What is economics about?

• The first goal of economics is to help society produce goods and services efficiently

• The second goal of economics is to predict how changes in government policy or market institutions will affect economic outcomes

• Economic principles are used to explain how the economic system functions and analyse ways of achieving these goals

Economics is about human behavior

• It is about how people make choices– About the use of scarce resources

• But– People make choices about a lot of things

(Marriage, having children, getting divorced)• And– Economic concepts can be used to analyse all of

these choices

The scope of economics

• Microeconomics is the branch of economics that examines individual behavior eg firms and households that are components of the larger economy

• Macroeconomics is the branch of economics that examines the behavior of economic aggregates – income, output, employment, and so on – on a national scale

Problems of micro or macro-economics?

• The Reserve Bank of New Zealand announced they will hold interest rates at their current levels.

• An Auckland family is deciding not to buy a house and continue to rent in the short-term.

• Investment commentators are concerned that their may be insufficient advisers to assist “mum and dad” investors considering purchasing shares in soon-to-be partially privatised state assets

• Criticism of government plans to partially sell state assets is escalating, despite continuing public concern about national debt

• Apple is lobbying the US government to continue its current tax arrangements.

• “Holiday-isation” of Mondays in New Zealand.

The Role of Government Policy

• Policy is important because it affects all aspects of people’s lives

• Economics is a fundamental tool for assessing the effects of policy

• Economics can explain how policy works and how it affects people’s behaviour

• Economics can help to distinguish between good and bad policy

Government has four main roles in a market economy

1. To pursue an efficient allocation of resources2. To achieve an equitable distribution of

income3. To make and enforce laws to protect property

rights and protect consumers4. To prevent excessive inflation and

unemployment

..and has four main tools to do this

1. Revenue gathering• Taxation• Fees for service

2. Spending• Subsidies to the public• Direct purchase from the private sector• Direct provision to the public

3. Regulation4. Information provision

Government provision must pass five tests

1. Is it necessary?– What would happen if there were no intervention?

2. Is it effective?– Will it actually do what was intended?– What are the unintended consequences?

3. Is it equitable?– Who bears the costs and benefits?

4. Is it efficient?– Do the benefits exceed all the costs? (productive efficiency)– Will resource use be distorted? (allocative efficiency)– Will it create incentives to technological change? (dynamic efficiency?

5. Is it the best option (including doing nothing)?