What is Economics?

Hello, My name is Avinash Dixit,

and I'm a retired professor of economics at Princeton University.

This is a course titled How Economists Think,

and it's basically just a very quick introduction to economics.

I'll be telling you in many places where you can

learn more in subsequent electrical says or your college studies.

But this is just the beginning.

The first mini is called Issues and Perspective,

and that basically tells you

what economics is all about.

And the main problem that economic studies

is scarcity

and how to cope with it.

The point of scarcity is that mankind's material wants for goods and services

exceed the productive capacity of the economy,

and therefore people have to make choices.

Individuals, households, groups, societies, nations

all must decide what's relatively more important

that can be produced using the resources available.

What trade offs have to be made giving up having more of this

in exchange for having more of that

and so on?

How to allocate the limited resources that are available labour materials,

machinery, land, clean water and air etcetera to alternative possible uses.

And when that has been done, or even in planning how to do that?

How to distribute the results,

goods and services among competing alternative users.

Economies over time and over space have developed different methods.

Different institutions for making these decisions

and the different methods have different advantages. Different disadvantages.

And the study of all of this constitutes economics.

I should also quickly say what economics is not.

Most importantly, scarcity does not mean poverty.

In fact, a lot of economics is about alleviation of poverty,

especially in countries that are currently poor and in others as well.

How countries can get their economies to perform better to improve

the living standards of their citizens is a central tenet,

one of the most important fields of research in economics, development,

economics, growth, economics, et cetera.

So economics is challenging in coping with scarcity.

But it's not the dismal science that it sometimes made out

I should also say right at the beginning that scarcity is relative, not absolute.

Productive resources technologies, et cetera, are inadequate

only in relation to their many desirable users.

In fact,

many of the rich countries of the world can

have very large outputs good standards of living.

They don't feel scarcity in that sense,

but still there people will be happy to have more

the assessments, choices, etcetera. In economics.

Telfair all involved comparisons.

So, for example,

it's not where the prices are high in any absolute sense.

But are they high relative to wages or income? All vice versa.

If prices are high relative to incomes, that's not so good

if prices are high, but incomes are even higher, that's good.

Should society value spending an extra dollar on a poor person

more than it should, giving it to a richer person?

That's a different kind of comparison.

That's a normative comparison comparison of prices. Wages was more, uh,

positive statement comparison,

and I said, there are all kinds of solutions that have been offered

conceptually and tried in practise.

But

in this many, I want to emphasise two of them that have been prominent.

In one

you use a top down or command method.

The government makes plans

on what to produce, who will produce it and who will get it

now. First of all, this goes against the notions of liberty,

freedom of people

that many of us share.

But even more importantly,

it's been found in historical experience not to work so well.

The information that's needed to make these plans

is hard to get.

And also

it's not just the quantity of information

but people's willingness to disclose it.

That's a big issue.

If people think that disclosing some information will

work against them in the government's plans,

they'll try to hide it.

If it will work in favour of them,

they'll exaggerate it,

and that's what causes the problem.

To illustrate this, Karl Marx, one of the proponents of this kind of solution,

gave his recipe

from each according to his ability

and to each, according to his need.

That sounds great,

but then people can pretend to have too little ability and too much need.

About 100 years before Marx.

Adam Smith, Scottish economist and philosopher

and the father of modern economics, if you like,

offered a different solution,

namely a price and market mechanism,

High price

signals high sketch City,

and it also creates private incentives

to relieve that scarcity.

The high price makes it profitable to produce more

and also makes it a good idea to consume less.

In fact, there's a wonderful quote from Smith that God's

it's not from the benevolence of the butcher, the brewer or the baker

that we expect our dinner, but from their regard to their own self interest.

So we are harnessing their self interest to solve

the economic problems of scarcity and choice.

This idea came to be known as the invisible hand

the economy should speak is guided as it were by an invisible hand

to make optimal choices in face of scarcity. Adam Smith was well aware

that

this works, but it's not perfect.

It's important for all this to work

that prices are established in competitive markets,

where producers will compete with one another to supply the goods and services,

and buyers will compete with one another

to bid to get those

now under a whole lot of assumptions.

You can prove mathematically that this will produce

an efficient solution to the problem of scarcity,

and it works reasonably well in practise.

But that's only the starting point.

The invisible hand will fail or be very imperfect in many situations.

We need to understand why, how

and what to do when the invisible hand is not working well.

What's the kind of right mix of

private choice and public policy that's needed?

And in the sequence of many lectures.

I'll briefly explain both of these possibilities

the working of the price mechanism

and the imperfection of the price mechanism.

But of course, I'll have to leave out many rich details, many nuances

and

all that

is fascinating, further study of economics that I hope you'll do in other Mass,

let lectures and in college courses.