The economist

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The economists approach

• Outline
• 1. Scarcity choice
• Markets versus planning
• 2. Key concepts
• 3. The tools of economic analysis
• 4. Thinking like an economist

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1. Scarcity choice

• What is economics about?
• Production consumption
• Scarce resources
• Resources factors of production
• Demand supply
• Demand consumption
• Supply production
• Choice sacrifice
• opportunity cost
• Efficiency

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2. Markets v. central planning

• How should scarce resources be allocated?
• (A) Planning
• Advantages
• high investment economic growth
• low unemployment
• equal distribution of income
• environment
• Disadvantages
• complex economy - information?
• Inefficient allocation of resources
• absence of incentives
• loss of liberty

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(B) Free market

• Decentralised decision-making
• Self-interested behaviour
• resources allocated automatically
• efficient allocation of resources
• incentives - e.g. efficient firms make bigger
  profits
• competition enhances consumer sovereignty
• The pursuit of private gain results in the
  social good
• Mixed economies

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Classifying economic systems
Early 1980s
N. Korea
Hong Kong
China
Poland
Cuba
France
UK
USA
Totally planned economy
Totally free-market economy
China
N. Korea
Poland
France
USA
Cuba
UK
China (Hong Kong)
Early 2000s
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Key concepts

• Rational choice
• consumers - value for money
• firms - profit
• benefits versus costs
• Marginal costs v. marginal benefits
• Positive v. normative economics

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3. Tools of economic analysis

• Macroeconomics v Microeconomics
• Efficiency versus equity
• Measures of efficiency
• Economics as a science
• Theories or models
• Example of a model
• Qd f(Price, Income, Advertising .)
• Qs f(Price, labour costs..)
• Equilibrium Qd Qs

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3 Tools of economic analysis

• Assessing models
• (a) Economic data
• Time series
• E.g. inflation rate unemployment rate
• Cross sectional
• E.g Surveys of individuals or firms
• Longitudinal or panel
• E.g. Repeated surveys of the same individuals
  firms over time
• (b) Statistical or econometric analysis
• Uses of models

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4 Thinking like an economist

• Key features
• (a) Choices trade-offs
• What tradeoffs
• How tradeoffs
• For Whom tradeoffs
• (b) Human nature, incentives institutions
• Criticisms
• (a) Models are simple
• (b) Do economic incentives matter?
• (c) Human behaviour ? scientific laws?