MICROECONOMICS 1101

TOPIC 1: INTRODUCTION

Part Description Mode

Part 1.1 What is economics? Online video

Week 1 Part 1.2 Key concepts, questions Online video

and lessons in economics
 What is Economics?

Image taken from Washington Center for Equitable Growth

https://equitablegrowth.org/research-paper/disaggregating-growth/?longform=true
1.1 Introduction

What is economics about?

• Standard textbook definition: Economics is the study of how we humans
allocate our scarce resources to meet our insatiable needs and wants. So it’s
about how we make choices.
• Can we be a little more specific? What do economists do, and why? I asked a
recent UWA economics graduate, Damian Lenzo:

“Economists use mathematical and statistical models to uncover

recurring patterns of behaviour of individuals and groups.

By understanding these patterns we can make predictions about

whether particular policies will be successful and improve the
wellbeing of others.

The study of economics is for people who are problem solvers, who
enjoy diving deep into data and who want to work on human
issues.”
1.1 Introduction

What is economics about?

1.1 Introduction

What is economics about?

• Economics is a social science which mixes elements of mathematics, moral
philosophy (and politics) and psychology; providing a toolkit for understanding
the causes and consequences of economic decisions made by individuals, firms,
governments and nations.
• Why do economists obsess about economic growth? Does economics endorse
greed?

– Clearly, some people in society are considered to have less than what they
and others consider fair. The benchmark for what is considered fair, or
sufficient, is quite subjective, and changes over time and across contexts.
– If we can increase the size of the pie, then we can make some people
better off without simultaneously making someone else worse off.
– Unless we suddenly decide we can be happier with less, the only way to
promote wellbeing/happiness/satisfaction and avoid discontent is to keep
growing the pie. So we DO have that choice…
– The way in which people vote suggests (to me, at least) that most people
would like to have more resources, and never less. Whether or not that is
reasonable is perhaps a question for moral philosophy.
1.1 Introduction

What is economics about?

• How shallow are we?
1.1 Introduction

What is economics about?

• Does money = happiness?
– “Money”, whether we’re talking about stocks (wealth) or flows (income)
probably doesn’t make us happy in and of itself.
– It feels good to have “money” because it provides a promise that we’ll be
able to secure the goods we need (food, shelter, healthcare) and want
(cars, haircuts, entertainment).
– Is it shallow to wish to be able to provide a good life for yourself and your
family?
• How do we become happy and fulfilled in life?
– Right now, we all have unique sets of resources or endowments (your
education, experience, talents, connections, health, bank balance, and
time).
– We all have unique sets of needs (food, shelter, basic healthcare) and
wants (be a successful economist, live by the beach, travel lots, have a
family, be fit, avoid having too much debt, learn to play drums..)
– Life forces us to conduct an enormous and ongoing optimization exercise,
whereby we make decisions on how to use our unique set of resources to
try to meet these unique set of needs and wants.
– THIS is economics!
1.1 Introduction

What is economics about?

• So should economists obsess about wealth and income?

– Figuring what makes us all happy is a tricky exercise

– BUT: Evidence suggests most people prefer to have more resources,
and avoid having less resources.
– SO: You are free to judge what makes you happy in life, and
economists will observe what you do and reason that you wouldn’t buy
a Ferrari unless it generates more happiness than the bunch of cash
you handed over to pay for it did.
– ALSO: J.M. Keynes famously predicted that, due to inevitable
increases in productivity, his grandchildren’s generation would only
need to work a couple of days a week in order to live well. This has
not come to pass.. Why? Clearly because we, now, want more stuff
than people did in Keynes’ days. At least: We do not seem to value
leisure any more than we value the income generated from work..
1.1 Introduction

What is economics about?

• To reiterate: More broadly, economics is about how society allocates its
scarce resources to meet the needs of its members.
• Societies must address three fundamental questions pertaining to resource
allocation:
1. What goods and services will be produced?
2. How will the goods and services be produced? At what cost?
3. Who will receive the goods and services produced? At what price?
• Societies have a choice with respect to the extent to which these decisions
are made by governments and markets.

– At one extreme, we have the market-based economy where all

decisions are made by markets, where privately owned and operating
producers interact with consumers, and prices serve as the only
allocative mechanism.
– At the other extreme, in a centrally planned economy all these
decisions are made by the state.
 What consequences does this choice have for human welfare?
 Spot the difference
between North and
South Korea…

Source: https://www.economist.com/graphic-detail/2019/05/04/satellite-
data-shed-new-light-on-north-koreas-opaque-economy
1.1 Introduction

What is economics about?

Per Capita GDP (1990 International Geary-Kham is dollars)
North Korea is a centrally planned economy.
$18,000
South Korea
$16,000
North Korea From Wikipedia:
$14,000
$12,000
“Juche, an ideology of national self-reliance,
$10,000 was introduced into the constitution in 1972.
$8,000 The means of productions are owned by the
$6,000
$4,000
state through state-run enterprises and
$2,000 collectivized farms. Most services such as
$0 healthcare, education, housing and food
production are subsidized or state-funded.”
50

54

58

62

66

70

74

78

82

86

90

94

98

02
19

19

19

19

19

19

19

19

19

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20 “From 1994 to 1998, North Korea

Under 5 Proportion of Fixed line / suffered a famine that resulted in
Life mortality rate children u/5yo mobile Roads
Expectancy (per 1,000 underweight subscribers (per paved (% the deaths of between 240,000
(2018) births), 2018 (2010,2012) 100 people) total) and 420,000 people […]. North
Korea follows Songun, or
South Korea 82.5 3 0.7% 120.7 74.50% “military-first” policy. It is the
country with the highest number
North Korea 70.7 22.1 15.2% 14.2 6.40% of military and paramilitary
Sources: CIA World Factbook, Word Development Indicators (2016) personnel”
1.1 Introduction

What is economics about?

• In other words, the way a society decides to allocate its resources is a major
factor in the standard of living its citizens enjoy.
• Most modern economies operate with a mixed model, harnessing the welfare-
producing powers of freely operating markets, but with the government
playing an important role in determining a range of key issues:

 How to regulate private sector industries in order to promote innovation

and wealth creation, while also ensuring social welfare is optimised.
 These are trade-offs in society, so choices must be made.
 How to provide a range of goods and services which, for a variety of
reasons, will not be provided efficiently (or at all) by private firms.
 E.g. healthcare, education, governance and law enforcement
 How to go about re-distribution of resources in a way that best reflect
society’s views on fairness
 E.g. taxation, social welfare
 How to ensure labour markets work efficiently and well
 E.g. laws and regulations around who gets paid what for what type of
work; childcare provision and support.
1.1 Introduction

What is economics about?

• So: Why do economists obsess over economic growth again?
 Economists worry about slowing economic activity, not because we’re
worried about the plight of the rich, but because economic activity is
inextricably linked to the welfare and quality of life for all in society –
especially those who are already vulnerable to economic hardship.
 Economics is not about maximising profits – that is the core objective of
business. The core objective of economics is to identify how we
can maximise welfare in society. These two objectives are not
always compatible. By the end of this unit, you will understand why!