speech on micro economics

Microeconomics: Essay on Microeconomics

Microeconomics studies the economic actions and behaviour of individual units and small groups of individual units.

In microeconomic theory we discuss how the various cells of economic organism, that is, the various units of the economy such as thousands of consumers, thousands of producers or firms, thousands of workers and resource suppliers in the economy do their economic activities and reach their equilibrium states.

“Microeconomics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body economic-the individuals or households as consumers, and the individuals or firms as producers—play their part in the working of the whole economic organism.”- Professor Lerner.

In other words, in microeconomics we make a microscopic study of the economy. But it should be remembered that microeconomics does not study the economy in its totality. Instead, in microeconomics we discuss equilibrium of innumerable units of the economy piecemeal and their inter-relationship to each other.

For instance, in microeconomic analysis we study the demand of an individual consumer for a good and from there go on to derive the market demand for the good (that is, demand of a group of individuals consuming a particular good). Likewise, microeconomic theory studies the behaviour of the individual firms in regard to the fixation of price and output and their reactions to the changes in the demand and supply conditions. From there we go on to establish price-output fixation by an industry (Industry means a group of firms producing the same product).

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Thus, microeconomic theory seeks to determine the mechanism by which the different economic units attain the position of equilibrium, proceeding from the individual units to a narrowly defined group such as a single industry or a single market. Since microeconomic analysis concerns itself with narrowly defined groups such as an industry or market.

However it does not study the totality of behaviour of all units in the economy for any particular economic activity. In other words, the study of economic system or economy as a whole lies outside the domain of microeconomic analysis.

Microeconomic Theory Studies Resource Allocation, Product and Factor Pricing :

Microeconomic theory takes the total quantity of resources as given and seeks to explain how they are allocated to the production of particular goods. It is the allocation of resources that determines what goods shall be produced and how they shall be produced. The allocation of resources to the production of various goods in a free-market economy depends upon the prices of the various goods and the prices of the various factors of production.

Therefore, to explain how the allocation of resources is determined, microeconomics proceeds to analyse how the relative prices of goods and factors are determined. Thus the theory of product pricing and the theory of factor pricing (or the theory of distribution) falls within the domain of microeconomics.

The theory of product pricing explains how the relative prices of cotton cloth, food grains, jute, kerosene oil and thousands of other goods are determined. The theory of distribution explains how wages (price for the use of labour), rent (payment for the use of land), interest (price for the use of capital) and profits (the reward for the entrepreneur) are determined. Thus, the theory of product pricing and the theory of factor pricing are the two important branches of microeconomic theory.

Prices of the products depend upon the forces of demand and supply. The demand for goods depends upon the consumers’ behaviour pattern, and the supply of goods depends upon the conditions of production and cost and the behaviour pattern of the firms or entrepreneurs. Thus the demand and supply sides have to be analysed in order to explain the determination of prices of goods and factors. Thus the theory of demand and the theory of production are two subdivisions of the theory of pricing.

Microeconomics as a Study of Economic Efficiency:

Besides analysing the pricing of products and factors, and the allocation of resources based upon the price mechanism, microeconomics also seeks to explain whether the allocation of resources determined is efficient. Efficiency in the allocation of resources is attained when the resources are so allocated that maximises the satisfaction of the people.

Economic efficiency involves three efficiencies; efficiency in production, efficiency in distribution of goods among the people (This is also called efficiency in consumption) and allocative economic efficiency, that is, efficiency in the direction of production. Microeconomic theory shows under what conditions these efficiencies are achieved. Microeconomics also shows what factors cause departure from these efficiencies and result in the decline of social welfare from the maximum possible level.

Economic efficiency in production involves minimisation of cost for producing a given level of output or producing a maximum possible output of various goods from the given amount of outlay or cost incurred on productive resources. When such productive efficiency is attained, then it is no longer possible by any reallocation of the productive resources or factors among the production of various goods and services to increase the output of any good without a reduction in the output of some other good.

Efficiency in consumption consists of distributing the given amount of produced goods and services among millions of the people for consumption in such a way as to maximize the total satisfaction of the society. When such efficiency is achieved it is no longer possible by any redistribution of goods among the people to make some people better off without making some other ones worse off. Allocative economic efficiency or optimum direction of production consists of producing those goods which are most desired by the people, that is, when the direction of production is such that maximizes social welfare.

In other words, allocative economic efficiency implies that pattern of production (i.e., amounts of various goods and services produced) should correspond to the desired pattern of consumption of the people. Even if efficiencies in consumption and production of goods are present, it may be that the goods which are produced and distributed for consumption may not be those preferred by the people.

There may be some goods which are more preferred by the people but which have not been produced and vice versa. To sum up, allocative efficiency (optimum direction of production) is achieved when the resources are so allocated to the production of various goods that the maximum possible satisfaction of the people is obtained.

Once this is achieved, then by producing some goods more and others less by any rearrangement of the resources will mean loss of satisfaction or efficiency. The question of economic efficiency is the subject-matter of theoretical welfare economics which is an important branch of microeconomic theory.

That microeconomic theory is intimately concerned with the question of efficiency and welfare is better understood from the following remarks of A. P. Lerner, a noted American economist. “In microeconomics we are more concerned with the avoidance or elimination of waste, or with inefficiency arising from the fact that production is not organised in the most efficient possible manner.

Such inefficiency means that it is possible, by rearranging the different ways in which products are being produced and consumed, to get more of something that is scarce without giving up any part of any other scarce item, or to replace something by something else that is preferred. Microeconomic theory spells out the conditions of efficiency (i.e., for the elimination of all kinds of inefficiency) and suggests how they might be achieved. These conditions (called Pareto-optimal conditions) can be of the greatest help in raising the standard of living of the population.”

The four basic economic questions with which economists are concerned, namely:

(1) What goods shall be produced and in what quantities,

(2) How they shall be produced,

(3) How the goods and services produced shall be distributed, and

(4) Whether the production of goods and their distribution for consumption is efficient fall within the domain of microeconomics.

The whole content of microeconomic theory is presented in the following chart:

Microeconomics and the Economy as a whole:

It is generally understood that microeconomics does not concern itself with the economy as a whole and an impression is created that microeconomics differs from macroeconomics in that whereas the latter examines the economy as a whole; the former is not concerned with it. But this is not fully correct. That microeconomics is concerned with the economy as a whole is quite evident from its discussion of the problem of allocation of resources in the society and judging the efficiency of the same.

Both microeconomics and macroeconomics analyse the economy but with two different ways or approaches. Microeconomics examines the economy, so to say, microscopically, that is, it analyses the behaviour of individual economic units of the economy, their inter-relationships and equilibrium adjustment to each other which determine the allocation of resources in the society. This is known as general equilibrium analysis.

No doubt, microeconomic theory mainly makes particular or partial equilibrium analysis, that is, the analysis of the equilibrium of the individual economic units, taking other things remaining the same. But microeconomic theory, as stated above, also concerns itself with general equilibrium analysis of the economy wherein it is explained how all the economic units, various product markets, various factor markets, money and capital markets are interrelated and interdependent to each other and how through various adjustments and readjustments to the changes in them, they reach a general equilibrium, that is, equilibrium of each of them individually as well as collectively to each other.

Professor A. P. Lerner rightly points out, “Actually microeconomics is much more intimately concerned with the economy as a whole than is macroeconomics, and can even be said to examine the whole economy microscopically. We have seen how economic efficiency is obtained when the “cells” of the economic organism, the households and firms, have adjusted their behaviour to the prices of what they buy and sell. Each cell is then said to be in equilibrium.’ But these adjustments in turn affect the quantities supplied and demanded and therefore also their prices. This means that the adjusted cells then have to readjust themselves. This in turn upsets the adjustment of others again and so on. An important part of microeconomics is examining whether and how all the different cells get adjusted at the same time. This is called general equilibrium analysis in contrast with particular equilibrium or partial equilibrium analysis. General equilibrium analysis is the microscopic examination of the inter-relationships of parts within the economy as a whole. Overall economic efficiency is only a special aspect of this analysis.”

Importance and Uses of Microeconomics:

Microeconomics occupies a vital place in economics and it has both theoretical and practical importance. It is highly helpful in the formulation of economic policies that will promote the welfare of the masses. Until recently, especially before Keynesian Revolution, the body of economics consisted mainly of microeconomics. In spite of the popularity of macroeconomics these days, microeconomics retains its importance, theoretical as well as practical.

