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01 - Economic and Economic Reasoning

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Rahmi Rabbani
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20 views

01 - Economic and Economic Reasoning

Uploaded by

Rahmi Rabbani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Business Economic and landscape

ECONOMIC
AND
ECONOMIC
REASONING
WHAT ECONOMIC IS?
Economics is the study of how people organize their needs and goals in light of social
norms, political realities, and decision-making processes.

Any economy has three central coordination


issues that need to be resolved:

• What, and how much, to produce


• How to produce it
• For whom to produce it
SCARCITY
Scarcity has two elements: So, how does an economy deal with
scarcity? The answer is coercion. In all
known economies, coordination has
involved some type of coercion—
limiting people’s wants and increasing
the amount of work individuals are

Our means of fulfilling willing to do to fulfill those wants.


Our wants those wants.

Since wants are mutable and influenced by society to some extent,


“The degree of scarcity is
these can be related to one another. What we want can change
depending on how we satisfy it. constantly changing.”
MICROECONOMICS AND
MACROECONOMICS
Economic theory is divided into two parts:
Microeconomics is the study of individual choice,
01 and how that choice is influenced by economic forces

.
02
Macroeconomics is the study of the economy
as a whole
SUCH THINGS AS STUDIES ABOUT
MICROECONOMICS: MACROECONOMICS:

• The pricing policy of firms • Inflation


• Household’s decisions on • Unemployment
what to buy • Economic growth
• How markets allocate
resources among alternative
ends
A GUIDE TO ECONOMIC REASONING
Steve Levitt’s bestseller, Freakonomics, contains many examples of “thinking
like an economist”

Levitt uses economic reasoning to explain why people


become drug dealers. The potential financial benefit of selling
drugs is much higher than the cost of giving up a minimum
wage job.

In the economic way of thinking, every choice has costs and


benefits, and decisions are made by comparing them.
MARGINAL COSTS AND MARGINAL BENEFITS
Using economic reasoning, decisions are often made by comparing marginal costs
and marginal benefits

A marginal cost is the additional cost to you over and


above the costs you have already incurred.
That means not counting sunk costs—costs that have already been
incurred and cannot be recovered—in the relevant costs when making a
decision.

A marginal benefit is the additional benefit


above what you’ve already derived.
THE ECONOMIC DECISION RULE:
If the marginal benefits of doing something
exceed the marginal costs, do it.

MB > MC = YES (Do it!)


If the marginal costs of doing something exceed
the marginal benefits, don’t do it.

MC > MB = NO (Don’t do it!)


OPPORTUNITY COST
Opportunity cost is the benefit forgone of the next-best alternative to
the activity you have chosen

Examples of opportunity cost:


01. Individual decisions
The opportunity cost of college includes:
• Items you could have purchased with the money spent for tuition and
books
• Loss of the income from a full-time job

02. Government decisions


The opportunity cost of money spent on the war on terrorism is less
spending on health care or education
ECONOMIC, SOCIAL, AND POLITICAL FORCES

Economic forces are mechanisms that ration scarce goods. A market force is an economic
force that is given relatively free rein by society to work through the market.

The invisible hand is the price mechanism that What happens in society can be seen
guides our actions in a market. The invisible as a reaction to, and interaction of:
hand is an example of a market force.

• Economic forces
• If there is a shortage, prices rise • Social forces
• If there is a surplus, prices fall • Political forces
USING ECONOMIC INSIGHTS
Theories tie together economists’ terminology and knowledge about
economic institutions

Theories are too abstract to apply in specific cases


and are often embodied in economic models and
principles
• An economic model is a framework that places the
generalized insights of the theory in a more
specific contextual setting
• An economic principle is a commonly held
insight stated as a law or general assumption
THE INVISIBLE HAND THEORY
According to the invisible hand theory, a market economy, through the price
mechanism, will allocate resources efficiently

• Prices fall when quantity • Prices rise when the quantity


supplied is greater than demanded is greater than the
quantity demanded quantity supplied

Efficiency means achieving a goal as cheaply as possible


ECONOMIC INSTITUTIONS
To apply economic theory to reality, you've got to have a sense
of economic institutions

• Economic institutions are laws, common practices, and organizations in a


society that affect the economy
• Economic institutions differ significantly among nations

• They sometimes seem to operate differently than economic theory


predicts
ECONOMIC POLICY OPTIONS
Economic policies are actions (or inaction) taken by To distinguish between objective and subjective
the government to influence economic actions: analysis, economics is divided into three
categories:

• Positive economics is the study of what is


• Objective policy analysis keeps
• Normative economics is the study of what
value judgments separate from the should be
analysis • Art of economics is using the knowledge
• Subjective policy analysis reflects of positive economics to achieve the goals

the analyst’s views of how things determined in normative economics

should be
THANK YOU
“It is not from the benevolence of the
butcher, the brewer, or the baker that we
expect our dinner, but from their regard
for their own interest.”
-Adam Smith

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