Core concepts/principles

This post is primarily aimed at the IB1 crowd. Right about now you should be well along your Frustration Curve – it looks something like this over the first year:

Should be fairly self-explanatory but maybe a few words about where you are heading. Your first tests should be reasonably straightforward – let’s face it, we are not rocket surgeons – and you should be able to deal with supply, demand, markets and elasticities with reasonable confidence. The initial shell-shock, and thus exponential part of the frustration curve, is in trying to put all the pieces together; how does PED link to taxes, markets, total revenue…and all the other basic concepts you have to have in your active economics vocabulary?!You read, practice, go through, read again, get guidance from classmates and teacher, read some more. You get the picture. Every new syllabus area will present you with another tier of new/additional concepts that you must build upon previous concepts.

That makes things increasingly complex but not difficult. There’s a difference. Adding ever more concepts over a year and a half increases the complexity of addressing economic scenarios – but I do claim that any given concept/model is really not rocket science. It’s keeping all the concepts together in a basket that makes sense, that’s the tricky part. In any case, if you have applied yourself, by the time exams roll around in May 2019, your level of frustration should be close to zero and your understanding at its peak.

Well, that’s what I try to convince my students of. Hopefully it calms them a bit. It’s cheaper than therapy.

All my students get to hear my litany of How to Study Economics:

1. Do not rote memorise but pay attention to core definitions and work them into your active vocabulary. By really *understanding* core terms, you will be able to apply and re-apply them.
2. Put effort into stories and practice your story-telling. In other words, make sure you can use the terms/concepts in applied economics. ‘…the opportunity cost of sick days…’ and how re-writing notes gives you ‘…an increased rate of return…’
3. Make sure you can draw links between different concepts and terms. Utility – marginal utility – downward slope of demand curve – PED – consumer surplus…this is really a ‘bundle’ of inter-connected terms. Once you have understood how they link together, you are well on your way.
4. Perhaps the most important thing is to understand CORE CONCEPTS. One of the most popular textbooks, by professor Mankiw, indeed is based on ‘Ten principles of economics’. Good call, wish I’d come up with the title. He basically brings up 10 principles upon which all economic thought is based.

Here is my own list, but with a heavy on the IB syllabus and diagrammatic content. If you know how to use these concepts and link to basic diagrams, understand the issue correlation/causality, and take pains to use good labels and metrics on the axes; well, you will do well. It bears mentioning that these are in ascending order – basic first, and the rest are either built on previous models or are extensions of them.

1. Opportunity cost and diminishing returns; the former creates the basis for economic thought because it teaches us to focus on doing the ‘best’ possible thing in order to minimise our losses. Diminishing returns is basically a law of nature that we ignore at our peril. Both concepts are part of the foundation needed to deal with Theory of the Firm.
2. Supply, demand and the price mechanism; the basis for pretty much everything we do in terms of markets. If you really understand these two curves in depth, you will do well. Depth means understanding marginal utility or benefits, marginal cost, ‘willing and able’ (both supply and demand)…and of course the forces at work towards market clearing. The continuation of this is of course aggregate supply and demand, labour markets, capital markets and trade diagrams.
3. Marginal; get a good grip on the concept of ‘marginal’! It means change over change, e.g. ‘how much does the next unit cost’ (marginal cost) or ‘how much does this increase your happiness’ (marginal utility). In a broader sense, the term marginal dictates all of our decisions; we basically are making continuous margin calls whenever we decide to to ‘a’ rather than ‘b’ – all decisions are made on the knife-edge of a margin. Do, or don’t do, that is the question, whatever the Sage of Stratford upon Avon said.
4. Trade-offs; similar to but not quite the same as opportunity costs, we must always be aware that any given path or alternative will contain trade-offs. In slowing inflation down we might well see a rise in unemployment – this is the famous Phillips curve trade-off.
5. Efficiency and optimum efficiency; doing the right things (allocative efficiency) and doing things right (productive efficiency) are measurable and important. It is in dealing with the basic economic problem that goods systems show their merit and bad systems do not. Efficiency declares the winner.
6. Incentives matter; it’s easier to pull a piece of string across the table than push it. Words from my father. He was right and I often ask my students if the think the carrot (incentive) is more effective than the stick (disincentive).  Well, look up why electric cars are now increasing geometrically in popularity – is it the tax on petrol…or lower road taxes, free parking and free registration causing the increased demand? Oh, and I frequently also ask if they think that love is a more powerful than hate. What do you think?
7. Any voluntary transaction has only winners; whether you are buying meat from your butcher (look up ‘the benevolence of the butcher’ and Adam Smith) or imported Chinese shoes, you are better off with the meat and shoes and the seller is better of with the money.
8. Trade is good! Had to include an exclamation mark there, simply too important a point. The simple fact is that the economic translation of ‘rural self-sufficient village’ is ‘poverty’. There are no rich countries that have gone it alone  – all traded their way to the top. Just contrast North and South Korea over the past 60 years.

All of the above are woven into the IB questions you will face in exams. You will have a very good return on investment by making them a core part of your active vocabulary.