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A basic introduction to macroeconomics
Published on September 30, 2015 15 min
Hello. My name is Ivan Cohen and I'm an associate professor in finance and economics at Richmond University, The American International University in London. I'm an experienced academic, mainly in finance and macroeconomics. So I hope what I am about to introduce you to is of some interest.
So let's start. What is economics? Economics is probably best defined as a study of mankind in the ordinary business of life. A lot of people think economics has some mystery to it, but it's not, it's about people. And it's about what people do in their ordinary, daily lives. This quotation is from Alfred Marshall. And it illustrates that economics is on one side a study of wealth, and on the other side, as he calls it, a study of man, we would now say a study of people. This is for me what economics is really about. It looks about how people deal with wealth. By wealth, we mean assets, resources, and so on. And those resources, of course, include not just material resources, but also intangible resources, of which probably the most important resource none of us have enough of is, of course, time.
So what underpins economics? Economics is essentially based on a series of assumptions about human behavior. We start with the premise that human beings have unlimited desires. And I think, if you look deep within yourself and the people around you, this is not an unreasonable assumption. The second assumption that underpins economics is that we are faced with limited or scarce resources. That there simply isn't enough, either for what we would like to have, and even if, our desires, we could limit them in some way, there really isn't enough to go around. So what economics has to do is reconcile these unlimited desires with the limited resources we face. The only way we can reconcile this is by some method of rationing. Rationing has a number of mechanisms that can be employed. And in economics, the one that economists have been focusing on in particular for hundreds of years is, of course, the market, that we buy and sell things via the market. And price is the rationing device that helps reconcile unlimited desires with our limited resources. Now, there are some economies which are not operated through price in the market place. And we tend to call these 'command' or 'planned economies.' And the old socialist economies of Eastern Europe were ostensibly command or planned economies, even though there would have been elements of the market going on. The current Chinese economy is essentially a planned economy from the top down, but at the bottom level, the market operates to ration, goods and services from suppliers to consumers. Most economies therefore are mixed economies. There is an element of command or planning, which usually means some form of government intervention, but there is also a heavy element of the market operating through price to determine who gets what.