It is microeconomics that tells us how a free-market economy with its millions of consumers and producers works to decide about the allocation of productive resources among the thousands of goods and services. As Professor Watson says, “microeconomic theory explains the composition or allocation of total production, why more of some things are produced than of others.”

He further remarks that microeconomic theory “has many uses. The greatest of these is depth in understanding of how a free private enterprise economy operates.” Further, it tells us how the goods and services produced are distributed among the various people for consumption through price or market mechanism. It shows how the relative prices of various products and factors are determined, that is, why the price of cloth is what it is and why the wages of an engineer are what they are and so on.

Moreover, as described above, microeconomic theory explains the conditions of efficiency in consumption and production and highlights the factors which are responsible for the departure from the efficiency or economic optimum. On this basis, microeconomic theory suggests suitable policies to promote economic efficiency and welfare of the people.

Thus, not only does microeconomic theory describe the actual operation of the economy, it has also a normative role in that it suggests policies to eradicate “inefficiency” from the economic system so as to maximize the satisfaction or welfare of the society. The usefulness and importance of microeconomics has been nicely stated by Professor Lerner.

He writes, “Microeconomic theory facilitates the understanding of what would be a hopelessly complicated confusion of billions of facts by constructing simplified models of behaviour which are sufficiently similar to the actual phenomena to be of help in understanding them. These models at the same time enable the economists to explain the degree to which the actual phenomena depart from certain ideal constructions that would most completely achieve individual and social objectives.

They thus help not only to describe the actual economic situation but to suggest policies that would most successfully and most efficiently bring about desired results and to predict the outcomes of such policies and other events. Economics thus has descriptive, normative and predictive aspects.”

We have noted above that microeconomics reveals how a decentralised system of a free private enterprise economy functions without any central control. It also brings to light the fact that the functioning of a complete centrally directed economy with efficiency is impossible. Modern economy is so complex that a central planning authority will find it too difficult to get all the information required for the optimum allocation of resources and to give directions to thousands of production units with various peculiar problems of their own so as to ensure efficiency in the use of resources.

To quote Professor Lerner again, “Microeconomics teaches us that completely ‘direct’ running of the economy is impossible—that a modern economy is so complex that no central planning body can obtain all the information and give out all the directives necessary for its efficient operation.

These would have to include directives for adjusting to continual changes in the availabilities of millions of productive resources and intermediate products, in the known methods of producing everything everywhere, and in the quantities and qualities of the many items to be consumed or to be added to society’s productive equipment.

The vast task can be achieved, and in the past has been achieved, only by the development of a decentralised system whereby the millions of producers and consumers are induced to act in the general interest without the intervention of anybody at the centre with instructions as to what one should make and how and what one should consume.

Microeconomic theory shows that welfare optimum of economic efficiency is achieved when there prevails perfect competition in the product and factor markets. Perfect competition is said to exist when there are so many sellers and buyers in the market so that no individual seller or buyer is in a position to influence the price of a product or factor.

Departure from perfect competition leads to a lower level of welfare, that is, involves loss of economic efficiency. It is in this context that a large part of microeconomic theory is concerned with showing the nature of departures from perfect competition and therefore from welfare optimum (economic efficiency). The power of giant firms or a combination of firms over the output and price of a product constitutes the problem of monopoly.

Microeconomics shows how monopoly leads to misallocation of resources and therefore involves loss of economic efficiency or welfare. It also makes important and useful policy recommendations to regulate monopoly so as to attain economic efficiency or maximum welfare. Like monopoly, monopsony (that is, when a single large buyer or a combination of buyers exercises control over the price) also leads to the loss of welfare and therefore needs to be controlled.

Similarly, microeconomics brings out the welfare implications of oligopoly (or oligopsony) whose main characteristic is that individual sellers (or buyers) have to take into account, while deciding upon their course of action, how their rivals react to their moves regarding changes in price, product and advertising policy.

Another class of departure from welfare optimum is the problem of externalities. Externalities are said to exist when the production or consumption of a commodity affects other people than those who produce, sell or buy it. These externalities may be in the form of either external economies or external diseconomies. External economies prevail when the production or consumption of a commodity by an individual benefits other individuals and external diseconomies prevail when the production or consumption of a commodity by him harms other individuals.

Microeconomic theory reveals that when the externalities exist free working of the price mechanism fails to achieve economic efficiency, since it does not take into account the benefits or harms made to those external to the individual producers and the consumers. The existence of these externalities requires government intervention for correcting imperfections in the price mechanism in order to achieve maximum social welfare.

Several Practical Applications of Microeconomics for Formulating Economic Policies :

Microeconomic analysis is also usefully applied to the various applied branches of economics such as Public Finance, International Economics. It is the microeconomic analysis which is used to explain the factors which determine the distribution of the incidence or burden of a commodity tax between producers or sellers on the one hand and the consumers on the other.

Further, microeconomic analysis is applied to show the damage done to the social welfare or economic efficiency by the imposition of a tax. If it is assumed that resources are optimally allocated or maximum social welfare prevails before the imposition of a tax, it can be demonstrated by microeconomic analysis that what amount of the damage will be caused to the social welfare.

The imposition of a tax on a commodity (i.e., indirect tax) will lead to the loss of social welfare by causing deviation from the optimum allocation of resources the imposition of a direct tax (for example, income tax) will not disturb the optimum resource allocation and therefore will not result in loss of social welfare. Further, microeconomic analysis is applied to show the gain from international trade and to explain the factors which determine the distribution of this gain among the participant countries.

Besides, microeconomics finds application in the various problems of international economics. Whether devaluation will succeed in correcting the disequilibrium in the balance of payments depends upon the elasticity’s of demand and supply of exports and imports. Furthermore, the determination of the foreign exchange rate of a currency, if it is free to vary, depends upon the demand for and supply of that currency. We thus see that microeconomic analysis is a very useful and important branch of modern economic theory.

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• Microeconomics: Notes on Meaning of Microeconomics – Discussed!
• Difference between Microeconomics and Macroeconomics
• Difference between Macroeconomics and Microeconomics
• Essay on Microeconomics and Macroeconomics

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1 Welcome to Economics

1.1 introduction, the complexity of the economy.

The economy is complex.

A simple sentence to start the semester, but something that is important to remember as we move through this semester. Even if you take both introductory microeconomics and macroeconomics, you will only scratch the surface of how complex the economy is. Consider this scenario below.

Pretend that you intend to construct a regular yellow pencil. What do you need? You will need some wood (cedar wood to be specific), graphite (which comprises the “lead” in the pencil), rubber for the eraser, and metal for the ferrule (the band on the top that connects the eraser to the rest of the pencil.) But, where will you find the wood? Will you need to cut down a tree? If so, where will you find the resources needed to do that like a saw, goggles, gasoline for the saw, etc. Already you are seeing the sheer number of connections before we even have a felled tree. To create something as simple as a pencil, we require the assistance of thousands, or more likely tens of thousands, of others. Now, consider an iPhone or a Galaxy tablet and the sheer increase in complexity with these goods.

The scenario above is not something I came up with. Instead, it is a scenario that countless students have been exposed to over the past half-century. In 1958, Leonard Read published I, Pencil which is the story of the life of a pencil. If you would like to read the short story, you can visit the Foundation for Economic Education  or you can also watch a short movie adapted from the book by the Competitive Enterprise Institute .

The Central Problem of Economics

Many students come into economics not really knowing what they will learn. Some students think issues like taxes and the stock market will be discussed. Others believe this is a course about money. None of those things are true. Instead, economics is the study of decision-making due to scarcity of resources.

As humans, our wants are unlimited. While we all have basic needs like food, water, and shelter, it is our desire for wants that puts a strain on the economy. Therefore, we need to decide how to best use our scarce resources. This is the crux of the study of economics.

Over the next several sections we will discuss the ways that individuals make decisions and the way those decisions impacts groups of people. These pillars of economic thought will guide us through the rest of the semester.

1.2 The Individual and the Decisions they Make

In this section, we will discuss the ways that individuals make decisions. This will be our first set of the pillars of economic thought.

Trade-offs and their Costs

Pillar 1: we all face trade-offs..

