Eco 1101

Introductory Microeconomics

Lecture 1
The Scope and Method of Economics
Contents

What is Economics?
Why Study Economics?
The Scope of Economics
The Method of Economics
What is Economics?
• Economics is the study of
• how resources are allocated
• to satisfy the unlimited needs and wants of
• individuals, governments and firms in an economy
• Economics examines the diverse social behaviors of individuals and societies in the
allocation of scarce resources to meet the endless needs and wants of economic agents
(decision makers in the economy- consumers, employees, firms and governments)
• The choices made by economic agents can generate positive or negative outcomes,
thereby affecting the relative well-being of individuals and societies
Brief History
• The word "economics" has its roots in ancient Greece
• It is derived from the Greek words "oikos" and "nomos“
1.Oikos (Οἶκος):
• This Greek word translates to "house" or "household."
• It was used to refer to the family unit, including the physical dwelling, as well as the
economic activities and resources associated with managing a household.
2.Nomos (Νόμος):
• This Greek word means "law" or "custom."
• In the context of economics, it refers to the principles or rules governing the management
of the household or, more broadly, the allocation and use of resources within a
community.
• Combining these two words, "oikos" and "nomos," gives us "economics," which originally
referred to the management of a household or the efficient allocation of resources within a
community
• Modern economics emerged as a distinct discipline during the 18th and
19th centuries, particularly with the works of economists like Adam
Smith, who is often considered the father of modern economics
• Smith's influential book, "The Wealth of Nations" (1776), marked a
turning point in economic thinking and laid the groundwork for
classical economic theory
• Since then, economics has continued to evolve and diversify into
various schools of thoughts
• The field now encompasses a wide range of topics, including
microeconomics, macroeconomics, international economics, and
interdisciplinary areas such as environmental economics and
development economics
Why Study Economics?
Three main reasons to study economics:
The study of economics teaches us a way of
 to learn a way of thinking thinking and helps us make decisions

The study of economics is an essential part of the

 to understand society study of society

 to be an informed citizen To be an informed citizen requires a basic

understanding of economics
 To learn a way of thinking
Opportunity Cost
• All decisions involve trade-offs
• The full “cost” of making a specific choice includes what we give up by not making
the best alternative choice
• The best alternative that we forgo, or give up, when we make a choice or a
decision is called the opportunity cost of that decision
When asked how much a movie costs, most If you decide to take time off from work, the
people cite the ticket price opportunity cost of your leisure is the pay that
For an economist, this is only part of the you would have earned had you worked
answer, not only a ticket but also time
The opportunity cost of going to a movie is the Part of the cost of a college education is the
value of the other things you could have done income you could have earned by working full
with the same money and time time instead of going to school
 To learn a way of thinking
• Opportunity costs arise because resources are scarce
• Scarce simply means limited

A farmer in rural Brazil must decide whether it is

better to continue to farm or to go to the city and look
for a job

A hockey player at the University of

Vermont must decide whether to play
on the varsity team or spend more time
studying
 To learn a way of thinking
Marginalism
• The process of analyzing the additional or incremental costs or benefits arising
from a choice or decision
• Sunk costs is the costs that cannot be avoided because they have already been
incurred
Suppose that you live in New Orleans
and that you are weighing the costs and
benefits of visiting your mother in Iowa

If business required that you travel to

Kansas City anyway, the cost of visiting
Mom would be only the additional, or
marginal, time and money cost of getting
to Iowa from Kansas City
 To learn a way of thinking
• Efficient Markets - No Free Lunch
A market in which profit opportunities are eliminated almost instantaneously

Suppose you are ready to check out at a busy grocery

store on the day before a storm and seven checkout
registers are open with several people in each line
Which line should you choose?
Clearly you should go to the shortest line!
But if everyone thinks this way, all the lines will be
equally long as people move around
 To Understand Society
• Past and present economic decisions have an enormous influence on the character
of life in a society
• The current state of the physical environment, the level of material well-being, and
the nature and number of jobs are all products of the economic system

During the period in England during the late

eighteenth and early nineteenth centuries (1750 -
1850),
Industrial Revolution (new manufacturing
technologies and improved transportation) gave
rise to the modern factory system and a massive
movement of the population from the countryside
to the cities
 To be informed citizen
• A knowledge of economics is essential to being an informed citizen
• To be an informed citizen requires a basic understanding of economics

• Between 2008 and 2013, much of the

world struggled with a major
recession and slow recovery, leaving
millions of people around the world
out of work

• Understanding what happens in a

recession and what the government
can and cannot do to help in a
recovery is an essential part of being
an informed citizen
 The Scope of Economics
• Microeconomics The branch of economics that examines the functioning of individual
industries and the behavior of individual decision-making units—that is, firms and
households

• Macroeconomics The branch of economics that examines the economic behavior of

aggregates (income, employment, output, and so on) on a national scale
• Macroeconomics deals with aggregate employment and unemployment:
• how many jobs exist in the economy as a whole and
• how many people who are willing to work are not able to find work
The 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
The Methods of Economics
Theories and Models
• Model A formal statement of a theory, usually a mathematical statement of a
presumed relationship between two or more variables
• A variable is a measure that can change from time to time or from observation
to observation

Income is a variable
It has different values for different people and different
values for the same person at different times

The price of a quart of milk is a variable

It has different values at different stores and at different times
The Methods of Economics
• Ceteris paribus, or all else equal A device used to analyze the relationship
between two variables while the values of other variables
are held unchanged
• The error of inferring causality from two events happening one after the other is
called the post hoc, ergo propter hoc fallacy (“after this, therefore because of
this”).
• The collection and use of data to test economic theories is called empirical
economics
• In the natural sciences, controlled experiments, typically done in the lab, are a
standard way of testing theories
• In recent years, economics has seen an increase in the use of experiments, both in
the field and in the lab, as a tool to test its theories
References
• Anderton, A. (2006) Economics, 4th edition, Causeway Press
• Arnold, R. A. (2006) Economics: New Ways of Thinking, 1st edition, EMC Publishing
• Case, K. E., Fair, R. C., and Oster, S. E. (2019) Principles of Microeconomics: Global
Edition, 13th edition, Pearson
• Huang, P., Wray, S. and Chakraborty, T. (2020) Economics, IB Diploma Program, Hodder
Education, An Hachette UK Company Carmelite House
• Mankiw, N. G. (2023) Principles of Microeconomics, 8th edition, Cengage Learning
• Sexton, R. L., Fortura, P.N., Kovacs, C. C. and Chapman, D. (2015) Exploring
Microeconomics, 4th edition, Cengage Learning Canada Inc.
The End!