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What is Economics?
Economics is the study of individuals using scarce resources to satisfy competing goals.
People need resources to fulfil their desires. Resources cannot be infinite, desire can be. People need to make choices about how to use scarce resources. Economists study these choices. So, Economics is a way of understanding behavior, what people do (Positive Economics) and ought to do (Normative Economics).
Broadly, economists try to understand and explain the world by assuming that the phenomena they observe are the outcomes of people’s purposeful decisions. Individuals try to achieve their objectives, given their limitations – limited time, money, and energy. The interactions of individuals will determine aggregate social outcomes.
There are four basic principles that guide economic reasoning:
#1: Scarcity: Scarcity necessitates choices, not all of our desires can be satisfied (trade-offs). People choose, individual choices are the source of social outcomes.
#2: Costs and Benefits: Choices imposes costs (opportunity cost: benefit of foregone alternative). People make choices based on their perceptions of expected costs and benefits of the alternatives
#3: Incentives: People respond to incentives in predictable ways. Choice are influenced by incentives (rewards and punishments). When incentives change, people’s behavior change in predictable ways. Institutions also matter.
#4: Supply and Demand: Prices change when demand/supply change. Market equilibrium emerges from the predictable responses of buyers and sellers to price incentives. Trade make everyone better off.
Here a useful summary of the principles of economic reasoning principles.
Jacob Viner (1892 – 1970) once said: Economics is what economists do.
What economists “do” (or study) has vastly changed during the past several decades: economists now study discrimination against minorities, marriage and divorce, the legal system, addictions, non-market interactions, suicides, tariffs and regulations, and wars and conflict. In short, all arenas of human interaction are subject to economic analysis and they can be analyzed and modeled using conventional economic methods.
Economics is not defined by its subject matter but by its method. Following this approach, in this course we use economic reasoning to shed light on a series of (mis)behavior such as why people engage in unprotected sex; why people lie, cheat and steal; why names affect the chance of being hired or rent an apartment; why people pollute the environment and waste natural resources; why people engage in risky health behavior such as smoking and drinking; and why people regret (but not change) their poor diet and sedentary lifestyle.
But, why study these topics? Different types of misbehavior -behavior that people consider inappropriate- has not only negative consequences for the individuals but also have huge costs for our society and can cause hundreds of thousands of preventable deaths.
If you want to know more, you can read:
- Boettke, P. J., Leeson, P. T., & Smith, D. J. (2008). The Evolution of Economics: Where We Are and How We Got Here. The Long term View, 7(1), 14. This article give a historical overview of what Economics has become and its contribution to addressing societal challenges.