Introduction and Basic Principles

Overview

Scarcity

Economics is about how society distributes scarce resources.

• Basic concepts:
  • When people maximize their interest society wins.
  • The cost of doing something is the opportunity that is given up.
  • Trade makes people better off.
  • Rational people take an action only when the marginal net benefits of that action are positive.
• Guiding questions
  • Why do we need economics? What is the main economic problem?
  • What are the opportunity costs of obtaining a good or engaging in an activity?
  • Why should trade always lead to higher benefits to those involved?
  • What are the differences between marginal benefits (costs) and average benefits (costs)?

What Is Economics?

• How to distribute Dr. Jose to economics learners?
• We need economics, because there is always more than one way of distributing limited resources amongst people who want it.
• Where there is limited resources, economics has something to say about it.

Opportunity Costs

Opportunity Cost

The value of the next best alternative that is given up to engage in an activity of exchange

“It’s perfectly simple without being perfectly obvious.”

Net Marginal Benefits Principle

• Opportunity cost is about the next action == marginal action, not the average action

Net Marginal Benefit

Rational people take an action only when marginal (extra) benefits of that action are higher than the marginal costs.

The Invisible Hand Principle

Proposed by Adam Smith. If everybody behaves to maximize their own benefit, society generates the greatest welfare.

Trade

Each of us decides to specialize on something, and trade it with others.

Princple

Trade creates value.

People who engage in the trade, see value in the trade.