From  Wikipedia: Trade-off

A  trade-off  (or trade-off ) is a situational decision that involves diminishing or losing one quality, quantity or property of a set or design in return for gains in other aspects. In simple terms, a trade-off is where one thing increases and another must decrease. Trade-offs stem from limitations of many origins, including simple physics – for instance, only a certain volume of objects can fit into a given space, so a full container must remove some items in order to accept any more, and vessels can carry a few large items or multiple small items. Trade-offs also commonly refer to different configurations of a single item, such as the tuning of strings on a guitar to enable different notes to be played, as well as allocation of time and attention towards different tasks.

The concept of a trade-off suggests a tactical or strategic choice made with full comprehension of the advantages and disadvantages of each setup. An economic example is the decision to invest in stocks, which are risky but carry great potential return, versus bonds, which are generally safer but with lower potential returns.

Every decision we make comes with lost opportunity. If you choose to attend Penn State, that means that you cannot attend West Virginia University. If you choose to have a hamburger for lunch, you are also choosing to not have pizza or chicken tenders for lunch (unless you are really hungry, of course!) If you spend $1 on one item, you are also losing the ability to spend that dollar on another item.

The same thing goes for businesses and the government. If a company has a scare number of resources, they have to decide how to best use them. Suppose that a restaurant has a surplus of $2,000 to spend to introduce new items. They can either buy a new ice cream machine or a new salad bar. If they choose to buy the ice cream machine, that means they have also decided not to get a salad bar.

Similarly, when the government decides to spend an additional $100 million on highways, it also means that said money is no longer available for education, veteran’s affairs, or environmental protection.

Pillar 2: A cost is more than just money.

From Wikipedia: Trade Off and Wikipedia: Opportunity Cost

In  economics , a trade-off is expressed in terms of the  opportunity cost  of a particular choice, which is the loss of the most preferred alternative given up. A trade-off, then, involves a sacrifice that must be made to obtain a certain product, service or experience, rather than others that could be made or obtained using the same required resources. For example, for a person going to a basketball game, their opportunity cost is the loss of the alternative of watching a particular television program at home. If the basketball game occurs during her or his working hours, then the opportunity cost would be several hours of lost work, as she/he would need to take time off work.

The  New Oxford American Dictionary   defines it as “the loss of potential gain from other alternatives when one alternative is chosen.” Opportunity cost is a key concept in  economics , and has been described as expressing “the basic relationship between  scarcity  and  choice .” [2]  The notion of opportunity cost plays a crucial part in attempts to ensure that scarce resources are used efficiently. [3] Opportunity costs are not restricted to  monetary  or financial costs: the  real cost  of  output forgone , lost time, pleasure or any other benefit that provides  utility  should also be considered an opportunity cost.

Costs can take two forms: explicit costs and implicit costs.

Explicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the  factors of production  not already owned by a producer is the price that the producer has to pay for them. For instance, if a firm spends $100 on electrical power consumed, its explicit opportunity cost is $100. [5] This cash expenditure represents a lost opportunity to purchase something else with the $100.

Implicit costs  (also called implied, imputed or notional costs) are the opportunity costs that are not reflected in cash outflow but implied by the failure of the firm to allocate its existing (owned) resources, or  factors of production  to the best alternative use. For example: a manufacturer has previously purchased 1000 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using it for production.

Example:  Suppose you bought two tickets for a total of $100 for a sold out sporting event. You will also spend $70 on gas/parking/food/etc. By going to the sporting event, you must call off of 8 hours of work where you make $10/hour. What is/are the explicit costs? What is/are the implicit costs?

Answer: The explicit cost is the total amount of money you actually paid. This is the $100 on the tickets and the $70 on the other goods. Thus, the explicit costs total $170. The implicit cost is what you gave up or sacrificed. This is going to work. By going to the sporting event, you did not go to work. Therefore, you missed 8 hours of work where you could have earned $80. Thus, the total implicit cost is $80. Note that you did not have to pay $80; instead, it was simply money you did not make (that you could have.)

Example:  You have to decide whether to work tomorrow or go to a party with your friend. If you work, you will earn $200. What is the opportunity cost of going to work?

Answer: If you go to work, you will miss out on going to the party (since that is your next best option.) Therefore, the implicit cost here is non-monetary. The implicit cost is the enjoyment you would have received by going to the party.

The Value of a Good or Service

Pillar 3: the value of a good or service is subjective.

From Wikipedia: Value (Economics) E conomic value  is a measure of the benefit provided by a  good  or  service  to an economic  agent . It is generally measured relative to units of  currency , and the interpretation is therefore “what is the maximum amount of money a specific actor is willing and able to pay for the good or service”?

Among the competing schools of economic theory, there are differing theories of value .

Economic value is  not  the same as market price, nor is economic value the same thing as  market value . If a consumer is willing to buy a good, it implies that the customer places a higher value on the good than the market price. The difference between the value to the consumer and the market price is called “consumer surplus” [1] . It is easy to see situations where the actual value is considerably larger than the market price: purchase of  drinking water  is one example. We will discuss consumer surplus later this semester.

Personal Decision-Making

Pillar 4: we assume that people are rational.

From Wikipedia: Rationality

Rationality plays a key role and there are several strands to this. [14] Firstly, there is the concept of instrumentality—basically the idea that people and organizations are instrumentally rational—that is, adopt the best actions to achieve their goals. Secondly, there is an axiomatic concept that rationality is a matter of being logically consistent within your preferences and beliefs. Thirdly, people have focused on the accuracy of beliefs and full use of information—in this view, a person who is not rational has beliefs that don’t fully use the information they have.

We will discuss the idea of information later this semester.

Pillar 5: We assume that rational people think marginally

One term that you will hear about a lot this semester is ‘marginal.’ Whether it is marginal benefit, marginal cost, marginal revenue, or marginal utility, this term is not going away. When we make decisions, we think incrementally. For instance, when looking to buy a new car, you typically set a price range. Let us say that you have found two cars: one costs $10,000 and the other costs $11,000. You will compare what  additional  features you get for the  additional  $1,000. At the same time, you are probably not going to decide between a $5,000 used Toyota Camry and a brand-new $325,000 Bentley Mulsanne. Again, we make decisions in increments.

Some examples of marginal variables are:

Marginal Utility Wikipedia: Marginal utility :

In  economics , the utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility  of a  good  or  service  is the change in the utility from an increase in the  consumption  of that good or service.

Marginal Cost Wikipedia: Marginal cost :

In economics,  marginal cost  is the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the  cost  of producing one more unit of a good. [1] Intuitively, the marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are considered  fixed . For example, the marginal cost of producing an automobile will generally include the costs of labor and parts needed for the additional automobile and not the  fixed costs  of the factory that have already been incurred. In practice, marginal analysis is segregated into short and long-run cases, so that, over the long run, all costs (including fixed costs) become marginal.

Marginal Revenue Wikipedia: Marginal revenue :

In  microeconomics ,  marginal revenue  is the additional revenue that will be generated by increasing product sales by one unit. [1] [2] [3] [4] [5]  It can also be described as the  unit revenue  the last item sold has generated for the firm. [3] [5]

Pillar 6: Incentives matter

From Wikipedia: Incentive

An  incentive  is a contingent motivator. [1]  Traditional incentives are extrinsic motivators which reward actions to yield a desired outcome. The effectiveness of traditional incentives has changed as the needs of Western society have evolved. While the traditional incentive model is effective when there is a defined procedure and goal for a task, Western society started to require a higher volume of critical thinkers, so the traditional model became less effective. [1]  Institutions are now following a trend in implementing strategies that rely on  intrinsic motivations  rather than the extrinsic motivations that the traditional incentives foster.

Some examples of traditional incentives are  letter grades in the formal school system and  monetary bonuses  for increased productivity in the workplace. Some examples of the promotion of  intrinsic motivation  are Google allowing their engineers to spend 20% of their work time exploring their own interests, [1]  and the  competency-based education system .

Incentive structures, however, are notoriously more tricky than they might appear to people who set them up. Incentives do not only increase motivation, but they also contribute to the self-selection of individuals, as different people are attracted by different incentive schemes depending on their attitudes towards risk, uncertainty, competitiveness. [9]  Human beings are both finite and creative; that means that the people offering incentives are often unable to predict all of the ways that people will respond to them. While the promotion of intrinsic motivation is sometimes is employed to avoid this uncertainty, using short term incentives can yield similar results.

