Download Economics - Fabio Landini

Economics past and present
Lecture 0 – academic year 2014/15
Introduction to Economics
Fabio Landini
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Course outline
Organizations:
•Part I – Microeconomics (13 lectures)
•Part II – Macroeconomics (13 lectures)
Classes will be both theoretical AND applied (exercises
and applications to real world problems)
Exam: Exercises and open/closed questions
Course outline
The slides will be posted on my personal webpage
before each class (at least I’ll try…):
http://www.fabiolandini.altervista.org/Teaching.html
(Painful parenthesis)
How are you doing with mathematics?
MUNK
(Painful parenthesis)
In order to pass the exam you need to be able to:
-Solve systems of two equations with two
unknowns….
-Read and draw graphs in the Cartesian (x,y)
space…
… not much after all…
Why to study economics?
1. Find a better job…
Why to study economics?
2. Understand the economic and political
debate…
Why to study economics?
3. Ask yourself big questions…
How do we explain the huge increase in economic
wealth brought about by capitalism?
Why to study economics?
3. Ask yourself big questions…
Why are there rich and poor people?
Why to study economics?
3. Ask yourself big questions…
How do we deal with complicated issues such as
economic sustainability and global warming?
(Brief) History of economic thought
The study of economics is relatively new, having
originated with capitalism (300 years ago)
Before capitalism, economic activity was woven into
family life and did not exist much outside of families.
Markets were social meeting places, not just places to
buy and sell.
(Brief) History of economic thought
“Putting out system”
(Brief) History of economic thought
“Market as a social place”
(Brief) History of economic thought
Karl Polanyi (anthropologist):
“pre-capitalist economy was
embedded in society.”
(Brief) History of economic thought
The emergence of capitalism (late 1700s – industrial
revolution) brought in a Great Transformation (Polanyi):
1. Work began to take place outside of home in factories
(Brief) History of economic thought
The emergence of capitalism (late 1700s – industrial
revolution) brought in a Great Transformation (Polanyi):
2. Buying and selling became the main purpose of market
(Brief) History of economic thought
The emergence of capitalism (late 1700s – industrial
revolution) brought in a Great Transformation (Polanyi):
3. The pursuit of economic gain and progress became the
main guiding principle of economic life – as opposed to
custom or religion dictating it.
(Brief) History of economic thought
In this new Era the birth of economics awaited only
minds creative enough to sense the new realities.
During the 18th and 19th century, a number of great
thinkers/philosophers moved in this direction: Adam
Smith, David Ricardo, Thomas Malthus, John Stuart
Mill, Karl Marx
(Brief) History of economic thought
Classical economists: markets as coordination device
(Smith), importance of trade (Ricardo), capitalism as a
conflictual system (Marx) -> Political Economy.
More similar than sometimes argued: class conflict in
Smith and praise of capitalism in Marx
(Brief) History of economic thought
At the turn of the 20th century
an intellectual revolution
began to transform political
economy into the science of
economics.
Critical in this switch was the importation of concepts
from physics, which brought “economics” closer to
natural sciences than to moral and political philosophy.
Economics as the science of decisions, let’s take a closer
look at it…..
The term economics . . .
Comes from a Greek word (οικονομìα, si legge:
oiconomìa) which means “management of a
household”.
To “manage” something, you must take
decisions.
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In a household/firm there are several
decision that need to be taken…
Who is going to work? Who is going to study?
What and how much are we going to
produce?
Which resources are we going to use?
At which price are we going to sell our
products?
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Scarcity, efficiency and management
These decisions are easy if the resources are abundant
(not scarce)
On the contrary, if resources are scarce there exist a
problem in their efficient use
This generates a key links between scarcity and
management / efficiency.
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Summarizing…
Economics is the study of the way in which
society manages scarce resources.
Problem:
What is “society”? How can “society” manage
scarce resources?
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How does “society” take decisions ?
Modern societies consists of many individuals. There is
no single individual that decides for everybody…
Economics explains:
A. How individuals take their decisions.
B. How individuals interact with each other.
C. The forces and tendencies that influence the
economy as a whole.
–
–
A e B: subject of Microeconomics (Part 1).
C: subject of Macroeconomics (Part 2).
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The seven principles of microeconomics
Microeconomics con be condensed in 7
principles
4 principles concerns point A, i.e. individual
decisions
The other 3 concerns point B, i.e. interactions
among individuals.
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1. People face tradeoffs
“To obtain something you are usually forced to
give up something else.”
Principle 1 derives from resource scarcity.
• Examples:
•
•
•
•
“Butter” (consumption) or “guns” (defence).
Work and health (e.g. Ilva in Taranto)
Leisure or work.
Less obvious: Efficiency or equity.
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2. The cost of something is what you give up
to get it.
“While taking a decision, individuals compare
costs and benefits of alternative actions”.
What matters is the “opportunity cost”, not the
monetary cost
Opportunity cost is the value of the best
alternative option that one is forced to give up
in order to obtain a certain good.
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Example: Is University enrolment a good
investment in Italy?
• Average taxes paid by undergraduate students during the first 4 years (data
2003-04): 2.178 euro.
• Other direct expenses to follow classes and write exams: 3.273 .
• Foregone income (comparison with non-Univ. students): 65.838.
• Total expenses: 71.739.
• Income differential for university degree (wit respect to non-Univ. students,
computed during the first 40 years of activity): 134.000.
• Value of university degree neat of its cost: (134.000-71.739) = 62.408
• Average annual return of university degree: 9,9 %.
Source: Moro-Bisin, La laurea: un ottimo investimento, www.LaVoce.info,
24/10/2005.
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3. Rational people think at the margin.
Marginal variations are small incremental Δ with
respect to e given plan of action.
People usually decides on the basis of costs and
benefits at the margin, not average costs and
benefit.
Example: airline companies and “last minute”
discount.
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4. People respond to incentives.
Rational people “respond to incentives”, i.e.
decide comparing marginal costs and benefits.
An action is preferred to an alternative when:
MB > MC (MB = Marginal benefits; MC =
Marginal costs).
Good to know for politicians and policy makers.
Example: aid to all unemployed or only to those
that carry out some qualification training?
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5. Trade can make everyone better off.
People can obtain important benefits from
the possibility to trade
Trade favours individual specialization and
thus improves efficiency.
Therefore: trade
more trade.
specialization efficiency
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6. Markets are usually a good way to organize
economic activity.
Individuals and firms that operate in a competitive
market are driven by an “invisible hand” towards
the social optimum (Smith).
Competition is not destructive, it is not a zero-sum
game. Rather, it is beneficial – at least when there
exist many sellers and many buyers.
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7. Governments can sometimes improve
market outcomes.
In the case of market failures, the government can
intervene to promote efficiency and/or equity.
Sometimes, however, there are also government
failures: governments not always seek efficiency…
in these cases privatisations can restore efficiency
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Economics as a science
Economics is a science (≅ biology, physics)
because it relies on the scientific method
Scientific method:
– Abstract models (“theories”) to understand
reality (e.g., supply & demand)
– Collection and analysis of real data to verify
the theories.
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Economics as a SOCIAL science
Economics is not really like biology or physics.
Economics = Social science, its laboratory is
society -> institutions (e.g. social norms, custom,
culture) matter.
However: it is impossible to do repeated tests as
in a Lab.
Therefore: it is difficult to “verify” economic
theories.
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Conclusions
Economists relies on the scientific method
(theoretical models + data analysis).
However: economics is a social science. It is more
difficult to obtain answers from data.
Indeed (as we will see): often economists achieves
different conclusions… e.g. debate on how to solve
the current Debt crisis (more at the end of the
course…)
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