The last topic that I wanted to cover in the
introduction to microeconomics series is the
context of economics as a social science and
as a policy tool.
When we study the social sciences, we have
two aspects to an argument.
Firstly, we look at cold, hard facts.
When we give out a statistic to support out
claims, for example, we are making what is
known as a positive statement.
If I tell you that GDP increased by 6%, I
am making a positive statement.
A normative statement is one which deals with
our own beliefs and values.
If I say that the unemployment rate should
be lowered, I would be making a normative
statement.
I’m expressing my own beliefs about what
ought to be.
To answer cause-and-effect questions in economics,
we use economic models.
A model is a description of some aspect of
the economy that includes only those variables
that are needed to assess what we are looking
at.
Essentially, we assume that nothing else in
the economy changes, except what we are looking
at.
This is known as the ceteris paribus assumption.
For example, if we say ask what happens to
the quantity demanded of a good when its price
changes, we are assuming that the prices of
other goods in the market, income, taxes,
etcetera remain the same.
We only care about what price does to the
quantity demanded of a good.
If you have no idea about the supply and demand
model, don’t worry, we’ll cover that in
a future lecture.
For now, just know that when we perform economic
analysis, we assume that all other aspects
of the world remain the exact same.
When economists advise the government on the
policies that should be implemented, there
is a lot that goes into it.
It’s a very complicated process.
Put very simply, the economist tries to figure
out what the best use of the resources in
the economy is.
He or she does so by comparing the marginal
costs, or the additional costs to producing
an additional unit of a good, to the marginal
benefits, or additional benefits gained from
consuming an additional unit of a good.
As a general rule of thumb, when the marginal
cost is equal to the marginal benefit, we
have reached a point that we can say is making
the best use of resources.
That was the lecture on an introduction to
microeconomics.
