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Economics: Introduction

Economics—Definitions

• Comes from Greek word oikonomos

– “One who manages a household”

Decision making

• Individuals, companies, governments

• Definition:

Study of how society allocates scarce resources

– What’s scarce? Everything

The Allocation Problem

• Economics : Study of how society allocates scarce resources

–Who gets what?

• Economic Systems:

1. Subsistence Economy

2. Traditional Economy

3. Command Economy

4. Market Economy

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Subsistence Economy

• No Trade Production = Consumption

• Hope for good weather!

Traditional Economy

• Production, jobs based on:

1. Heredity

2. Custom

3. Religion

• Examples:

– Feudalism

– Caste System

Command Economy

• Central planners decide allocations 1. Production

• Who works where

• What to produce, how much, and with what

2. Consumption

• Communism, Socialism

• Example: Cuba – Ration books determine allocation for food

(formerly for clothes and other products as well)

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Command Economy • Allocation problems:

1. Information problems Have to decide:

• Everyone’s job, everything to be produced – And how much of each

• Everyone’s goods for consumption – At every time period

– In all parts of the country

2. Incompetence of planners • China’s “Great Leap Forward”

3. Corruption • Mengistu in Ethiopia

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Market Economy

• Goods bought and sold at prices agreed upon by buyers and sellers

• Individuals allocate their incomes to whatever they want – Problem: Inequality in incomes

• Government needed: – Foster the market (property rights, enforce

contracts, rule of law, etc.)

– Not to own companies, make allocations, etc.

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Markets • Markets arise naturally

– “Capitalism” (i.e. a market economy) was never “invented”

– Example: Silk Road

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Market Economy

• Vaclav Havel (Czech playwright, first president post-communism):

“Though my heart be left of center, I have always known that the only economic system that works is a market economy, in which everything belongs to someone–which means that someone is responsible for everything.

It is a system in which complete independence and plurality of economic entities exist within a legal framework, and its workings are guided chiefly by the laws of the marketplace.

This is the only natural economy, the only kind that makes sense, the only one that can lead to prosperity, because it is the only one that reflects the nature of life itself.”

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