Introduction to Economics

Economics is the discipline that studies how resources are used to satisfy individual and social needs. The term comes from the Greek oikonomia which can be translated as “the laws of the house”, which demonstrates the ambition inherent in this human science which is to establish regularities in the economic behavior of the various actors. The economy is divided into two main branches: 

• microeconomics: it starts from the individual agent to study his behavior on a

• market when he consumes or produces, whether he is a supplier or a buyer. This type of approach presupposes the rationality of the actor: it starts from the principle that he seeks the best possible solution; 
• macroeconomics: it starts with collective agents to study their behavior within a geographical area. This type of approach reasons on aggregates, i.e. on quantities measuring the activity of an entire economy (for example: GDP, the level of unemployment, household consumption, etc. .).

 1/ Microeconomics is the branch of economics that studies the individual behavior of economic agents. 

A/ The microeconomic approach is part of a perspective which is mainly that of neoclassical analysis. The neoclassical current greatly developed formalization and the use of mathematics in the 1940s and 1950s. Its main representatives are John Hicks and Paul Samuelson. 
In neoclassical microeconomic analysis, the point of view adopted is that of methodological individualism : social interactions are analyzed from the rational behavior of these actors, who are considered as atoms of the economic system, i.e. say autonomous decision-making units. 
The behavior of economic agents is postulated as rational: this means that they have sufficient cognitive capacities to analyze all the available information and make an optimal choice to allocate their resources. It is a simple point of view allowing to analyze the behaviors, not to describe the reality. 
In this sense, the economic individual can be designated by the terms of homo oeconomicus , that is, man is described from his desire to maximize profit (for the entrepreneur) or satisfaction (for the consumer) under resource constraint. This point of view makes it possible to mathematically formalize an arbitration under constraint. 

B/ Neoclassical microeconomics is deployed in three main areas: 

• the demand axis: through consumer theory, which studies the behavior of households having to make consumption choices under budgetary constraints, this axis makes it possible to determine how households arbitrate between such and such a good; 
• the supply axis: through the theory of the producer which studies the behavior of entrepreneurs who want to maximize their profit under technological and budgetary constraints, it makes it possible to determine how entrepreneurs arbitrate between the factors of production that are capital and labor; 
• the axis of the market: the market is the meeting place between supply and demand. Analyzed from the model of pure and perfect competition, the market is then more or less disturbed according to the degree of competition (monopoly, oligopoly, etc.). 

a/ The consumer theory aims to determine how an individual decides to allocate his budget. The rational individual is supposed to derive the maximum possible satisfaction from his consumption. But he acts under constraint: that of his income. From there, it will be possible to formalize its behavior. 
For example, we will be able to show that his consumption decreases as he meets his needs. But since on the one hand his needs are almost unlimited and on the other the resources are scarce, he will have to take into account the opportunity costconsumption: by giving up buying a top-of-the-range car, for example, a consumer can pay for a trip to the islands. The whole challenge for the company that sells top-of-the-range cars is then to convince the consumer that it is better to give up the satisfaction of this trip to obtain the product it offers. 
This analysis of consumer behavior allows two observations to be made on demand: 

• the higher the price of a good, the lower the demand (except for luxury goods where a high price improves sales); 
• the greater the income, the greater the demand. 

b/ The theory of the producer is symmetrical to that of the consumer. Just as the consumer chooses between two different goods to maximize his pleasure, the producer seeks to maximize his profit by making the best possible use of two factors of production at his disposal: capital and labor. 
However, he will have to face a double bindboth technological (ie linked to the level of techniques) and budgetary (ie linked to the cost of factors). Once the firm has determined the quantity of production maximizing its profit, it must choose among the technically possible combinations the one which makes it possible to produce at the lowest cost. It will thus be possible to determine what is the optimal capital-labor combination. 
From this theory of the producer will result two observations on the offer: 

• the company will produce the quantity of goods that will maximize its profit: consequently, the higher the price, the more the company will increase the supply; 
• supply also depends on production costs: the lower these are, the more the company has an incentive to produce. 

c/ The market will be the meeting place between supply and demand. In a situation of pure and perfect competition, it is the law of supply and demand that applies, ie the price is determined by the balance between these two elements. In this case, the price imposes itself on the company, so it is a price taker . On the other hand, in a monopoly situation, the company decides the price, it therefore has market power: it is a price maker . 
When the market is in equilibrium, there is what is called a surplus .for the consumer and for the entrepreneur. The choice of the consumer between two goods and the choice of the entrepreneur between capital and labor are made necessary by the situation of scarcity of goods. Any renunciation has an opportunity cost. However, the equilibrium of the market is what will allow the consumer and the producer to buy at the right price, that is to say at a price such that both have an interest in the exchange, c ie derive a net benefit. When the exchange takes place at the point of equilibrium, the opportunity cost is the lowest possible for the consumer and the entrepreneur. 

2/ Macroeconomics studies collective behavior at the scale of a sector of activity, a country or a region of the globe. 

