ECON204:

Introduction to
Economics

W. Quarmine

House Rules
No calls in class
Show respect to your friends (dont distract
them)
Feel free to ask any question
All assignments must be sent by email:
William.quarmine@gmail.com
Attendance and participation in class are
important
Bad grammar will cost you

House rules
Finals marks will be composed of
Five assignments [10%]
Two quizzes [15%]
One Midsem [15%]
1 examination [60%]

Quizzes and exams will be in the form of

True or false question [wrong answer = -1 point]
Multiple response questions [wrong answer = -1 point]
Short answers [Understand the course and chew what
cant]

House Rules
The course will cover

The meaning and principles of economics

Thinking like an economist
Demand and Supply
Applications of demand and supply
Elasticity
Taxes and welfare
Markets and competition: Perfect competition, monopoly, oligopoly, monopolistic

Production
Consumer behaviour

Course materials
Gregory N. Mankiw. Principles of Economics
Compiled reader
PowerPoint handouts

The meaning of economics

Economics comes from Greek
word Oikonomikos
Oikos, which means Home, and
Nomos, which means Management,
custom or law.

rules or laws for managing a household

The meaning of economics

All households and economies face many
decisions:
Who will work?
What goods and how many of them should be
produced?
What resources should be used in production?
At what price should the goods be sold?

Economics is the study of how society

manages its scarce resources.

Definitions of economics
Wealth definitions,
Material welfare definitions,
Scarcity definitions,
Growth-related definitions
Economics, its definition and concepts have
evolved and expanded over the years

Wealth definition
Focus on wealth
Adam Smith (1723-1790):Economics is the study of the
nature and causes of the wealth of nations or, simply the
science of wealth.
Jean-Baptiste Say (1767 -1832): Economics is the science
of production, distribution, and consumption ofwealth

Wealth is anything MATERIAL, produced by

LABOUR, which can SATISFY human needs
and has EXCHANGE value.

Wealth definition
Wealth definitions have been criticized
They are narrow and focus only on wealth. Economics
is broader than wealth
Narrow definition of wealth. Even with wealth their
definition focuses only on material wealth.
They ignore human welfare

Material welfare
definitions
Focus is on material welfare
Arthur Cecil Pigou (1877-1959): Economics is the
science of material welfare
Alfred Marshall (1842-1924): Economics is a study
of man in the ordinary business of life. It enquires how
he gets his income and how he uses it. Thus, it is on the
one side, the study of wealth and on the other and more
important side, a part of the study of man.
Welfare is not always material. There are non-material
forms of wealth and welfare such as social capital

Scarcity definitions
Focus is on scarcity
Lionel Robbins (1898-1984): Economics is a
science which studies human behaviour as a
relationship between ends and scarce means which
have alternative uses.

Human needs are unlimited. Human resources

(means) are limited. Therefore there is scarcity.
Humans must make careful choices.

Scarcity definitions
Scarcity arises because
Needs are unlimited.
Often once a need is fulfilled another shows up
Resources limited
Resources have alternative uses
Careful choices must be made. To do so, our needs
must be listed in order of importance (scale of
preference). But if we choose to satisfy one need, it
means we must forego others.

Scarcity leads to four

economic issues

Allocation of resources.

What are we to produce? How are we to produce it? What are we to

sacrifice to meet our needs?

Economic efficiency
How do we distribute the little resource that we have such that
everyone is better off?

Full-employment of resources
Must an economy utilize all its resources at a go or must it sacrifice
efficiency and reserve some resources for future use.

The problem of economic growth

To grow any economy, the resources must expand. How can
this be achieved?

Scarcity leads to
economic systems

Traditional economic system

What to produce, how to produce and for who are

determined by traditional rules and communal decision.
Found in aboriginal people of Amazons and Australia

Command orplanned economic system

What to produce, how to produce and for who are
determined central government. Socialist state of Cuba
and former USSR of the 60s and 70s.

