INTRODUCTION

● Origins
○ “Oikonomia”
■ Coined by Aristotle
■ Meaning “household management”
○ Adam Smith
■ Father of Economics
■ Philosopher
■ Moralist turned economist
■ The Theory of Moral Sentiments
● Individual desire vs. societal norms
● Selfish individuals
■ The Wealth of Nations
● Pathbreaking anti-mercantilist book
● Economics as the science of wealth
● Scarcity
○ Limited resources, given the state of technology, unlimited human wants
○ Raison d’etre
● Efficiency
○ Most cost-effective use of resources
○ Pareto efficiency
■ A state where there is no reallocation of resources to make at least one
person better off without making anyone else worse off
● Opportunity Cost
○ Value of the next best alternative given up
○ There is always a sacrifice due to scarcity of resources
● Utility
○ Based on individual’s preferences
○ JS Mill and Jeremy Bentham
■ Utilitarianism
■ Pleasure or happiness is the only thing that has intrinsic value
○ Preferences drive individual choice
○ Preferences can be ranked
■ Law of transitivity
● A ≻ B, B ≻ C, so A ≻ C
● ≻ is “preferred to”
● Choice
○ An individual is free to choose given the preferences
○ Rationality
■ Assumption
■ Homo Economicus
■ An individual knows what he wants and how to get it
● Incentives
○ Means of urging people to do something
○ Economic, social, or moral
● Comparative Advantage
○ Based on relative cost differences of doing some task
○ Different levels of efficiency
 ○ Implies specialization and mutually exclusive beneficial exchange
○ There will be gains from trade
● Economics
○ A social science
○ Studies how societies choose to use scarce productive resources that have
alternative uses
○ Basic Questions
■ What goods are produced
■ How are goods produced
■ For whom are goods produced
○ A mental skill that incoporates a special view of human behavior
○ Alfred Marshall
■ Father of Microeconomics
■ “Study of mankind in the ordinary business of life”
○ “Study of incentives”
○ Economist
■ Mathematician, philosopher, historian, statesman
■ Assess policies in terms of their welfare consequences
■ Evaluate policies by examining how well they satisfy people’s preferences
○ Methodology
■ Scientific method
■ Objective (can), not normative (should)
■ Ceteris paribus
● Holding all other factors constant
■ Try to establish causal relationships
■ Beware of logical fallacies
● Post hoc, ergo propter hoc fallacy
● Fallacy of composition
○ Objective, but inexact
■ Morality
● Deals with how humans want the world to be
■ Economics
● Deals with how the world is
■ Value
● Economic theory captures the most important causes of phenomena