For example, decision-makers in for-profit firms often must decide what incentives they will offer to employees and managers to encourage them to act in ways beneficial to the firm. But many  corporate  policies – especially of the “extreme incentive” variant popular during the 1990s – that aimed to encourage productivity have, in some cases, led to failures as a result of unintended consequences. For example,  stock options  were intended to boost  CEO  productivity by offering a remunerative incentive (profits from rising stock prices) for CEOs to improve company performance. But CEOs could get profits from rising stock prices either (1) by making sound decisions and reaping the rewards of a long-term price increase, or (2) by fudging or fabricating accounting information to give the illusion of economic success, and reaping profits from the short-term price increase by selling before the truth came out and prices tanked. The  perverse incentives  created by the availability of option (2) have been blamed for many of the falsified earnings reports and public statements in the late 1990s and early 2000s.

Also there is the trade-off of short term gains at the expense of long term gains or even long term company survival. It is easy to plunder the assets of a previously successful company and show spectacular short term gains only to have the enterprise collapse after those responsible have gotten their incentives and left the organization or industry. Although long term incentives could be part of the incentive system, they have been abandoned in the past 20 years. An example of an organization that used long term incentive programs was  Hughes Aircraft  and was highly successful until the government forced its divestiture from the  Howard Hughes Medical Institute . Recently there has been movement on adopting the  benefit corporation or B-Corporation as a way to change the trend away from short term financial incentives to long term financial and non-financial incentives. [10]

Not all for-profit companies used short term financial incentives at levels below the president or very top executive levels. The trend to move financial incentives down the organization hierarchy started in the 1980s as a way to boost what was considered low productivity. Prior to that time the incentives were associated more with customer satisfaction and producing high-quality products. Moving financial incentives down the corporate chain had the unintended consequences of subverting internal processes to save short term costs, forcing obsolescence at the lower levels as investment was deferred or abandoned, and lowering quality. Some of these issues are explored in the British documentary The Trap . This idea of financial incentives and pushing them to the lowest level common denominator has led to a new company structure or  organizational ecology  where essentially everything is a standalone profit center with the only incentive being short term financial incentives.

1.3 How Our Decisions Affect Others

Society can produce only so much.

From Wikipedia: Rationing

Pillar 7: Rationing is necessary

Because society can only produce so much with our scarce resources, we must ration.

Rationing  is the controlled distribution of scarce resources, goods, or services, or an artificial restriction of demand. Rationing controls the size of the  ration , which is one’s allowed portion of the resources being distributed on a particular day or at a particular time. There are many forms of rationing, and in western civilization, people experience some of them in daily life without realizing it. [1]

Rationing is often done to keep the price below the equilibrium ( market-clearing ) price determined by the process of  supply and demand  in an  unfettered market . Thus, rationing can be complementary to  price controls . An example of rationing in the face of rising prices took place in the various countries where there was rationing of gasoline during the  1973 energy crisis .

A reason for setting the price lower than would clear the market may be that there is a shortage, which would drive the market price very high. High prices, especially in the case of necessities, are undesirable with regard to those who cannot afford them. Traditionalist economists argue, however, that high prices act to reduce waste of the scarce resource while also providing an incentive to produce more.

Rationing using  ration stamps  is only one kind of non-price rationing. For example,  scarce  products can be rationed using queues. This is seen, for example, at  amusement parks , where one pays a price to get in and then need not pay any price to go on the rides. Similarly, in the absence of  road pricing , access to roads is rationed in a  first-come, first-served   queueing  process, leading to  congestion .

Authorities which introduce rationing often have to deal with the rationed goods being sold illegally on the  black market .

Rationing has been instituted during wartime for civilians. For example, each person may be given “ration coupons” allowing him or her to purchase a certain amount of a product each month. Rationing often includes  food and other necessities for which there is a shortage, including materials needed for the war effort such as rubber tires,  leather   shoes ,  clothing , and  fuel .

Rationing of food and water may also become necessary during an emergency, such as a  natural disaster  or  terror attack . In the U.S., the  Federal Emergency Management Agency  (FEMA) has established guidelines for civilians on rationing food and water supplies when replacements are not available. According to FEMA standards, every person should have a minimum of 1 US quart (0.95 L) per day of water, and more for children, nursing mothers and the ill. [2]

Trade and Markets

From Wikipedia: Trade

Pillar 8: Trade Can Improve Everyone’s Circumstances

Trade  involves the transfer of  goods or services  from one person or entity to another, often in exchange for  money . A  system  or network that allows trade is called a  market .

Trade is meaningful because it is a mutual agreement. We do not voluntarily enter into a trade if we believe it will make us worse off. You will not always be made better off, as we take risks anytime we enter into a trade, but we believe that, on average, we will make ourselves better off.

Trade exists due to specialization and the  division of labor , a predominant form of  economic activity  in which individuals and groups concentrate on a small aspect of production, but use their output in trades for other products and needs. [2] Trade exists between regions because different regions may have a  comparative advantage  (perceived or real) in the production of some trade-able  commodity —including the production of natural resources scarce or limited elsewhere, or because different regions’ sizes may encourage mass production . [3]  In such circumstances, trade at  market prices  between locations can benefit both locations.

We will discuss trade-in more depth in chapter 2.

Pillar 9: There are many different ways to organize markets…some better than others

Planned economies.

From Wikipedia: Planned Economy

A  planned economy  is a type of  economic system  where  investment  and the allocation of  capital goods  take place according to economy-wide economic and production  plans .

Planned economies are usually associated with  Soviet-type central planning , which involves centralized state planning and administrative decision-making. [5]  In command economies, important allocation-decisions are made by government authorities and are imposed by law. [6]  Planned economies contrast with  unplanned economies , specifically  market economies , where autonomous firms operating in markets make decisions about production, distribution, pricing, and investment. Market economies that use indicative planning  are sometimes referred to [ by whom? ]  as “planned market economies”.

The traditional conception of  socialism  involves the integration of  socially-owned  economic enterprises via some form of planning with direct calculation substituting  factor markets . As such, the concept of a planned economy is often associated [ by whom? ]  with socialism and with  socialist planning . [7] [8] [9]  More recent approaches to socialist planning and allocation have come from some economists and computer scientists proposing planning mechanisms based on advances in computer science and information technology. [10]

Market economies

From Wikipedia: Market economy

A  market economy  is an  economic system  in which the decisions regarding  investment ,  production , and  distribution  are guided by the  price signals  created by the forces of  supply and demand . The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of  capital  and the  factors of production . [1] [2]

Market economies range from minimally regulated “ free market ” and laissez-faire systems—where state activity is restricted to providing  public goods  and services and safeguarding private ownership [3] —to  interventionist  forms where the government plays an active role in correcting  market failures  and promoting  social welfare . State-directed or  dirigist  economies are those where the state plays a directive role in guiding the overall development of the market through  industrial policies  or  indicative planning —which guides but does  not  substitute the market for  economic planning —a form sometimes referred to as a  mixed economy . [4] [5] [6]

Market economies are contrasted with  planned economies  where investment and production decisions are embodied in an integrated economy-wide economic plan by a single organizational body that owns and operates the economy’s  means of production .

Pillar 10: Market Economies are Driven by the Invisible Hand

From Wikipedia: Invisible hand and Wikipedia: Spontaneous order

The  invisible hand  is a term used by  Adam Smith to describe the unintended social benefits of an individual’s self-interested actions. The phrase was employed by Smith with respect to income distribution (1759) and production (1776). The exact phrase is used just  three times in Smith’s writings  but has come to capture his notion that individuals’ efforts to pursue their own interest may frequently benefit society more than if their actions were directly intending to benefit society.

