Key Economic Concepts 1

COMM394: Government and Business

Dr. Steven Minns

Sauder School of Business
Now for some economics!

Let’s get started!

In the next section, I’m going to ask you some

questions about basic economic concepts that we
will using in the course. Your answers will not be
graded. Feel free to make your best guess.
This class is (probably) the first time that
you’ll be expected to think like an
economist. Mostly this means using economic
concepts correctly.
Rationality vs. Social Welfare
Acting rationally means selfishly maximizing
my own anticipated utility
Surplus is the difference between the utility of
having the good and the utility of the
transaction price
Maximizing social welfare means maximising
the sum of everyone’s utility
A Free Market is one where transactions are
voluntary

So what’s the problem?

Pareto-efficiency
Problem: A rational agent participating in a free
market may fail to maximize social welfare.
The outcome from trade will not be
pareto-efficient when there is:
Imperfect competition
Information problems
Externalities
Public goods
Some other situations (coordination problems,
etc).

And even if the outcome is pareto-efficient we might

want to redistribute the surplus...
Institutions

Free markets do not always give us what we

want!
We create institutions that govern how
transactions take place
Creating institutions and implementing policies
are both costly, and we have to trade-off the
gains that we get from fixing market failures
against these costs
We have to be wary that institutions and
policies may serve special interest groups, or
self-serving bureacrats
Policy
Think of policy as a set of rules, created and
enforced by a governing body.

In this class we will mostly be concerned with

normative analysis. That is we will want to
consider what policy should to do. This is
different from positive analysis, which considers
which policies are actually adopted.
We want to design rules that are both ‘fair’
and ‘efficient’. This will often mean making a
trade-off between gaining additional social
welfare against the costs of implementing the
policy (i.e., Cost-Benefit analysis).
Economic Concepts

Let’s add some more terms to our conversation:

Incentives - linking an agent’s utility to some
action or outcome
Opportunity cost - the benefits associated
with the best alternative
Willingness-to-pay - the total utility an agent
gets from a good, expressed in dollars
Classroom Policy

Try to think like an economist!

I’m going to ask you 3 questions about

‘Classroom Policy’.
Again, you are not being graded on your
answers!
If you can’t work out the answer feel free to
guess.
Concept List

We have talked (very briefly) about:

Rationality, Utility, Surplus, Social Welfare,
Free Markets
Pareto-efficiency, Imperfect Competition,
Information Problems, Externalities
Policy, Normative and Positive Analysis,
Cost-Benefit Analysis
Incentives, Opportunity cost, Willingness-to-pay
Adverse selection
A lot of concepts to take in?

Don’t worry, we are going to cover them all again

(and again). With a little luck, by the end of the
course, you’ll understand them all (and more) and
will be able to talk like an economist!