A/ The macroeconomic approach aims to study the level of economic activity from a global point of view (macro means large in Greek, micro small). It owes a lot to the work of Keynes. 
Macroeconomics focuses on aggregates , i.e. relatively homogeneous global quantities such as national income, price level, household consumption, firm investment, government expenditure and revenue or foreign trade. It makes it possible to understand the economic behavior of basic units (those of the national accounts): households, companies, administrations (cf. Institutional sectors and their operations). It is therefore a means of gaining a comprehensive understanding of all the players in a national economy or a group of nations. 
a/ For some economists, there is a continuity between macroeconomics and microeconomics: this is the bridge theory . This is particularly the case of the liberals who consider that the global interest can be deduced from the sum of the individual interests. According to Adam Smith, for example, the overall well-being of society derives from the free play of individual interests. The economic system balances itself. 
b/ However, other economists consider that there are no bridges between the two: this is the no bridge theory. This is particularly the case with the social democrats and the Keynesians. According to Keynes, for example, there is “a chasm” between individual behavior and collective behavior: the economic system does not balance itself. This therefore establishes the relevance of the intervention of the state actor in the economy. 

B/ Macroeconomics studies four main phenomena: 

• unemployment, 
• inflation,
• the growth, 
• macroeconomic policies. 

a/ The International Labor Office (ILO) considers as unemployed any person who satisfies the following three criteria (mnemonic principle: D-SE-R): 

• be available to take up employment within 15 days (D);
• being unemployed: ie not having worked – even for an hour – during the week of the survey (SE);
• be actively looking for a job since the previous month or have found one starting within the next three months (R). 

This internationally recognized definition allows comparisons to be made. However, another measure of unemployment is available in France, it is the DEFM (Applications for Employment at the End of the Month). The DEFM figures are published by Pôle emploi: the main difference with the ILO definition is that any individual who has worked less than 78 hours in the month is considered unemployed. 
Beyond these definitions, the essential question about unemployment is whether or not it is voluntary: 

• voluntary unemployment refers to all agents who have chosen not to work; 
• involuntary unemployment refers to all individuals who have not found work at the current wage (ie the wage received by those who have a job). 

This distinction is important because it determines the economic policies to be implemented to reduce particular forms of economic inactivity. 
b/ Inflation is an increase in the general level of prices. 
Strictly speaking, an inflation phenomenon is observed as soon as a price increase appears, however slight and short-lived it may be. However, for economists, the idea of ​​inflation is associated with a relatively large and cumulative price increase, the assessment of which is quite subjective. 
Inflation is measured using the Consumer Price Index (CPI). This synthetic index describes the evolution of the average price of goods and services offered to consumers throughout the national territory (excluding a few). To reflect the importance of each component in the total result of the index, they are weighted according to their representative share in household consumption. 
The inflation rate measured by this price index refers to the change in the price index from one year to the next. There are also other movements of the general price level: 

• disinflation corresponds to a reduction in the rate of price increases; 
• Deflation corresponds to a fall in the general level of prices during periods of crisis. 

c/ Economic growth refers to the increase in the volume of goods and services produced and traded over the course of a year in a country or a group of countries. 
The growth of gross annual production is a fundamental objective for a State because it makes it possible, on the one hand, to obtain an increase in the standard of living per capita when the growth of production is greater than the growth of the population, and on the other hand, to create jobs. 
This growth is measured by the Gross Domestic Product (GDP). GDP is calculated by adding up the value of all goods and services produced within the country and intended for final use (consumption, investment, exports net of imports). This means that we reason in terms of added value (we do not take into account intermediate consumption, that is to say, destroyed or transformed by the producers in the production process). 
To be able to make meaningful comparisons, the nominal GDP (before adjustment) is corrected by inflation, which makes it possible to have a more exact idea of ​​the annual production of an economy: it is then called the real GDP. To find real GDP, simply divide nominal GDP by the price level. 
GDP can be: 

• increasing: we then speak of an economic boom (cf. China currently); 
• decreasing: this is then referred to as an economic recession, it must be decreasing for at least two consecutive quarters (cf. Ireland, Spain). In the event of a severe recession, we then speak of depressions (cf. the Great Depression of 1929). 

These fluctuations in economic activity have led economists to speak of business cycles . A cycle consists of a general phase of expansion followed by a general phase of recession, then a phase of recovery which opens a new cycle. In reality, the regularity of the cycle nevertheless remains difficult to predict: even if we see recurrent recession phases in the economy, it is impossible to determine the probability of the occurrence of these phases. 
d/ Macroeconomic policies refer to the ways in which the State can intervene to influence the economic situation (changes in unemployment, production, price levels). It has two instruments for this: 

• budgetary policy: it designates the revenue (taxes and duties) and expenditure (salaries, equipment, subsidies) that it pays; 
• monetary policy: it refers to the control of the mass of money in circulation. 

The opinions of economists on the effectiveness of these policies differ. To simplify, we can distinguish two currents: the interventionists (dirigistes) and the non-interventionists (non-dirigistes). 
The interventionists refer to Keynes, they are in favor of state intervention. They believe that the markets are balancing too slowly, which should lead to compensation through the implementation of public policies to help the economy return to a level of full employment. 
The non-interventionistsare in favor of minimal state intervention, they refer to neo-classical, liberal or neo-liberal currents. They trust the market more than the state because they believe the economy can adjust quickly and effectively to disturbances as long as markets work well. 
On a macroeconomic level, it should be remembered that neo-classical macroeconomic approaches specific to monetarists condemn active macroeconomic policies, while Keynesian approaches legitimize these policies and specify their content.