Economics 1

• Economics


  The social science that studies the choices that individuals, businesses, governments make as they cope with scarcity and the incentives that influence those choices
• Economics prepares you for employment in diverse areas including business, government, consulting, public policy, industrial relations, international relations, media and environmental studies
• Microeconomics


  Focuses on individual agents in the economy, how households and firms make decisions and how they interact, aims to understand how scarce resources are allocated among alternative uses, the role of prices and markets and how economic policy can lead to better outcomes for society
• Macroeconomics


  Looks at the economy as a whole, focuses on economy-wide phenomena, including inflation, unemployment and economic growth
• Ten lessons from economics

  • People face trade-offs
  • The cost of something is what you give up to get it
  • Rational people think at the margin
  • People respond to incentives
  • Trade can make every one better off
  • Markets are a usually a good way to organise economic activity
  • Governments can sometimes improve market outcomes
  • A country standard of living...
  • Prices rise when...
  • 10. Society faces a trade-off...
• Trade-off


  Because of scarce resources, making decisions requires trading off one goal for another
• Opportunity cost


  The value of the next-best alternative that you give up to obtain that item
• Marginal change


  A small incremental adjustment to a plan of action
• Marginal cost (MC)


  The cost associated with a marginal change
• Marginal benefit (MB)


  The benefit associated with a marginal change
• Incentive


  A "reward" or "punishment" that induces a person to act (or not to act) in a certain way
• Incentives


  • Fine if you are caught drink driving (punishment)
  • Bonus to an employee if she exceeds expectations on her performance (reward)
• Government policies often use a set of incentives to encourage or discourage certain behaviours
• Incentives used by government

  • Tax on alcohol or cigarettes
• In May 2004, the then Treasurer Peter Costello announced a $3000 payment for every child born after 1 July 2004 (baby bonus')
• This created an incentive for parents to delay births, if they could. And by agreeing with their doctors to schedule planned caesareans and inductions a little later, births could be moved
• Economists had argued that the policy should be 'phased in' so there were no big jumps in payments on any given day
• Joshua Gans and Andrew Leigh estimated that 1167 births were shifted from June to July that year because of the baby bonus
• Scarcity forces people to make decisions/choices about what to get and what to give up (i.e. we face trade-offs). The true cost of what we choose is what we give up to get it (opportunity cost). Making the right decision implies comparing costs and benefits. This comparison is often made at the margin. Since incentives alter the costs and/or benefits of our choices, we do respond to incentives
• You can read Lessons 5 to 10 to get a flavour of the material that we will cover later in this subject as well as in Economics for Business 2