I’m going to write a series of posts briefly summarizing the ideas from my intermediate micro textbook, partly for my own benefit and partly to allow others to get a quick introduction to the subject.

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Economics is divided into microeconomics and macroeconomics. What I will address in these posts is microeconomics, but from here on out I will refer to just plain economics for convenience.

First, a few caveats. Economists make assumptions that are sometimes a bit unrealistic. However, these assumptions make life easier, and often a simple model can capture the salient features of reality. For the economist, the key is to balance simplicity with realism. In the typical introductory economics course, the student is shown the most simplified model with the strongest assumptions first, and later the assumptions are relaxed to attain greater realism.

Also, you should keep in mind that economics is concerned with positive statements, as opposed to normative ones (I believe this is true across the social sciences). A positive statement is true or false. It regards “what is.” For example, “it is day” is a positive statement. On the other hand, a normative statement is about right or wrong — a value judgement, like “you should get a college education.” Normative statements cannot be proven false. Although economists will often voice personal opinions that include normative statements, the substance of the discipline lies in falsifiable theories of cause and effect.

That economists study “wants” rather than “needs” is an example of this distinction. To say that a person needs something could be a positive statement. For instance, a human being needs food and water to survive for more than a week or so. However, more commonly in everyday speech we imply a value judgement when we use the word “need” — e.g. “needs a job,” “needs health insurance,” “needs regulation.” Although the observability of “wants” is debatable, economists do observe patterns in people’s behavior, particularly in the realm of buying and selling, and describe these patterns in the language of “wants.” Thus, economists test positive statements about “wants,” or patterns of behavior, but have nothing to say about normative statements regarding “needs.”

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The basic assumption in economics is that we live in a world of scarcity, meaning that we cannot all have as much of everything as each of us would like. There are materials to make only so many cars, refrigerators, books, or TVs. There is a limited amount of time in a day. There is a limited amount of space on the earth. There are a limited number of possible license plate numbers. Given that we cannot have everything, we are faced with trade-offs between different goods. Building a house means foregoing any number of alternative uses for those materials, such as furniture and wooden spoons. Extra time spent on the job leaves less time for leisure. Logging and development of a pristine forest means more wood, places to live, etc. but also means that less unspoiled land remains.

Some definitions:

Good – something that is desired.

Scarcity – limited availability of desirable things (goods).

A society faces three main tradeoffs: (a) which goods to produce, (b) with which combination of inputs (materials, labor, machinery, etc.) to produce them, and (c) who gets the goods. In a market system, these decisions are made in a mostly decentralized fashion by a large number of decision-making agents, namely individuals, firms, and government.

Interactions between firms and individuals take place in a market, a space where trading in a particular good or several closely related goods occurs. A market might be literally a place where buying and selling happens, like the New York Stock Exchange, or simply the sum of diverse trading activities, like the U.S. housing market.

A crucial mechanism in modern market economies for navigating the trade-offs mentioned above is price. Prices are a way to communicate information about the relative scarcity of different goods. How they accomplish this task will be discussed in the next post.

Edited: 8/26/07, 12/15/07

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