Kinh tế học vĩ mô - Chapter 1: Economics and economic reasoning

Economics and Economic ReasoningChapter 1What Economics IsEconomics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.What Economics IsOne of the key words in the definition of the term “economics” is coordination.What Economics IsThree central coordination problems any economic system must solve are:What, and how much, to produce.How to produce it.For whom to produce it.What Economics IsScarcity ensues because individuals want more than can be produced.Scarcity – the goods available are too few to satisfy individuals’ desires.Wants are unlimited, but resources are limitedWhat Economics IsThe degree of scarcity is constantly changing.The quantity of goods, services, and usable resources depends on technology and human action.What Economics IsThe following are the five important things to learn in economics:Economic reasoning.Economic terminology.Economic insights economists have about issues, and theories that lead to those insights.What Economics IsThe following are the five important things to learn in economics (cont’d):Information about economic institutionsInformation about the economic policy options facing society today.A Guide to Economic ReasoningEconomic reasoning is making decisions by comparing costs and benefits.Marginal Costs and Marginal BenefitsThe relevant costs and benefits to economic reasoning are the expected incremental or additional costs incurred and the expected incremental or additional benefits of a decision.Marginal Costs and Marginal BenefitsIn economists’ jargon, marginal refers to additional or incremental.Think of it as one more.Marginal Costs and Marginal BenefitsMarginal cost = the additional cost to you over and above the costs you have already incurred.This means eliminating sunk costs – costs that have already been incurred and cannot be recovered.Marginal Costs and Marginal BenefitsMarginal benefit = the additional benefit above and beyond what you’ve already accrued.Marginal Costs and Marginal BenefitsAccording to the economics decision rule:If the marginal benefits of doing something exceed the marginal costs, do it.If the marginal costs of doing something exceed the marginal benefits, don’t do it.Economics and PassionEconomic reasoning is based on the premise that everything has a cost.Reasonable economic solutions are often not the most popular, as economic reasoning may take some passion out of life.Opportunity CostOpportunity cost – the basis of cost/benefit economic reasoning; it is a cost of the activity you have chosen measured by the benefit foregone of the next-best alternative.Opportunity CostIn economic reasoning, opportunity cost must be less than the benefit of the choice you have made.Opportunity CostOpportunity costs are not limited to individual decisions but to government decisions as well.Opportunity CostThe opportunity cost concept applies to all aspects of life and is fundamental to understanding how society reacts to scarcity.Economics and Market ForcesWhen goods are scarce, they must be rationed.Rationing is a mechanism chosen to determine who gets what.Economic and Market ForcesOne of the important choices that a society must make is to what extent economic forces are allowed to function freely.Economic and Market ForcesA market force is an economic circumstance that is given relatively free rein by society to work through the market.Market forces ration by changing prices.Economic and Market ForcesEconomic reality is controlled by three forces:Economic forces (the invisible hand).Social and cultural forces.Political and legal forces.Economic and Market ForcesEconomic forces:The invisible hand is the price mechanism—the rise and fall of prices—that guides our actions in a market.When there is a shortage, the price goes up.When there is a surplus, the price goes down.Economic and Market ForcesSocial and cultural forces, political and legal forces:Political and social forces often work together against the invisible hand.What happens in society can be seen as a reaction to, and interaction of, the invisible hand, political and legal forces, and social and cultural forces.Economic InsightsGeneral insights into how economies work are often based on economic theory.Economic theory – generalizations about the workings of an abstract economy.Economic InsightsTheory ties together economists’ terminology and knowledge about economic institutions and leads to economic insights.Economic InsightsBecause theories are too abstract to apply to specific cases, a theory is often embodied in an economic model or an economic principle.Economic model – a framework that places the generalized insights of the theory in a more specific contextual setting.Economic InsightsBecause theories are too abstract to apply to specific cases, a theory is often embodied in an economic model or an economic principle. Economic principle – a commonly held insight stated as a law or general assumption.Economic InsightsTheories, and the models and principles used to represent them, are abstract but efficient, means of conveying information.Economic InsightsIn order to understand the theory you must understand the assumptions underlying the theory.The Invisible Hand TheoryThe invisible hand theory states that markets are efficient in coordinating individuals’ decisions, allocating scarce resources to their best possible use.The Invisible Hand TheoryThis insight is called the invisible hand theory – a market economy through the price mechanism will allocate resources efficiently.Economic Theory and StoriesEconomic theory and its models are a shorthand means of telling a story. If you can’t translate a theory into a story, you don’t understand the theory.Microeconomics and MacroeconomicsEconomic theory is divided into two parts: microeconomics and macroeconomics.MicroeconomicsMicroeconomics is the study of individual choice, and how that choice is influenced by economic forces.MicroeconomicsMicroeconomic theory considers economic reasoning from the viewpoint of individuals and firms and builds up from there to an analysis of the entire economy.MicroeconomicsMicroeconomics studies such things as: pricing policy of firms, households’ decisions on what to buy, and how markets allocate resources among alternative ends.MicroeconomicsMicroeconomics analyses from the parts to the whole.MacroeconomicsMacroeconomics is the study of inflation, unemployment, business cycles, and economic growth.Macroeconomics analyzes from the whole to the parts.Economic InstitutionsCorporations, governments, and cultural norms are all economic institutions. They differ significantly among nations.Economic institutions sometimes seem to operate in ways quite different than economic theory predicts.Economic InstitutionsIn applying economic theory to reality, you must know about economic institutions.Economic Policy OptionsEconomic policies are actions taken by government to influence economic actions.Economic Policy OptionsThose who wish to carry out economic policy effectively must understand how institutions might change as a result of the economic policy.Objective Policy AnalysisGood objective policy analysis keeps the value judgments separate from the analysis.Subjective policy analysis is that which reflects the analyst’s view of how things should be.Objective Policy AnalysisIn order to make the distinction between objective and subjective analysis clear, economists have divided economics into three categories.Positive economicsNormative economicsArt of economicsObjective Policy AnalysisPositive economics is the study of what is, and how the economy works.Examples include: how does the stock market work, what are the consequences of rent control on the market for housing, and are the costs of having children related to family income?Objective Policy AnalysisNormative economics is the study of what the goals of the economy should be.Objective Policy AnalysisNormative economics is the study of what the goals of the economy should be.Examples include: people on welfare should work in order to get benefits, inherited wealth should be taxed more heavily, and corporations should not be allowed to move their facilities overseas unless it is agreed to by labor unions.Objective Policy AnalysisArt of economics is the application of the knowledge learned in positive economics to the achievement of the goals determined in normative economics.Objective Policy AnalysisMaintaining objectivity is easier in positive economics – harder in normative economics.Objective Policy AnalysisIt is hardest to maintain objectivity in the art of economics since it embodies the problems of both positive and normative economics.Objective Policy AnalysisOne of the best ways to find out about feasible economic policy options is to compare them from one country to another.Policy and Social and Political ForcesThe choice of policy options depends on more than economic theory.Political and social forces must be taken into account when applying economic theory to reality.Economics and Economic ReasoningEnd of Chapter 1