The idea of trade and market exchange automatically channeling self-interest toward socially desirable ends is a central justification for the  laissez-faire  economic philosophy, which lies behind  neoclassical economics . [3]  In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the “invisible hand” is. In alternative models, forces which were nascent during Smith’s lifetime, such as large-scale industry,  finance , and advertising, reduce its effectiveness. [4]

Spontaneous order , also named  self-organization  in the  hard sciences , is the spontaneous  emergence  of order out of seeming chaos. It is a process in  social networks  including  economics , though the term “self-organization” is more often used for  physical changes  and  biological processes , while “spontaneous order” is typically used to describe the emergence of various kinds of social orders from a combination of self-interested individuals who are not intentionally trying to create order through  planning . The  evolution of life on Earth ,  language ,  crystal structure , the  Internet  and a  free market   economy  have all been proposed as examples of systems which evolved through spontaneous order. [1]

Spontaneous orders are to be distinguished from organizations. Spontaneous orders are distinguished by being  scale-free networks , while organizations are hierarchical networks. Further, organizations can be and often are a part of spontaneous social orders, but the reverse is not true. Further, while organizations are created and controlled by humans, spontaneous orders are created, controlled,  and controllable by no one. In economics and the social sciences, spontaneous order is defined as “the result of human actions, not of human design”. [2]

Spontaneous order is an equilibrium behavior between self-interested individuals, which is most likely to evolve and survive, obeying the natural selection process “survival of the likeliest”. [3]

Many economic classical liberals, such as Hayek, have argued that  market economies  are a spontaneous order, “a more efficient allocation of societal resources than any design could achieve.” [7]  They claim this spontaneous order (referred to as the  extended order  in Hayek’s  The Fatal Conceit ) is superior to any order a human mind can design due to the specifics of the information required. [8]  Centralized statistical data cannot convey this information because the statistics are created by abstracting away from the particulars of the situation. [9]

In a market economy, price is the aggregation of information acquired when the people who own resources are free to use their  individual knowledge . Price then allows everyone dealing in a commodity or its substitutes to make decisions based on more information than he or she could personally acquire, information not statistically conveyable to a centralized authority. Interference from a central authority which affects price will have consequences they could not foresee because they do not know all of the particulars involved.

According to Barry, this is illustrated in the concept of the invisible hand  proposed by  Adam Smith  in  The Wealth of Nations . [1]  Thus in this view by acting on information with greater detail and accuracy than possible for any centralized authority, a more efficient economy is created to the benefit of a whole society.

Lawrence Reed , president of the  Foundation for Economic Education , describes spontaneous order as follows:

Spontaneous order is what happens when you leave people alone—when entrepreneurs… see the desires of people… and then provide for them. They respond to market signals, to prices. Prices tell them what’s needed and how urgently and where. And it’s infinitely better and more productive than relying on a handful of elites in some distant bureaucracy. [10]

The Role of Government

Pillar 11: government can fix economic problems.

The government can, in the broadest of terms, improve market outcomes in the following three ways:

• The government can create and enforce rules to protect institutions.
• The government can promote efficiency in order to minimize market failures.
• The government can promote equity by creating policies to reduce gaps in economic well-being.

Property rights will be discussed in the next pillar, but let us look at efficiency and equity first.

From Wikipedia: Equity (economics)

Equity  or  economic equality  is the concept or idea of fairness in  economics , particularly in regard to  taxation  or welfare economics. More specifically, it may refer to  equal life chances  regardless of identity, to provide all citizens with a basic and equal minimum of income, goods, and services or to increase funds and commitment for redistribution. [1]

Inequality and inequities have significantly increased in recent decades, possibly driven by the worldwide economic processes of globalization, economic liberalization, and integration. [2]  This has led to states ‘lagging behind’ on headline goals such as the  Millennium Development Goals  (MDGs) and different levels of inequity between states have been argued to have played a role in the impact of the  global economic crisis of 2008–2009 . [2]

Equity is based on the idea of  moral equality . [2]  Equity looks at the distribution of capital, goods, and access to services throughout an economy and is often measured using tools such as the  Gini index . Equity may be distinguished from  economic efficiency in the overall evaluation of social welfare. Although ‘equity’ has broader uses, it may be posed as a counterpart to  economic inequality  in yielding a “good”  distribution  of wealth. It has been studied in  experimental economics  as  inequity aversion . Low levels of equity are associated with life chances based on inherited wealth, social exclusion and the resulting poor access to basic services and intergenerational poverty resulting in a negative effect on growth, financial instability, crime, and increasing political instability. [2]

The state often plays a central role in the necessary redistribution required for equity between all citizens, but applying this in practice is highly complex and involves contentious choices.

From Wikipedia: Productive efficiency

Productive efficiency  is a situation in which the  economy could not produce any more of one good without sacrificing the production of another good. In other words, productive efficiency occurs when a good or service is produced at the lowest possible cost. The concept is illustrated on a production possibility frontier  (PPF), where all points on the curve are points of productive efficiency. [1]  An equilibrium may be productively efficient without being  allocatively efficient — i.e. it may result in a distribution of goods where  social welfare  is not maximized. It is one type of  economic efficiency .

Productive efficiency requires that all firms operate using best-practice technological and managerial processes. By improving these processes, an  economy  or business can extend its  production possibility frontier  outward, so that efficient production yields more output than previously.

Productive inefficiency, with the economy operating below its production possibilities frontier, can occur because the productive inputs  physical capital  and labor are underutilized—that is, some capital or labor is left sitting idle—or because these inputs are allocated in inappropriate combinations to the different industries that use them.

Due to the nature and culture of monopolistic companies, they may not be productively efficient because of  X-inefficiency , whereby companies operating in a monopoly have less of an incentive to maximize output due to lack of competition. However, due to economies of scale, it can be possible for the profit-maximizing level of output of monopolistic companies to occur with a lower price to the consumer than perfectly competitive companies.

The Trade-off Between Efficiency and Equity

One issue that the modern economy faces is that of uneven economic growth. As the world continues to grow, some people, countries, and groups grow slower than others. When that growth is compounding over many years, the difference becomes staggering. Therefore, the following trade-off persist. If we promote policies focused on equity, we need to remove resources from the most successful and redistribute them to the least successful. But this is removing resources from those that are able to do the most with them. On the other hand, policies that are only concerned with efficiency allow for increasing inequality which also poses its own threat to the economy.

As an analogy, we can think of economics as the size of a pie and equity as the distribution of the pie.

Pillar 12: Property rights have the ability to increase economic activity

From Wikipedia: Property rights (economics)

Property rights  are theoretical socially-enforced constructs in  economics  for determining how a resource or economic good is used and  owned . [1]  Resources can be owned by (and hence be the  property  of) individuals, associations or governments. [2]  Property rights can be viewed as an attribute of an economic good. This attribute has four broad components [3]  and is often referred to as a  bundle of rights : [4]

• the right to use the good
• the right to earn income from the good
• the right to transfer the good to others
• the right to enforce property rights

In economics, the property is usually considered to be ownership ( rights to the proceeds generated by the property ) and control over a resource or good. Many economists effectively argue that property rights need to be fixed and need to portray the relationships among other parties in order to be more effective. [5]

1.4 Pitfalls to Avoid in Economic Thinking

Good intentions do not guarantee desirable outcomes.

From Wikipedia: Unintended consequences

In the  social sciences ,  unintended consequences  (sometimes  unanticipated consequences  or  unforeseen consequences ) are outcomes that are not the ones foreseen and intended by a purposeful action. The term was popularised in the twentieth century by American  sociologist   Robert K. Merton . [1]

Unintended consequences can be grouped into three types:

• Unexpected benefit : A positive unexpected benefit (also referred to as  luck ,  serendipity  or a  windfall ).
• Unexpected drawback : An unexpected detriment occurring in addition to the desired effect of the policy (e.g., while irrigation schemes provide people with water for agriculture, they can increase  waterborne diseases  that have devastating health effects, such as  schistosomiasis ).
• Perverse result : A perverse effect contrary to what was originally intended (when an intended solution makes a problem worse). This is sometimes referred to as ‘backfire’.

