Econ 4307 - 4337 Lecture Notes

These lecture notes will serve as a useful study aid only if you regularly attend the lectures and participate in class discussions. You are given these notes so that you spend more time participating in class rather than taking notes. Together with the assigned readings and class participation, these notes will help you study and understand the material. 2 Lecture 1-Introduction Econ 4307-4337 Lecture 1 Introduction to the theory of economic systems I. What is an economy? Although we use the word often and we know it when we see one, it is actually not easy to define what we mean by " the economy. " We will use the following definition: Definition An economy consists of 1. a group of individuals, the economic agents (such as the inhabitants of a country), 2. a set of rules, customs governing the activities of agents (such as the legal framework), 3. the environment in which economic activity takes place (such as the qualities of land, geography, climate). A. What isn't comparative economics? Comparative economics is not directly concerned with 1. and 3. above. Economic anthropology, economic psychology and other fields study the nature and evolution of the behavior of economic agents. Economic geography studies the relationship between a country's geography and economy. Economic history describes the evolution of the economy through time. Comparative economics relies on all these fields, but it is directly concerned with studying 2. above, which we call the economic system. If we are interested in the rules of the economy, first we must define exactly what these rules pertain to: B. The economic process We picture the economic process as consisting of two phases. In the first phase, the economic agents (producers, consumers, resource holders, government agencies) exchange " messages " (proposals, bids, plans, information about technology or preferences). In the second phase, these messages are translated into plans of action (production, exchange) for the various units and ultimately into decisions to be actually implemented. [Hurwicz] p. 81. We may summarize the economic process as Communication =⇒ Action =⇒ Outcome. Definition An economic system is a set of rules, customs, traditions which form a framework for the economic process. They govern the way communication and action can take place, how communication leads to action, and what outcome certain actions lead to.