Economics: The Science Of How People Deal With Scarcity

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Economics Notes

Part 1: Economics: The Science of How People Deal with Scarcity
-Economics studies how people deal with scarcity and the inescapable fact that our wants typically exceed the means available to satisfy them
Everyone deals with constraints and limitations
Scarcity can occur with money, resources, time
-18th century industrial revolution
Process of rapid innovation, lead to invention/exploitation of electricity, engines, complicated machines, computers, radio, television, biotechnology, scientific agriculture, antibiotics, etc.
Factors:
Democracy
More likely to invest if investment is protected by law instead of tyrant
Governments in democratic era have better incorporated the views of merchants/manufacturers
Limited liability corporation
Investors only lose amount of their own investment, not liable for debts corporation can’t pay
Reduced risk of investing
Patent rights to protect inventors
Inventors have the exclusive right to market and sell their inventions, instead of having their ideas stolen
Financial incentive to invent, even became a full-time job
Widespread literacy and education
Educated inventors needed to invent and educated work force needed to mass produce inventions/products

-Separating Macroeconomics and Microeconomics
Macroeconomics looks at the economy as an organic whole, concentrating on economy wide factors like interest rates, inflation and unemployment. Also looks at the study of economics growth/how governments use monetary and fiscal policy to try to moderate the harm of recessions
GDP (Gross Domestic Product)- value of all goods and service produced in the economy in a given time period, usually quarter or year
Vital because you must be able to measure how the economy is doing so you can determine whether government policies are effective or not
Inflation- measure how the economy changes over time
High inflation rates usually bring huge economic problems such as deep recession/countries defaulting on their debts
Government policy is the sole reason for high inflation rates, so government are 100% responsible
-Recessions linger only because institutional factors in the economy make it hard for prices to fall, or else recessions would quickly resolve themselves, so economists have had to develop anti-recessionary policies
2 things that help (first introduced by John Maynard Keynes in 1936)
Monetary policy uses changes in the money supply to change interest rates in order to stimulate economics activity. So if the government causes interest rates to fall, more people borrow money to buy things like houses and cars which stimulates economics activity and gets the economy moving
Fiscal policy refers to increased government spending or lower tax rates to help fight recessions. So if the government buys more goods/services, economic activity increases; or if the government cuts tax rates, people have higher post tax incomes, and increase economic activity by spending that money
Monetary/fiscal policy are constrained in their effectiveness by rational expectations, the idea that people often change their behavior in response to policy changes in ways that limit the effectiveness of those changes

Microeconomics looks at individual people/businesses and explains how they behave when faced with decision about where to spend/how to invest. Also looks at how profit maximizing firms behave individually/when they are competing with other markets
-Economists love profit maximizing firms because the must compete which satisfies 2 conditions:
Competitive firms are allocatively efficient, which means they produce goods/services that consumers want most
Competitive firms are productively efficient, meaning they produce goods/services at the lowest possible cost
Basis of invisible hand idea, that
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