Economics : an introduction

1. Economics: an introduction GrowthEconomics Roberto Pasca di Magliano 2015/2016

2. ECONOMICS: an Introduction WhatisEconomics all about? Evensomeonewhoisnotfamiliar with the discipline probablyhas an idea of the maintopicsthatEconomicsisconcerned with A first listof thesetopics,could be the following: • markets, competition, market structure • consumption , production • labour market • inflation • public spending, taxes, public debt, • stock market • multinationals, globalization, foreigninvestment

3. But a mere list of topics is not enough The list (evenifenriched) isnotenough to define the economic science. Thesetopics are not the sole interest of economicsbuttheyalsoconcern: • Otherdisciplines (sociology, law, etc.) • Social actors (enterprises, banks, tradeunions, etc.) • Institutions (eitherlocal, national or international) Itisnecessary to specifythe point of viewand the methodthat the economistchooses to use whilestudyingthesetopics.

4. What is Economics? Economicsis a social science whichstudies the choices of the economic agents and the interactionthatestablishesitselfamong the single choices. In otherwords, itstudies the modalitythroughwhichindividuals, organizations and enterprisesemployscarceresourcesto produce varioustypes of goods and services, aswellas the ways in whichthey are distributedamong the subjects (families, entreprises) to satisfytheirpresent or future needs. Economics assume that the choices of the agents are: • basedon a criteria of rationality • aimedto maximizeobjectives of individualinterest(profits, utility, etc.)

5. General Principles: Scarcity • Scarcity of resourceshappenseverytimethat, given the needs of a society at a given time, the meansavailable to satisfythemare notsufficient. • A consequence of scarcityisthatsociety, institutions, organizations and individuals are almostalwaysforced to choosewithin a limited set of possibilitiesbetweenobjectivesand scarcemeansapplicable to alternative uses. • Scarcemeansthatanyresourceacquiresa value (price)

6. General Principles: Reliable information • It is assumed that all the data relative to the prices of any good and to the available technologies are known and available a-priori both to the entreprises who produce goods, and to the consumers who buy them.

7. General Principles: Rationality • A fundamental principle on which are based most of economic analyses is the rationality of choices. • Rationalityassumes that economic agents’ behavior uses standard criteria as it is assumed that everybody is perfectly capable of assessing the costs and the benefits following each available set of alternative scenario.

8. Microeconomics and Macroeconomics Economicsisarticulatedintotwo major sub-disciplines: microeconomicsand macroeconomics • MICROECONOMICS emphasizethe individualdimension of the variouseconomicproblems (choice of the single consumer, choice of the single firm, the functioning of a given market, the determination of a price, etc.) • MACROECONOMICS studythe functioning of the economicsystemas a whole (nationalproduct, consumption, saving, investment, employment and unemployment, inflation etc.)

9. Microeconomics The maintopicsitdeals with are: 1. Consumer ChoiceTheory How a rational consumer decides to spendhisownincome in order to maximize the satisfaction (utility) that he draws from hispurchases 2. Theory of Production How a firmchooses the inputs to be used and in whichquantity, aswellashowitdecidesabout production mix 3. Market Structure Characteristics and degree of market powerheld by sellers and buyers

10. Macroeconomics The main topics it deals with are: 1. National Income How to determine a country’s GDP, national consumption, saving, investment, public expenditure, etc. 2. Employment Causes, typologies (structural, conjonctural), consequences 3. Political economy • Fiscal policies (taxes, transfers, public investments) , as it is run by the State • Monetary policies (interest rate, currency exchange rate) as it is run by the Central Bank

11. Main Schools of Thought Classical School (1600/1700, until the second-half of the 1800s) Mainauthors : Abate Ferdinando Galiani, Adam Smith, Thomas Malthus, David Ricardo, Stuart Mill, Karl Marx Economicsis a social science thatstudiesquestionssuchas capital accumulation and incomedistribution Marginalist or Neo-classical School (since 1870 circa) Mainauthors : Jevons, Walras, Marshall, von Hajek, Friedman, Say, Philips Economicsstudieshow to obtain the best result in the presence of a givenamount of resourcesavailable

12. Main Schools of Thought (2) Keynesian School (since 1930 circa) MainThinkers: Keynes, Galbraith, Stiglitz, Dornbusch, Phelps Growthis no longerdriven by offer, butrathersustained by demand, even public Development different from growth (since 1950 circa) Mainthinkers of development: Lewis, Kuznets, Bauer, Myint, Streeten, Sen, Yunus The problems of the economiesof the developing world are concernednotonly with economicaspectsbutalsowith institutionaland social ones; unlikegrowththatisconcernedonly with economics and isconcentrated in the developedcountries

13. The State and the Market • Periodically, in conjunction with major economiceventsthatraise the attention of the public opinion, the scientific and political community interrogate themselves on the role of the free market • The discussionaimsatunderstanding theextentand the modalitiesof State intervention in the market mechanism • At the extremes of thisdebate, there are on the onehand the supporter of State intervention and on the other the liberal orientedeconomists

14. Comparing the two positions Supporter of State interventionsustainsthat: • outcome by market allocationsmaynot be sociallyacceptable • the market, ifleftunregulated and free to followitsownrules, doesnotfunctionwell Market supporter arguesthat: • market is the mostefficientmechanism • market has an automaticcapacity to increasewell-being • moral qualities (i.e.: meritocracy)