Introduction

These weekly notes are to supplement what you will be reading in your text. They may reinforce the content of your book, or provide additional information about the topics we are investigating.

About what economics is about, Alfred Marshall, the leading British economist at the end of the 1800s, desribed it as the study of humankind in the ordinary business of life. We look at how individuals (consumers and workers) firms, non-profits, and governments go about their business and make decisions. One overarching theme in economics is scarcity. If resources -- time, money, natural resources, and so on -- were infinite, we would not have to make decisions, or choose among trade-offs, since we could "have it all."

The "toolkit" of economics includes mathematical approaches, which is why we have the math review in week 1.

The practical application of what we cover in microeconomics is quite broad, and applies to all business strategy. I would argue that finance and marketing are essentially applied microeconomics.

History of economics as a discipline

People have researched and written about economic themes for hundreds of years, but the field was first written about systematically by Adam Smith, a Scottish philosophy professor. His Wealth of Nations (1776), was well-regarded in his time and became the foundational work for the field as it developed in the 1800s. Although written at the beginning of the Industrial Revolution, Smith understood how the specialization of labor and machinery (capital) led to increased productivity. To put it simply, Smith's research question in The Wealth of Nations was why some countries are wealthier than others, and the answer is productivity.

Both the Industrial Revolution and economics as a discipline developed in the 1800s. By about 1900, the US shifted to more employment in industry than farming, and had advanced to the largest economy in the world (measured by GDP), overtaking the UK. This was owing to higher productivity and having a large, single market. And ample natural resources. (The US has been and continues to be one of the economies with the highest productivity.)

By 1900, the tools of economic analysis – mathematics and graphics – were in place. Many of the approaches used in the first half of this course come from the work of Alfred Marshall, who used demand and supply diagrams in his Principles of Economics (1890.) As an aside, Marshall’s student, John Maynard Keynes, went on to become the most influential economist in the 20^th century, but Keynes's work is addressed in macroeconomics.

But also in the 1800s, the rise of the Industrial Revolution led to both enormous wealth for the owners of industry, and stark conditions for factory workers. In this environment, Karl Marx researched the ongoing struggle between the interests of owners (capitalists) and workers (the proletariat), publishing his work as Das Kapital (Capital, 1867). Marx predicted the overthrow of the capitalists, and the dictatorship of the proletariat, eventually leading to an advanced economic system called communism. Inspired in part by Marx’s work, revolutionaries such as Lenin and Stalin (Russia), Mao (China), and Fidel Castro and Che Guevara (Cuba) implemented command economic systems, with mixed results. We will have little to say about Marx in this microeconomics course.

It was not until the 20^th century that economic research led to theories about market structure. Joan Robinson work in the 1930s was key, while John Nash’s work on game theory in the 1950s led to better understanding of market structure dynamics. (We address market structure in weeks 5 and 6.)

Economic Systems

Economics studies how decisions about production and distribution get made.

Traditional economies

In pre-colonial Essex Country Massachusetts, the Agawam people were farmers, hunters, and fishers. They migrated to Plum Island (Newbuyport) in the summer to harvest clams, basically having a clambake for a few weeks, with the archaeological evidence visible in shell middens. During the same time, the Shawmut people who lived in what is now Boston operated fish weirs near the current Arlington subway station.

Questions like "Who fishes?," and "Who gets the catch?" were answered by a complex system of traditional norms and values. Perhaps the family gets half and the rest of the community gets the other half? Or perhaps the group leader distributes the catch? For the Native Americans in the Northeast, the market system played a small part in their economic lives, although trade took place across the area.

Command economies

A command economy is where the ruler or ruling class or governmental authorities makes economic decisions about production and distribution. In the 20^th century, Russia and China under Communist Party leadership were command economies. Although often wasteful, a command economy can sometimes create impressive results. For example, Stalin industrialized Russia, defeating Nazi Germany in World War Two, but at the cost of a repressive regime. Mao’s attempt at economic reform in China was much less successful, although reforms by his successor Deng Xiaoping led to what appears to be lasting success.

The market system (or price system)

The market system is sometimes called the price system, or capitalism, although that term really refers to the private ownership of the means of production. The means of production include property, plant, and equipment (PPE), and are referred to as physical capital. So Cummings Center in Beverly is and example of "capital." It has been an industrial complex for United Shoe Machinery, which produced equipment for making shoes and also defense-related equipment, and thus the owners of USM were "capitalists." USM was once one of the largest factories in the world, and the facility has now been re-purposed as an industrial park and office complex.

Sometimes people us the term "free market," which means a market system with little or no government involvement or oversight, or what might be called a laissez faire approach. The term is often misleading, since government oversight is often necessary to foster a competitive market environment. And most business people want government protection with respect to intellectual property, such as patents, trademarks, and copyrights. Plus the limited liability that comes with the corporate style of ownership. (We will explore these issue when we examine market structure.)