education , Tools and Technology Government Budget deficits lower investment and productivity Prices Rise when Government Prints too Much Money Inflation: Increase in the overall level of prices Culprit: Growth in the quantity of money supply (money value?) Keeping inflation low is part of good public policy Society Faces Short-run Trade off between Inflation and Unemployment Reduction in inflation causes temporary increase in unemployment Restriction of money supply decreases spending leading to less sales Monetary Policy and Fiscal Policy are the instruments of control

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