Examples of Unexpected Drawbacks

The implementation of a profanity filter by  AOL  in 1996 had the unintended consequence of blocking residents of  Scunthorpe ,  North Lincolnshire ,  England  from creating accounts due to a  false positive . [24]  The accidental  censorship  of innocent language, known as the  Scunthorpe problem , has been repeated and widely documented. [25] [26] [27]

The objective of microfinance initiatives is to foster micro-entrepreneurs but an unintended consequence can be informal intermediation: That is, some entrepreneurial borrowers become informal intermediaries between microfinance initiatives and poorer micro-entrepreneurs. Those who more easily qualify for microfinance split loans into smaller credit to poorer borrowers. Informal intermediation ranges from casual intermediaries at the good or benign end of the spectrum to ‘loan sharks’ at the professional and sometimes criminal end of the spectrum. [28] [ clarification needed ]

In 1990, the Australian state of  Victoria  made  safety helmets  mandatory for all bicycle riders. While there was a reduction in the number of head injuries, there was also an unintended reduction in the number of juvenile cyclists—fewer cyclists obviously leads to fewer injuries, assuming  all else being equal . The risk of death and serious injury per cyclist seems to have increased, possibly due to  risk compensation . [29]  Research by Vulcan,  et al.  found that the reduction in juvenile cyclists was because the youths considered wearing a bicycle helmet unfashionable. [30]  A health-benefit model developed at  Macquarie University  in Sydney suggests that, while helmet use reduces “the risk of head or brain injury by approximately two-thirds or more”, the decrease in exercise caused by reduced cycling as a result of helmet laws is counterproductive in terms of net health. [31]

Prohibition in the 1920s United States , originally enacted to suppress the alcohol trade, drove many small-time alcohol suppliers out of business and consolidated the hold of large-scale  organized crime over the illegal alcohol industry. Since alcohol was still popular, criminal organizations producing alcohol were well-funded and hence also increased their other activities. Similarly, the  War on Drugs , intended to suppress the  illegal drug trade , instead of increased the power and profitability of drug cartels who became the primary source of the products. [32] [33] [34] [35]

In  CIA   jargon , “ blowback ” describes the unintended, undesirable consequences of covert operations, such as the funding of the  Afghan Mujahideen  and the destabilization of Afghanistan contributing to the rise of the  Taliban  and  Al-Qaeda . [36] [37] [38]

The introduction of  exotic  animals and plants for food, for decorative purposes, or to control unwanted species often leads to more harm than good done by the introduced species.

• The introduction of  rabbits in Australia  and  New Zealand for food was followed by explosive growth in the rabbit population; rabbits have become a major  feral pest  in these countries. [39] [40]
• Cane toads , introduced into Australia to control canefield pests, were unsuccessful and have become a major pest in their own right.
• Kudzu , introduced to the US as an ornamental plant in 1876 [41]  and later used to prevent erosion in earthworks, has become a major problem in the Southeastern United States. Kudzu has displaced native plants and has effectively taken over significant portions of land. [42] [43]

The protection of the steel industry in the United States reduced the

production of steel in the United States, increased costs to users, and increased unemployment in associated industries. [44] [45]

Examples of Perverse Results

In 2003,  Barbra Streisand  unsuccessfully sued Kenneth Adelman and Pictopia.com for posting a photograph of her home online. [46]  Before the lawsuit had been filed, only 6 people had downloaded the file, two of them Streisand’s attorneys. [47]  The lawsuit drew attention to the image, resulting in 420,000 people visiting the site. [48] The  Streisand effect  was named after this incident, describing when an attempt to censor or remove a certain piece of information instead draws attention to the material being suppressed, resulting in the material instead becoming widely known, reported on, and distributed. [49]

Passenger-side  airbags  in motorcars were intended as a safety feature, but led to an increase in child fatalities in the mid-1990s as small children were being hit by deploying airbags during collisions. The supposed solution to this problem, moving the child seat to the back of the vehicle, led to an increase in the number of children forgotten in unattended vehicles, some of whom died under extreme temperature conditions. [50]

Risk compensation, or the  Peltzman effect , occurs after implementation of safety measures intended to reduce injury or death (e.g. bike helmets, seatbelts, etc.). People may feel safer than they really are and take additional risks which they would not have taken without the safety measures in place. This may result in no change, or even an increase, in morbidity or mortality, rather than a decrease as intended.

The British government, concerned about the number of venomous cobra snakes in Delhi,  offered a bounty for every dead cobra . This was a successful strategy as large numbers of snakes were killed for the reward. Eventually, enterprising people began breeding cobras for the income. When the government became aware of this, they scrapped the reward program, causing the cobra breeders to set the now-worthless snakes free. As a result, the wild cobra population further increased. The apparent solution for the problem made the situation even worse, becoming known as the  Cobra effect .

Theobald Mathew ‘s temperance campaign in 19th-century  Ireland  resulted in thousands of people vowing never to drink  alcohol  again. This led to the consumption of  diethyl ether , a much more dangerous intoxicant — due to its high flammability — by those seeking to become intoxicated without breaking the letter of their pledge. [51] [52]

It was thought that adding south-facing  conservatories  to British houses would reduce energy consumption by providing extra insulation and warmth from the sun. However, people tended to use the conservatories as living areas, installing heating and ultimately increasing overall energy consumption. [53]

A reward for  lost nets  found along the Normandy coast was offered by the French government between 1980 and 1981. This resulted in people vandalizing nets to collect the reward. [54]

Beginning in the 1940s and continuing into the 1960s, the Canadian federal government gave the Catholic Church in Quebec $2.25 per day per psychiatric patient for their cost of care, but only $0.75 a day per orphan. The perverse result is that the orphan children were diagnosed as mentally ill so the church could receive a larger amount of money. This psychiatric misdiagnosis affected up to 20,000 people, and the children are known as the Duplessis Orphans . [55] [56] [57]

There have been attempts to curb the consumption of sugary beverages by imposing a tax on them. However, a study found that reduced consumption was only temporary. Also, there was an increase in the consumption of beer among households. [58]

The  New Jersey Childproof Handgun Law , which was intended to protect children from accidental discharge of firearms by forcing all future firearms sold in  New Jersey  to contain  “smart” safety features , has delayed, if not stopped entirely, the introduction of such firearms to New Jersey markets. The wording of the law caused significant public backlash, [59]  fuelled by  gun rights lobbyists , [60] [61]  and several shop owners offering such guns received death threats and stopped stocking them [62] [63]  In 2014, 12 years after the law was passed, it was suggested the law be repealed if gun rights lobbyists agree not to resist the introduction of “smart” firearms. [64]

Drug prohibition  can lead  drug traffickers  to  prefer  stronger, more dangerous substances, that can be more easily smuggled and distributed than other, less concentrated substances. [65]

Televised drug prevention advertisements may lead to increased drug use. [66]

Abstinence-only sex education has been shown to increase teenage pregnancy rates, rather than reduce them, when compared to either comprehensive sex education or no sex education at all. [67]

Increasing usage of  search engines , also including recent  image search features, has contributed to the ease of which media is consumed. Some  abnormalities  in usage may have shifted preferences for pornographic film actors, as the producers began using  common search queries or tags  to label the actors in new roles. [68]

The passage of the  Stop Enabling Sex Traffickers Act  has led to a reported increase in risky behaviors by sex workers as a result of quashing their ability to seek and screen clients online, forcing them back onto the streets or into the  dark web . The ads posted were previously an avenue for advocates to reach out to those wanting to escape the trade. [69]

Association is not Causation

From Wikipedia: Correlation does not imply causation

In  statistics , many  statistical tests  calculate correlations between  variables  and when two variables are found to be  correlated , it is tempting to assume that this shows that one variable  causes  the other. [1] [2]  That “correlation proves causation” is considered a  questionable cause   logical fallacy  when two events occurring together are taken to have established a cause-and-effect relationship. This fallacy is also known as  cum hoc ergo propter hoc , Latin for “with this, therefore because of this”, and “false cause”. A similar fallacy, that an event that followed another was  necessarily a consequence  of the first event, is the  post hoc ergo propter hoc  ( Latin  for “after this, therefore because of this.”) fallacy.

For example, in a widely studied case, numerous  epidemiological studies  showed that women taking combined  hormone replacement therapy  (HRT) also had a lower-than-average incidence of  coronary heart disease  (CHD), leading doctors to propose that HRT was protective against CHD. But  randomized controlled trials  showed that HRT caused a small but  statistically significant   increase  in risk of CHD. Re-analysis of the data from the epidemiological studies showed that women undertaking HRT were more likely to be from higher  socio-economic groups  ( ABC1 ), with better-than-average diet and exercise regimens. The use of HRT and decreased incidence of coronary heart disease were coincident effects of a common cause (i.e. the benefits associated with a higher socioeconomic status), rather than a direct cause and effect, as had been supposed. [3]

As with any logical fallacy, identifying that the reasoning behind an argument is flawed does not imply that the resulting conclusion is false. In the instance above, if the trials had found that hormone replacement therapy does in fact have a negative incidence on the likelihood of coronary heart disease the assumption of causality would have been correct, although the logic behind the assumption would still have been flawed. Indeed, a few go further, using correlation as a basis for testing a hypothesis to try to establish a true causal relationship; examples are the  Granger causality  test,  convergent cross-mapping , and Liang-Kleeman information flow [4] . [ clarification needed ]

Fallacy of Composition

From Wikipedia: Fallacy of composition

The  fallacy of composition  arises when one infers that something is true of the  whole  from the fact that it is true of some  part  of the whole (or even of  every   proper part ). For example: “This tire is made of rubber, therefore the vehicle to which it is a part is also made of rubber.” This is fallacious because vehicles are made with a variety of parts, many of which may not be made of rubber.

