Economics

How Economist’s Think

Some basic questions that Economics asks –

• What should be produced by the society?

• How it should be produced?

• How it should be distributed?

The answer to these questions lies with the power wielders in a society. The different forms of systems possible are -

• Total Individual control – Individuals decide

• Night Watchman state – Govt. just provides protection to avoid theft, enforces private contracts, assures property rights, provides national defence

• Stage 3 - Public services like roads fire protection, education science

• Stage 4 - Retirement plus health care

• Stage 5 - Running industries like steel, cars, agriculture distributing consumer goods like food and housing

• Stage 6 - Handing out all jobs, all housing, food, telling firms what to do, setting all prices

• Total Govt. control – Govt. decides

Economists can’t predict future events.

Economists take trade-offs seriously, that a trade-off exists and we have to take it seriously – E.g. – Increase taxes for corporations – this increase might mean lower return on shares, lower bonuses for top executives, higher prices for consumers, etc.

Economists believe that self-interest can be an effective way of organizing a society. Many real life activities are driven by self-interest (endorsed by the great Adam Smith, invisible hand)

Incentives matter – E.g. - Tax gasoline to decrease its usage, Give money on returned cans to reduce garbage, Want to encourage something, subsidize it, and encourage people to work more

Don’t use prices when you want to redistribute income (decrease the rich poor gap), in fact give them money

Individuals and Firm DO NOT set prices, no banks, no oil companies etc. What it depends on is supply and demand forces.

Opportunity cost – What you lose out if you go for a particular alternative, the alternative you ignore has some opportunity costs associated with it. E.g. - If you are living in your own house, you could always sell it off...