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Unformatted text preview: 1 University of Essex Session 2011/12 Department of Economics Autumn Term EC111: INTRODUCTION TO ECONOMICS Lecturer: Tim Hatton; Room 5B:313; email: [email protected] INTRODUCTION The scope of economics ―How society decides what, how and for whom to produce‖ The central problem is reconciling unlimited wants with limited resources to satisfy those wants. The resources are the means of producing goods and services. The main mechanism for the allocation of resources is the market . We study the way in which markets work and the outcomes that the market mechanism produces. The main economic actors (or agents) are: Households, who consume goods and supply labour and capital. Firms, which employ workers and capital to produce goods. There is also an important role for the government in: Creating and enforcing the conditions for markets to work. Intervening to correct situations where markets ‗fail‘. Redistributing income and wealth in the interest of equity. Stabilising economy wide fluctuations. Positive versus normative economics Positive economics involves ‗if—then‘ statements: e.g. ―a tax on cigarettes will cause the price to rise and the quantity consumed to fall‖. Normative economics: makes recommendations about what should be, based on value judgments: e.g. ―the government should put more tax on cigarettes to cut smoking‖. The methodology of economics Economists mostly focus on positive aspects and they use economic ‗models‘ which abstract from many details in order to focus on the key economic mechanisms. These economic models: Attempt to capture the key elements of economic behaviour Produce predictions that can be tested against the available data. 2 Thinking like an economist Economics is not a set of facts to be learned. It is a way of addressing issues and problems using a coherent framework of thought and a rigorous methodology. Economic methodology can be used to analyse a wide range of issues, not just the quantities and prices of goods and services but social issues such as marriage and divorce, crime, drug use, social discrimination, education fashion and politics. Key assumptions of this approach: Individuals seek to maximise their own welfare as they perceive it Individuals are on the whole rational, forward looking and have preferences that are consistent over time Actions and choices are constrained by what is feasible Some popular fallacies about economics and economists Economists always disagree Economics is mainly about predicting the future Economics is common sense dressed up with jargon and maths Economic models are too simple to capture reality. Economics views individuals as caring only about money Microeconomics versus Macroeconomics Microeconomics studies the behaviour of individual decision-making units, the individual, the household, the firm, the industry; and how these agents in interact in markets....
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- Spring '12