This  fallacy  is often confused with the fallacy of  hasty generalization , in which an unwarranted inference is made from a statement about a sample to a statement about the population from which it is drawn.

The fallacy of composition is the  converse  of the  fallacy of division ; it may be contrasted with the case of  emergence , where the whole possesses properties  not  present in the parts.

Slippery Slope

From Wikipedia: Slippery slope

A  slippery slope argument  ( SSA ), in  logic ,  critical thinking , political  rhetoric , and  caselaw , is a  consequentialist  logical device [1]  in which a party asserts that a relatively small first step leads to a  chain of related events  culminating in some significant (usually negative) effect. [2]  The core of the slippery slope argument is that a specific decision under debate is likely to result in  unintended consequences . The strength of such an argument depends on the  warrant , i.e. whether or not one can demonstrate a process that leads to the significant effect. This type of argument is sometimes used as a form of  fear mongering , in which the probable consequences of a given action are exaggerated in an attempt to scare the audience. The fallacious sense of “slippery slope” is often used synonymously with  continuum fallacy , in that it ignores the possibility of middle ground and assumes a discrete transition from category A to category B. In a non-fallacious sense, including use as a legal principle, a middle-ground possibility is acknowledged, and reasoning is provided for the likelihood of the predicted outcome.

There is no such thing as a free lunch

From Wikipedia: There ain’t no such thing as a free lunch

“ There ain’t no such thing as a free lunch ” (alternatively, “ There is no such thing as a free lunch ” or other variants) is a popular adage communicating the idea that it is impossible to get something for nothing. The  acronyms   TANSTAAFL ,  TINSTAAFL , and  TNSTAAFL  are also used. The phrase was in use by the 1930s, but its first appearance is unknown. [1]  The “free lunch” in the saying refers to the nineteenth-century practice in American bars of offering a “ free lunch ” in order to entice drinking customers.

The phrase and the acronym are central to  Robert Heinlein’s  1966  science-fiction  novel  The Moon Is a Harsh Mistress , which helped popularize it. [2] [3]  The  free-market economist  Milton Friedman  also increased its exposure and use [1]  by paraphrasing it as the title of a 1975 book, [4]  and it is used in  economics  literature to describe  opportunity cost . [5]  Campbell McConnell writes that the idea is “at the core of economics”. [6]

In economics, TANSTAAFL demonstrates  opportunity cost .  Greg Mankiw  described the concept as follows: “To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another.” [17]  The idea that there is no free lunch at the societal level applies only when all resources are being used completely and appropriately – i.e., when  economic efficiency  prevails. If not, a ‘free lunch’ can be had through a more efficient utilization of resources. Or, as  Fred Brooks  put it, “You can only get something for nothing if you have previously gotten nothing for something.” If one individual or group gets something at no cost, somebody else ends up paying for it. If there appears to be no direct cost to any single individual, there is a  social cost . Similarly, someone can benefit for “free” from an  externality  or from a  public good , but someone has to pay the cost of producing these benefits. (See  Free rider problem  and  Tragedy of the commons ).

1.5 Introductory Wrap-up

Economics as a social science.

From Wikipedia: Scientific method

The Scientific Method

The  scientific method  is an  empirical  method of knowledge acquisition which has characterized the development of  science since at least the 17th century. It involves careful observation, which includes rigorous skepticism  about what is observed, given that  cognitive assumptions  about how the world works influence how one interprets a  percept . It involves formulating  hypotheses , via  induction , based on such observations;  experimental  and measurement-based testing of  deductions  drawn from the hypotheses; and refinement (or elimination) of the hypotheses based on the experimental findings. These are  principles  of the scientific method, as opposed to a definitive series of steps applicable to all scientific enterprises. [1] [2] [3]

How Economists (Try to) Use the Scientific Method

From: Openstax: Principles of Microeconomics

John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking. Keynes famously wrote in the introduction to a fellow economist’s book: “[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.” In other words, economics teaches you how to think, not what to think.

Economists see the world through a different lens than anthropologists, biologists, classicists, or practitioners of any other discipline. They analyze issues and problems using economic theories that are based on particular assumptions about human behavior. These assumptions tend to be different than the assumptions an anthropologist or psychologist might use. A theory is a simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying.

Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. We use models to test theories, but for this course we will use the terms interchangeably.

For example, an architect who is planning a major office building will often build a physical model that sits on a tabletop to show how the entire city block will look after the new building is constructed. Companies often build models of their new products, which are more rough and unfinished than the final product, but can still demonstrate how the new product will work.

Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem. Economists express theories as diagrams, graphs, or even as mathematical equations. (Do not worry. In this course, we will mostly use graphs.) Economists do not figure out the answer to the problem first and then draw the graph to illustrate. Rather, they use the graph of the theory to help them figure out the answer. Although at the introductory level, you can sometimes figure out the right answer without applying a model, if you keep studying economics, before too long you will run into issues and problems that you will need to graph to solve. We explain both micro and macroeconomics in terms of theories and models. The most well-known theories are probably those of supply and demand, but you will learn a number of others.

Realism versus Understanding

As with many concepts, what you are taught in this class is incomplete. That does not mean it is incorrect; rather, it simply means that we will be excluding pieces of the story. This is done because economists face a trade-off between realism and understanding. What this means is that the more realistic a model is, the more complex it is. On the other hand, if we try to make a model easier to understand, we accomplish this by simplifying certain components therefore making it less realistic (but again, not incorrect.)

For example, say we want to investigate the role of a price increase in the quantity of gasoline purchased. For our purposes, we are interested in the fact that the law of demand would say that an increase in the price of gas will reduce the consumption of gasoline. But in reality, there are other factors at play. For instance, how will an increase in the price of gas impact the availability of alternative fuels (and how will their availability impact the price and consumption of gasoline)? In reality, a change in the price of one good will have impacts on many, many other goods and those impacts have the ability to influence the original good. But, we need not worry about it. Instead, our goal is to study the main relationships, so we simply ignore the other components. If you progress further through the economics courses, you will start to move from understanding to realism.

Ceteris Paribus

From Wikipedia: Ceteris paribus

Ceteris paribus  or  caeteris paribus  is a  Latin  phrase meaning “other things equal”. English translations of the phrase include “ all other things being equal ” or “ other things held constant ” or “ all else unchanged “. A prediction or a statement about a  causal ,  empirical , or  logical  relation between two states of affairs is  ceteris paribus if it is acknowledged that the prediction, although usually accurate in expected conditions, can fail or the relation can be abolished by intervening factors. [1]

A  ceteris paribus  assumption  is often key to scientific inquiry, as scientists seek to screen out factors that perturb a relation of interest. Thus,  epidemiologists  for example may seek to control  independent variables  as factors that may influence  dependent variables —the outcomes or effects of interest. Likewise, in  scientific modeling , simplifying assumptions permit illustration or elucidation of concepts thought relevant within the sphere of inquiry.

There is ongoing debate in the philosophy of science concerning  ceteris paribus  statements. On the  logical empiricist  view,  fundamental physics  tends to state universal laws, whereas other sciences, such as biology, psychology, and economics, tend to state laws that hold true in normal conditions but have exceptions,  ceteris paribus laws  (cp laws). [2]  The focus on universal laws is a criterion distinguishing fundamental physics as  fundamental science , whereas cp laws are predominant in most other sciences as  special sciences , whose laws hold in special cases. [2]  This distinction assumes a  logical empiricist view of science. It does not readily apply in a mechanistic understanding of scientific discovery. There is reasonable disagreement as to whether mechanisms or laws are the appropriate models, though mechanisms are the favored method. [3]

One of the disciplines in which  ceteris paribus  clauses are most widely used is  economics , in which they are employed to simplify the formulation and description of economic outcomes. When using  ceteris paribus  in economics, one assumes that all other variables except those under immediate consideration are held constant. For example, it can be predicted that if the price of  beef   increases — ceteris paribus —the quantity of beef demanded by buyers will  decrease . In this example, the clause is used to operationally describe everything surrounding the relationship between both the  price  and the  quantity demanded  of an  ordinary good .

