Economics Summar

CHAPTER SUMMARIES

Chapter 1

Economy and Economics: Introduction

In this chapter, we lay the framework which forms the backbone of this course. Note the following:

* Generally speaking, economics is the study of how an economy works. A somewhat more precise definition will be discussed a little later.

* In the lay understanding, an economy tends to coincides with a particular society though it is supposed to have a somewhat specific focus: dealing only with the economic aspects of society. These aspects primarily include two activities: production and consumption (we will encounter three specific questions – what, how, and for whom – relating to these activities).

* For a nation state, the economy is obviously defined with reference to the geographical boundaries – but then we may also talk about the economy of a province or the economy of a city within that overall national economy.

* How the economy handles production and consumption requires an attendant institutional framework and some assumptions about the values upheld by the society. Thus we are required to be somewhat more specific as to how the economy is to be conceptualized. This is obviously a fairly complicated task due to the diverse values upheld by society and the fact that the number of institutions that characterize an economy are quite numerous.

* To keep things as simple as possible, we will focus on the bare essentials. Thus here we will identify the minimum set of characteristics of a market economy (though we will see a brief discussion of the command economy also), and these are:

1. Private property.

2. Freedom of choice.

3. Self-interest as the motivation postulate.

4. Prices as signals (the market mechanism).

5. Competition.

6. Role of government in the case of market failure.

It may be noted that part of this discussion occurs in chapter 2 of the text. When we combine 1 and 2 above, we get the important concept of property rights as...