MIEC Session 1

Madhu Sehrawat

Study of how agents make decisions of

resource allocation in conditions of scarcity

What is economics all about

Economics is a behavioral science that studies how people make
choices.
Agents: Household and firm (Buyers and Sellers)
Scarcity: The first lesson of economics is scarcity: there is never
enough of anything to fully satisfy all those who want it. (Scare:
Limited)
Resources: Land, labor and capital

Why study economics ?

1. To learn a way of thinking
Opportunity cost
Efficient market (No free lunch)

Opportunity cost
The best alternative that we forgo, or give up, when we make a choice or a
decision

Efficient market (No free lunch)

A market in which profit opportunities are eliminated almost
instantaneously

Why study economics ?

2. To understand society
3. To understand global affairs

4. To be an informed voter

 Fundamental Questions of Economics - Scarcity

requires all societies to answer the following questions:
What is to be produced?
How is to be produced?
For whom will it be produced

Scope of economics
Microeconomics: The branch of economics that examines the
functioning of individual industries and the behavior of individual
decision-making unitsthat is, business firms and households.
Macroeconomics: The branch of economics that examines the
economic behavior of aggregatesincome, employment, output, and
so onon a national scale.

Methods of Economics
Positive Economics: An approach to economics that seeks to understand
behavior and the operation of systems without making judgments. It
describes what exists and how it works.

Normative Economics: An approach to economics that analyzes

outcomes of economic behavior, evaluates them as good or bad, and

may prescribe courses of action. Also called policy economics.

Economic Theories and Models

Economic Theory
Economic Model
A variable is a measure that can change from observation to
observation.
The ceteris paribus device is part of the process of abstraction.
Using the ceteris paribus, or all else equal, assumption, economists study the
relationship between two variables while the values of other variables remain
constant.

Ockhams razor: The principle that irrelevant detail should be cut

away.

Methods of Economics
Economics relies heavily on modeling
Economics relies on assumptions
Develops theories, collects, and analyses data to evaluate the
theories