Economics examines how individuals and societies make choices to allocate scarce resources. It aims to help societies produce goods efficiently and predict how policy changes will impact economic outcomes. Microeconomics analyzes individual decision-making of firms and households, while macroeconomics examines national aggregates like income, output and employment. Economics provides tools to assess the effects of government policy on behavior and distinguish good policy from bad.

1. 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

2. 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

3. 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

4. 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.

5. 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

6. Government has four main roles in a
market economy
1. To pursue an efficient allocation of resources
2. To achieve an equitable distribution of
income
3. To make and enforce laws to protect property
rights and protect consumers
4. To prevent excessive inflation and
unemployment

7. ..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. Regulation
4. Information provision

8. 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)?