MECO 6303 Business Economics

1
MECO 6303 Business Economics

• Lesson One
• Introduction to Economics
• Part A
• Definitions, assumptions and implications

2
What is Economics?

• Oh Dear! is it a dismal science? Who said that?
• Is it a science?
• What is a science?
• Is it all about prediction or understanding or
  truth?
• Is it an art?
• Whats the difference?
• Is it dismal?

Exhibit 1
3
What Types Of Questions Do Economists Try To
Answer?

• What pricing strategies allow firms to increase
  profits?
• When should a firm produce a product in house,
  and when should it purchase from outside vendors?
• Can a firm pass on a tax? What is the effect of
  taxes on the behavior of firms?
• What is the impact of airline deregulation?
• What is the right amount of air pollution?
• Do women get paid less then men? Why?
• Why do families have less children than they used
  to?

Exhibit 2
4
How do they try to answer this type of question?

• What do the questions have in common?
• They are not all about business narrowly
  understood
• They are not all about social policy
• We will see they all involve the question of
  CHOICE in one way or another.
• Economics is the science (or the study) of
  choice.
• Whose choice?
• Mine, yours and ours anyones homo economicus
  the typical human.

Exhibit 3
5
What does choice mean?

• Above all choice means scarcity!
• We all have to choose among unlimited options
  constrained by limited means.
• Economics is the study of the allocation of
  scarce means to alternative uses. (Lionel
  Robbins).
• What are the options/uses/ends?
• read a book, buy a car, make love, make war,
  visit a sick person, have fun at a party, buy new
  clothes, . the sky is the limit
• my wish list is infinite.
• What are the means?
• time, money and stuff (labor, capital, land,
  knowledge, )
• my instrument list is limited

Exhibit 4
6
Is it too complicated?

• Choice is a complex thing.
• We are all different
• We exist in time, therefore we face uncertainty
• We dont even know how we do it
• That is not the point
• We dont want to predict actual choices
• We want to understand typical choices and use
  this understanding to analyze social salutations.

Exhibit 5
7
So how do we do it?

• We make certain assumptions.
• We need to simplify the aspects of reality that
  may be irrelevant we need to build a model
  of reality.
• People behave rationally
• What is rational behavior?
• Do all people behave rationally?
• Rationally means purposefully.
• Background assumptions
• Property rights are secure, well understood and
  widely respected

Exhibit 6
8
People Try to Maximize Happiness (Utility)

• This does not imply selfish behavior. Behavior is
  self interested.
• If giving to others is what makes you happy, that
  is what maximizes your utility.
• Rationality in this case implies that you wish to
  maximize your giving to others, not to just have
  the money wasted.
• To whom does this apply?
• Everyone! In all aspects of life!
• Those who buy for themselves consumers
• Those who sell to them producers, firms
• Those who work
• Those who dont

Exhibit 7
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Firms (those who decide) Try to Maximize Profits

• Private for-profit firms
• Are supposed to work for their shareholders
• Who usually are interested in stock price
  appreciation - which is connected to profits
  (earnings).
• But, many organizations are not for-profit
  firms
• Clubs, government, charities
• Even if they dont maximize profits, they still
  should be interested in efficiency.

Exhibit 8
10
Some Basic Definitions

• Goods
• Things people want
• Economic goods
• goods that are scarce.
• Must goods have a positive price?
• Are positively priced items economic goods?
• Free goods have a zero price they are not
  scarce
• Scarcity ?? Value
• Opportunity Cost
• What you give up when you engage in any activity.
  
• Measured as the value of your next best activity
  (the activity you would have engaged in if you
  didnt choose the first activity).
• Example opportunity cost of going to college.

Exhibit 9
11
Schools of Economic Thoughtwhere do I fit in?
Pre-Classical The Classical Economists Adam
Smith (1776) David Hume David Ricardo James
Mill John Stuart Mill
Karl Marx
Neoclassical The Revolution (1871) Menger, Walras
and Jevons
Modern Neoclassical Economics Alfred Marshall
(c.1890-1912) In America Paul Samuelson Kenneth
Arrow Paul Krugman Gregory Mankiw The Chicago
School Milton Friedman George Stigler Gary
Becker
The Austrian School Carl Menger (1871) Mises
(1912- 1973) Hayek (1928 1992) Modern
Austrians Kirzner, Lachmann Garrison, Lewin
Boettke, Horwitz,
End of Part A
Exhibit 10