Lecture 1. Fundamentals of Economics
Recommended reading : 【Microeconomics】 Microeconomics Table of Contents
1. Basic characteristics of economics
2. The subject matter of economics
3. The basic structure of the national economy
4. Economic theory
1. Basic characteristics of economics
⑴ All economic agents are assumed to be rational (self-interested).
⑵ Economics is fundamentally a “cold” discipline : because it studies the selfish economic actor (homo economicus).
⑶ The lineage (intellectual tradition) of economics
Figure 1. Lineage of Economics
① A. Smith (1776) → D. Ricardo (1817) + T. Malthus (1789)
② D. Ricardo (1817) → J. S. Mill (1847) + K. Marx (1867)
③ The invisible hand
○ J. S. Mill (1847) → L. Walras, A. Marshall (1890) (Neoclassical school)
○ L. Walras, A. Marshall (1890), T. Malthus (1789) → J. M. Keynes (1936) (Keynesianism)
○ J. M. Keynes (1936), L. Walras, A. Marshall (1890) → mainstream economics, free-market economics
④ Labor theory of value
○ K. Marx (1867) → V. Lenin (1914) (socialism) → radical economics
⑷ Classification of economics
① Perfectly competitive markets and imperfectly competitive markets: complete information theory (large scale)
② Contract theory: simultaneous incomplete information theory (small scale)
③ Signaling: sequential incomplete information theory (small scale)
④ Game theory provides the mathematics used to explain these.
2. The subject matter of economics
⑴ Flow and stock
① Flow : something whose quantity must be measured over a period of time (e.g., quantity demanded, income, consumption, investment, etc.)
② Stock : something whose quantity must be measured at a point in time (e.g., wealth/assets, money supply)
⑵ Resources
① Resources in a broad sense
② Resources in a narrow sense : factors of production
○ Labor
○ Capital
○ Land
○ Recently, entrepreneurial effort is also increasingly regarded as a factor of production.
⑶ Products
① Definition : an item that becomes an object of people’s desires and is bought and sold in the market
② If it is visible, it is called a good; if it is not visible, it is called a service.
③ Free goods and economic goods
○ Free goods : goods that can be enjoyed in any amount without conscious effort
○ Economic goods : goods that can be obtained only by paying a price
④ Consumer goods and capital goods
○ Consumer goods : goods directly consumed in daily life to satisfy human wants
○ Capital goods : goods used to produce consumer goods (machines, buildings, etc.)
⑷ Cost
① Accounting cost : the amount spent in monetary form
② Opportunity cost : includes even those items that have the character of a cost despite not being an actual monetary outlay
○ Among what is given up to make a choice, the most valuable thing
○ Example : If choosing to attend university means giving up Job A (₩1,000,000/month) and Job B (₩2,000,000/month), the opportunity cost is ₩2,000,000/month.
○ If you open a restaurant, you assess profit and loss by considering not only accounting profit but also the salary you could have earned at another job.
○ Economics uses the concept of opportunity cost because the thought “Should I do this work for this money?” can restrain entry into an industry.
③ Sunk cost : a cost that, once spent, cannot be recovered regardless of what choice is made afterward
○ In reality, people often make irrational choices because they fixate on sunk costs.
○ The opportunity cost related to a sunk cost is 0.
○ Example : the Concorde fallacy
⑸ Price
① Roles of price : conveying signals, providing incentives, and distributing income
② Price mechanism : A. Smith argued that the invisible hand determines prices.
3. The basic structure of the national economy
⑴ Three major economic agents
① Households : consume goods and supply factors of production
② Firms : supply goods and purchase factors of production
③ Government : levies taxes and carries out various projects
⑵ Three major markets
① Product market
○ Payments for goods flow from households to firms.
○ Goods and services flow from firms to households.
② Labor market
○ Labor flows from households to firms.
○ Wages flow from firms to households.
③ Capital market
○ Capital flows from households to firms.
○ Rent, interest, and profits flow from firms to households.
⑶ Major types of economies
① Market economy : an economy in which the market is the center of all economic activity
○ The prices of all goods are determined in the market.
○ Establishment of property rights, allowance of free competition, and guarantee of free trade
…
② Command economy : an economy that is mainly driven by government control
③ Mixed economy : the government intervenes to supplement market imperfections
○ Market imperfection : the market economy fails to allocate resources efficiently
4. Economic theory
⑴ Positive economics : a theory that analyzes reality as it is
⑵ Normative economics : a theory that analyzes what ought to be done (what is desirable)
Posted: 2020.09.06 12:08