1.1: Introduction
The Economy: Prices and Markets
• Decentralized process: at all points along the production process, individuals will voluntarily decide to engage in their “part” in return for compensation (wage, etc.)
• Unplanned market economies: these activities are based on mutual benefits coordinated by prices determined in the market
o Prices are determined by the actions of consumers (called demand), and the actions of producers (called supply)
o Price reflects the willingness of consumers to forgo other goods in order to gain this specific good
• The forces of supply and demand interact in order direct output
Economics: Part of a Social Science
• Economics is scientific: social science: it seeks explanation of human behavior
• Positive statements: classified as either true or false (economic science should consist of these)
o About what is, not what ought to be
o Exclude value judgment
o Can be scientifically tested
• Normative statements: opposite of positive statements/show opinion and value judgment (not part of the study of economics)
o Ex. Studying of laws and policies will always be a value judgment—not science (even the scientific aspect of economics can predict what is likely to occur and may effect how a person will then feel about the issue)
• Economics is all about taking positive statements that could be false, but which survive endless testing—making us all agree that they are true
o Economics is about making predictions regarding effects of changing the rules that govern peoples actions (ex: trade restrictions)
o We identify the effects and analyze the consequences for individuals
• Difference between social/physical sciences:
o Physical: analyzes objects that don’t have conscious thought, based on conservation laws, zero-sum game (one person gains, the other loses)
o Social: cant really test in a lab, just wait for the world to provide a situation, positive-sum game (all parties stand to gain), hard to be unbiased...