LECTURE 1

INTRODUCTION TO ECONOMICS

Economics is about making choices. We make all kinds of choices every day. How much should I spend
on petrol? What’s the best route to work? Where should we go for dinner? Which job or career should I
go for? What are the pros and cons of finishing University versus taking a job or inventing the next, best
Internet startup? Can I get that dog as a pet? Should I get married, have children, and if so, when? Which
politician should I vote for when they all claim they can improve the economy or make my life better?
What is “the economy,” anyway? What if my personal or religious principles conflict with what people
tells me is in my best economic interest?
Many people hear the word “economics” and think it is all about money. Economics is not just about
money. It is about weighing different choices or alternatives. Some of those important choices involve
money, but most do not. Most of your daily, monthly, or life choices have nothing to do with money, yet
they are still the subject of economics. For example, your decisions about whether you should spend an
hour a week volunteering for a worthy charity or send them a little money via your cell phone, or whether
you should take a job so you can help support your siblings or parents or save for your future are all
economic decisions. In many cases, money is merely a helpful tool or just a veil, standing in for a partial
way to evaluate some of the goals you really care about and how you make choices about those goals.
You might also think economics is all about “economizing” or being efficient–not making foolish or
wasteful choices about how you spend or budget your time and money. That is certainly part of what
economics is about. However, that’s just the tip of the iceberg. We all know that we can save money or
time by being more efficient in our planning. A trip to the supermarket can be coordinated with a trip to
the library and to deposit a cheque at the bank across the street to save on petrol. But we sometimes don’t
choose the most efficient options. Why not? Economics is also about plumbing the depths of why we
sometimes do and sometimes don’t make what seem like the most economizing or economical choices.
Is economics a science (like physics), or is it a social science, or even an art? What is the difference, and
what do we know about what we can’t or don’t know for now? Can economic problems be solved by
better government, more experts, bigger computers, more engineering, better education, less government,
more dispersed knowledge, more markets? How can we make informed choices?
DEFINITIONS

No one has ever succeeded in neatly defining the scope of economics. Many have agreed with Alfred
Marshall, a leading 19th-century English economist that economics is
1. “a study of mankind in the ordinary business of life; it examines that part of individual
and social action which is most closely connected with the attainment, and with the use
of the material requisites of wellbeing”
This definition ignores the fact that sociologists, psychologists, and anthropologists frequently study
exactly the same phenomena.
In the 20th century, English economist Lionel Robbins defined economics as
2. “the science which studies human behaviour as a relationship between (given) ends and
scarce means which have alternative uses.”
In other words, Robbins said that economics is the science of economizing. While his definition captures
one of the striking characteristics of the economist’s way of thinking, it is at once too wide (because it
would include in economics the game of chess). It is also too narrow (because it would exclude the study
of the national income or the price level).
3. Economics is a social science concerned with the production, distribution, and
consumption of goods and services. It studies how individuals, businesses, governments,
and nations make choices about how to allocate resources.

1
Economics focuses on the actions of human beings, based on assumptions that humans act with rational
behavior, seeking the most optimal level of benefit or utility. The building blocks of economics are the
studies of labor and trade. Since there are many possible applications of human labor and many different
ways to acquire resources, it is the task of economics to determine which methods yield the best results.

Perhaps the only foolproof definition is that attributed to Canadian-born economist Jacob Viner:
‘economics is what economists do’.
Difficult as it may be to define economics, it is not difficult to indicate the sorts of questions that concern
economists. Among other things, they seek to analyze the forces determining prices—not only the prices
of goods and services but the prices of the resources used to produce them.
This involves the discovery of two key elements: what governs the way in which human labour,
machines, and land are combined in production and how buyers and sellers are brought together in a
functioning market. Because prices of the various things must be interrelated, economists therefore ask
how such a “price system” or “market mechanism” hangs together and what conditions are necessary for
its survival.
These questions are representative of the two major types of economics
Microeconomics and Macroeconomics
1) Microeconomics, the part of economics that deals with the behaviour of individual entities such as
consumers, business firms, traders, and farmers.
2) The other major branch of economics is Macroeconomics, which focuses attention on aggregates such
as the level of income in the whole economy, the volume of total employment, the flow of
total investment, and so forth. Here economists are concerned with the forces determining the income of a
country or the level of total investment, and they seek to learn why full employment is so rarely attained
and what public policies might help a country achieve higher employment or greater price stability.
But these examples still do not exhaust the range of problems that economists consider.
There is also the important field of Development economics, which examines the attitudes and
institutions supporting the process of economic development in poor countries as well as those capable of
self-sustained economic growth (for example, development economics was at the heart of the Marshall
Plan). In this field the economist is concerned with the extent to which the factors affecting economic
development can be manipulated by public policy.
Cutting across these major divisions in economics are the specialized fields of

 public finance,
 money and banking,
 international trade,
 labour economics,
 agricultural economics,
 industrial organization, and others.

Economists are frequently consulted to assess the effects of governmental measures such
as taxation, minimum-wage laws, rent controls, tariffs, changes in interest rates, changes in government
budgets, and so on.

KEY TAKEAWAYS

Economics is the study of how people allocate scarce resources for production, distribution, and
consumption, both individually and collectively.

2
Two major types of economics are microeconomics, which focuses on the behavior of individual
consumers and producers, and macroeconomics, which examine overall economies on a regional,
national, or international scale.

Economics is especially concerned with efficiency in production and exchange and uses models and
assumptions to understand how to create incentives and policies that will maximize efficiency.

Economists formulate and publish numerous economic indicators, such as gross domestic product (GDP)
and the Consumer Price Index (CPI).