Scarcity leads to
economic systems

Market economies

What to produce, how to produce and for whom are decided by

private individual interacting in markets, responding to prices
and motivated by prices.
Past USA and French economies were totally free of controls
(lassez-faire)

Mixed economic system

What to produce, how to produce and for whom are decided by
both government and private sector. The principle here is that
the government does what he market refuses to pay for.
Ghana is a mixed economy

Principle #1: People Face

Tradeoffs

There is no such thing

as a free lunch!

Principle #1: People Face

Tradeoffs
To get one thing, we usually have to give up another
thing
ExampleEfficiency v. Equity
Efficiency means society gets the most that it can from its scarce
resources.
Equity means the benefits of those resources are distributed fairly
among the members of society.

Making decisions requires trading

Principle #2: The Cost of

Something Is What You
Give Up to Get It
Decisions require comparing costs and
benefits of alternatives on a scale of
preference
The real or opportunity cost of an item is
what you give up to obtain that item

Principle #3: Rational

People Think at the Margin
Marginal changes are small, incremental adjustments to an
existing plan of action
EXAMPLE.If you have to choose between drinking water and
picking diamond, you will probably choose DIAMOND. Why? Because
if after taking 3 glasses of water, 1 more glass does not bring you
extra satisfaction. But, after grabbing three diamond stones, if you
add one more you will still not be satisfied.

People make decisions by comparing

costs and benefits at the margin

Principle #4: People Respond to

Incentives
Marginal changes in costs or benefits motivate
people to respond.
The decision to choose one alternative over
another occurs when that alternatives marginal
benefits exceed its marginal costs!
An incentive is something that induces a person
to act.
Incentives change the marginal costs and benefits
facing people and thus makes them act in certain ways

Principle #5: Trade Can Make Everyone

Better Off
Trade allows people to specialize in what
they do best.
People gain from their ability to trade with
one another.
Thanks to trade, your family doesnt have to grow its
own food, make its own cloth and build its own home

Principle #6: Markets Are Usually a

Good Way to Organize Economic
Activity.
A market economy is an economy that allocates
resources through the decentralized decisions of many
firms and households as they interact in markets for
goods and services.
Households decide what to buy and who to work for.
Firms decide who to hire and what to produce.
prices guide decision makers to reach outcomes that tend to
maximize the welfare of society as a whole

A market is an arrangement which allows people to

exchange goods and services. It could be a physical
structure, a set of rules or even a virtual design.

Principle #7: Governments Can

Sometimes Improve Market
Outcomes.
The market sometimes fails to allocate resources efficiently.
Market failure may be caused by
an externality, which is the impact of one person or firms
actions on the well-being of a bystander.
market power, which is the ability of a single person or firm to
unduly influence market prices.

When the market fails (breaks down) government can

intervene to promote efficiency and equity.

Principle #8: The Standard of

Living Depends on a Countrys
Production.

Standard of living may be measured in different ways:

By comparing personal incomes.
By comparing the total market value of a nations production.

Almost all variations in living standards are explained by

differences in countries productivities.

Productivity is the amount of goods and services

produced from each hour of a workers time.

Principle #9: Prices Rise When the

Government Prints Too Much
Money.

Inflation is an increase in the overall level of prices in

the economy.
One cause of inflation is the growth in the quantity of
money.
When the government creates large quantities of
money, the value of the money falls.

Principle #10: Society Faces a

Short-run Tradeoff Between
Inflation and Unemployment.

The Phillips Curve illustrates the tradeoff between

inflation and unemployment:
Inflation Unemployment
Its a short-run tradeoff!

Summary
When individuals make decisions, they face tradeoffs
among alternative goals.
The cost of any action is measured in terms of foregone
opportunities.
Rational people make decisions by comparing marginal
costs and marginal benefits.
People change their behavior in response to the
incentives they face.

Summary
Trade can be mutually beneficial.
Markets are usually a good way of coordinating trade
among people.
Government can potentially improve market outcomes if
there is some market failure or if the market outcome is
inequitable.

Summary
Productivity is the ultimate source of living standards.
Money growth is the ultimate source of inflation.
Society faces a short-run tradeoff between inflation and
unemployment.