Introduction

Many years ago, the concept of economics was not as familiar as it is in

South Africa today. Economic matters received little attention in the
media space in the past. Today, everyone is fully informed and
appreciates economics. People are well informed about economic issues
today compared to the past. But does this mean that people know what
economics is all about?

Many people think that economics is only centred on money making.

Some believe that economics is only concerned with the buying and
selling of shares on the Johannesburg Stock Exchange market. Whereas,
others think that economics is the study of balance sheets and profit
statements. These views are very narrow, and do not fully capture the
concept of economics. What then is economics? This unit gives a
summarised view of what economics is all about.

The scope of economics is very wide and is concerned with every aspect
of human existence. This unit, thus, incorporates the subject matter of
economics, looks at economics as a social science subject and discusses
economics as a normative or a positive science.

Definition of Economics

Economics is the social science studying the choices that individuals,

businesses, governments, and societies make in the midst of scarcity. All
economic questions arise because we are unable to satisfy all of our
wants – because we face scarcity (Parkin et al., 2020: 2).

Microeconomics is the study of choices that are made by individuals and

businesses and the influence of government on those choices (Parkin et
al., 2020: 2).

Macroeconomics is the study of the effects on the national and global

economy of the choices that individuals, businesses, and governments
make (Parkin et al., 2020: 2).

Two Big Economic Questions

1. How do choices determine what, how, for whom?

 What are the goods and services

that are produced in our
economy?
  How are the goods and services
produced?
 For whom are the goods and
services produced?

2. When do choices made in the pursuit of self-interest also

promote social interest?

Self-interest: A choice is in your self-interest if you think that choice is the best one available
for you (Parkin et al., 2020: 5).

Social interest: A choice is in the social interest if it leads to an outcome that is the best for
society as a whole (Parkin et al., 2020: 5).

The Economic Way of Thinking

The questions that economics tries to answer tell us about the scope of economics (Parkin et
al., 2020: 7).

Six key ideas that define the economic way of thinking:

1. A choice is a trade-off

2. Making a rational choice

3. Benefit: What you gain

4. Cost: What you must give up

5. How much? Choosing at margin

6. Choices respond to incentives

A choice is a trade-off

Think about choices as trade-offs – giving up one thing to get something else.

Making a rational choice

Economists assume that the choices people make are always rational.

A rational choice compares costs and benefits and achieves the greatest benefit versus cost
for the person making the choice.
Benefit:

 What you gain

 Benefit of something is the utility or measure of satisfaction that it brings and is
determined by preference
 Economists measure benefits as the most that a person is willing to give up in order to
get something

Cost:

 What you must give up

 Opportunity cost
 Highest valued alternative forgone
For example, consider the opportunity cost of being at university:

o Things you cannot afford to buy

o The things you cannot do with your time

Choosing at the margin (Parkin et al., 2020: 8)

Marginal benefit

The benefit that arises from an increase in an activity

Marginal cost

The opportunity cost of an increase in an activity

Compare marginal benefit & marginal cost.

 MB > MC – you do more of it

 MC > MB – you don’t do it

Choices respond to incentives

Economists take human nature as a given and view people as acting in their self-interest.
Rational individuals are driven by self-interest.

Economics as a social science and policy tool (Parkin et al., 2020: 9)

Economics is a science because it involves a systematic attempt to discover regular patterns

of behaviour. Economics is both a social science and an aid for advising on important policy
decisions.
Positive statement: About what is

Normative statement: About what ought to be

Unscrambling cause and effect

Economists are particularly interested in positive statements about cause and effect.

To answer questions, economists create and test economic models.

Economic models

Models are used to simplify and explain a real word concept or principle in a way that is
rational and applicable to how things work in the real world. It is done by including only
those features that are needed for the purpose at hand. A model is tested by comparing its
predictions with the facts.

Ceteris paribus

The logical device, which all scientists use to identify cause and effect

Common mistakes in reasoning

Economists try to avoid fallacies – errors of reasoning that lead to a wrong conclusion.

The most common ones are:

 Fallacy of composition
 Post hoc ergo propter hoc fallacy
 Blinkered approach
 Correlation and causation
 Levels & rates of change
 Cause and effect

The economist as policy advisor

Economics is an aid for advising governments and businesses and for making personal
decisions.

Economics cannot help with the normative part – the policy goal.

But for a given goal, economics provides a method of evaluating alternative solutions –
comparing marginal benefits and marginal costs and finding the solution that makes the best
use of the available resources.

Effective demand:

Having the willingness and ability to pay for a good

Why economists disagree:

 They might have different value judgements.

 They might not agree on the facts.
 They might be biased.
 They might hold different views about how the economy operates.
 They might have different time perspectives.

Summary

Economists see the real world as one of scarcity (Parkin et al., 2020: 2). That is, a world in which
every individual’s unlimited needs and wants exceed their limited resources. This scarcity leads
to trade-offs whereby individuals, firms, and society as a whole needs to sacrifice something in
order to obtain more of something else. On a micro level, individuals face a trade-off between the
quantities of goods and services they wish to consume. This trade-off implies an opportunity
cost. Opportunity cost measures the implicit cost of what needs to be given up in exchange for
an alternative. However, it is useful to measure opportunity cost in terms of forgone time or
resources too. Most economic choices and subsequent trade-offs involve marginal analysis. That
is, decisions are made at the margin.

The economic way of thinking provides a useful approach to understanding human behaviour.
Economists make a careful distinction between positive statements, which describe the world as
it is, and normative statements, which describe how the world should be. Even when economics
analyses the gains and losses from various economic events or policies, and thus draws
normative conclusions about how the world ought to be, the analysis of economics is rooted in a
positive analysis of how individuals, firms, and governments actually behave, not how they
should behave.

Societies can be organised into traditional, command, or market-oriented economies. However,

like the South African economy, most societies are a mix of these systems. Over the last few
decades, the world has become smaller through globalisation due to the growth in commercial
and financial networks that across national borders, making firms and households from different
countries increasingly interdependent.
Microeconomics and macroeconomics are two different angles of the economy. Microeconomics
only focuses on parts of the economy: the decisions made by individuals, firms, and industries.
Macroeconomics focuses on the economy in its entirety, such as economic growth,
improvements in a country’s standard of living, unemployment, inflation and international trade.

Economists analyse economic problems differently than other disciplinary experts. The main
instruments used by economists are economic theories or models. A theory is not an illustration
of the answer to a problem. Rather, a theory is a tool for determining the answer. These theories
and models are illustrated and explained by means of algebraic equations and graphs.

In this course, we will be directing our attention to microeconomics. We will analyse the
underlying principles of demand and supply and attempt to understand the way in which
individuals, also referred to as households, as well as firms make decisions in order to maximise
some predefined objective. In this course, we will notice the importance of making decisions at
the margin, whether from a household’s perspective or from that of the firm. All in all, we will
strive to answer the single most basic (and perhaps most important) question in economics: how
does society make choices when confronted with scarcity?