This operational description intentionally ignores both known and unknown factors that may also influence the relationship between price and quantity demanded, and thus to assume  ceteris paribus  is to assume away any interference with the given example. Such factors that would be intentionally ignored include: a change in the price of substitute goods, (e.g., the price of pork or lamb); a change in the level of  risk aversion  among buyers (e.g., due to an increase in the fear of  mad cow disease ); and a change in the level of overall demand for a good regardless of its current price (e.g., a societal shift toward  vegetarianism ).

The clause is often loosely translated as “holding all else constant.” It does not imply that no other things will in fact change; rather, it isolates the effect of one particular change.

Making Economic Statements

Positive economic statements.

From Wikipedia: Positive economics

Positive economics  (as opposed to  normative economics ) is the branch of  economics  that concerns the description and explanation of economic phenomena. [1]  It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of  economics theories . [2]  An earlier term was value-free ( German :  wertfrei ) economics.

Positive economics as  science , concerns analysis of economic  behavior . [3]  A standard theoretical statement of positive economics as  operationally meaningful theorems is in  Paul Samuelson ‘s  Foundations of Economic Analysis  (1947). Positive economics as such avoids economic  value judgments. For example, a positive economic  theory  might describe how  money supply  growth affects  inflation , but it does not provide any instruction on what policy   ought to  be followed.

Still, positive economics is commonly deemed necessary for the ranking of economic policies or outcomes as to acceptability, [1]  which is  normative economics . Positive economics is sometimes defined as the economics of “what is”, whereas normative economics discusses “what ought to be”. The distinction was exposited by  John Neville Keynes  (1891) [4]  and elaborated by  Milton Friedman  in an influential 1953  essay . [5]

Positive economics concerns  what is . To illustrate, an example of a positive economic statement is as follows: “The unemployment rate in France is higher than that in the United States.”

Normative Economic Statements

From Wikipedia: Normative economics

Normative economics  (as opposed to  positive economics ) is a part of  economics  that expresses  value  or  normative  judgments about economic  fairness  or what the outcome of the economy or goals of  public policy   ought to be . [1]

Economists commonly prefer to distinguish normative economics (“what ought to be” in economic matters) from  positive economics  (“what is”). Many normative (value) judgments, however, are held conditionally, to be given up if facts or knowledge of facts changes, so that a change of values may be purely scientific. [2]  On the other hand, welfare economist  Amartya Sen  distinguishes  basic (normative) judgments , which do not depend on such knowledge, from  nonbasic  judgments, which do. He finds it interesting to note that “no judgments are demonstrably basic” while some value judgments may be shown to be nonbasic. This leaves open the possibility of fruitful scientific discussion of value judgments. [3]

Positive and normative economics are often synthesized in the style of  practical idealism . In this discipline, sometimes called the “art of economics,” positive economics is utilized as a practical tool for achieving normative objectives.

An example of a normative economic statement is as follows:

This is a normative statement because it reflects value judgments. This specific statement makes the judgment that farmers deserve a higher living standard and that family farms ought to be saved. [1]

Subfields of normative economics include social choice theory, cooperative game theory, and mechanism design.

Some earlier technical problems posed in  welfare economics  and the  theory of justice  have been sufficiently addressed as to leave room for consideration of proposals in applied fields such as  resource allocation ,  public policy , social indicators, and  inequality and poverty measurement . [4]

• The government should provide healthcare to all of its citizens.
• If the government provides healthcare, total healthcare expenditures will increase.
• Higher interest rates will increase home purchases.
• Penn State Behrend should ban tobacco on its entire campus.
• Pennsylvania should raise its minimum wage to $15 per hour.
• A car scrapping rebate will reduce the price of used cars.
• Normative. This is an opinion. There is nothing to test.
• Positive. If the government begins to provide healthcare we could compare expenditures before and after the change in healthcare provision to determine whether the statement is true or false.
• Positive. This statement is false, but it is still testable. When interest rates increase, it makes getting a loan more expensive. This is part of the cause of the housing market failure leading up to 2008. But none of that matters to this question. We can see that when interest rates go up, housing sales fall. So we can state that the above statement is false. Whenever we can state whether something is true or false, it is positive (regardless of the answer.)
• Normative. This is also an opinion. If the statement were “raising minimum wage to $15/hour would increase employment,” then the statement would be positive. But, in the given statement, there is nothing to test.
• Positive. This was actually done in 2008 in a program called Cash for Clunkers. This ended up increasing the price of used cars because many of them (the fuel inefficient ones) were taken off the road. A lower supply means a higher price. But, like #3, this does not matter. We can state whether the statement would be true or false, thereby making it a positive statement.

Microeconomics versus Macroeconomics

Microeconomics.

From Wikipedia: Microeconomics

Microeconomics  (from Greek prefix  mikro-  meaning “small” +  economics ) is a branch of  economics  that studies the behaviour of individuals and  firms  in making decisions regarding the allocation of  scarce resources  and the interactions among these individuals and firms. [1] [2] [3]

One goal of microeconomics is to analyze the  market mechanisms  that establish  relative prices  among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes  market failure , where markets fail to produce  efficient  results.

Microeconomics stands in contrast to  macroeconomics , which involves “the sum total of economic activity, dealing with the issues of  growth ,  inflation , and  unemployment  and with national policies relating to these issues”. [2]  Microeconomics also deals with the effects of economic policies (such as changing  taxation  levels) on the aforementioned aspects of the economy. [4]  Particularly in the wake of the  Lucas critique , much of modern macroeconomic theory has been built upon  microfoundations —i.e. based upon basic assumptions about micro-level behavior.

Macroeconomics

From: Wikipedia: Macroeconomics

Macroeconomics  (from the Greek prefix  makro-  meaning “large” +  economics ) is a branch of  economics  dealing with the performance, structure, behavior, and decision-making of an  economy  as a whole. This includes regional, national, and global economies. [1] [2]

Macroeconomists  study aggregated indicators such as  GDP ,  unemployment rates ,  national income ,  price indices , and the interrelations among the different sectors of the economy to better understand how the whole economy functions. They also develop models that explain the relationship between such factors as  national income ,  output ,  consumption ,  unemployment ,  inflation ,  savings ,  investment ,  international trade , and  international finance .

While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the  business cycle ), and the attempt to understand the determinants of long-run  economic growth  (increases in national income).  Macroeconomic models  and their forecasts are used by governments to assist in the development and evaluation of  economic policy .

Macroeconomics and  microeconomics , a pair of terms coined by  Ragnar Frisch , are the two most general fields in economics. [3]  In contrast to macroeconomics, microeconomics is the branch of economics that studies the behavior of individuals and firms in making decisions and the interactions among these individuals and firms in narrowly-defined markets.

Introduction to Microeconomics Copyright © 2019 by J. Zachary Klingensmith is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License , except where otherwise noted.

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Microeconomics: Meaning, Scope, Importance and Limitations

Microeconomics / Micro Economic Analysis

The word ‘ MICRO ‘ is derived from the Greek word ‘ MIKROS ‘, which means “Small”. The meaning of micro is millionth part of a thing. Generally, it means the smallest unit of anything

Microeconomics studies the economic actions and behaviour of individual units and small groups of individual units. It is the study of small components of the economy. It establishes the relationship between facts and results, which are called economic laws. Microeconomics is also called “The Price Theory”, because it deals with the price of goods and services, rewards of the factors of production and interaction of the markets.

Microeconomics is the study of households, firms and industry. It explains the working of market for individual commodities and behaviour of individual buyer and seller in such market. There are two types of markets that are product market and factor market These markets are dependent on each other. The factors of production are earning in factor market but they are spending in product market. The change in one market is reflected in other market. There are differences in the working of these markets.

In product market. demand comes from households and supply comes from firms. A group of similar firms is called an industry. In product pricing the forces behind demand are examined. A household can get maximum satisfaction through allocation of its expenses. A firm can get maximum profit when marginal revenue is more than marginal cost. An industry is in equilibrium when new firm does not enter the market or old firm does not leave the market. It is a matter of resource allocation.

The factor market is examined because of supply of factors and derived demand from product market. In fact, microeconomics deals with individual consumer and a firm or industry. Therefore, it is concerned with behaviour of individual consumers and producers and principles relating to organisation and operations of firms and industries.

Microeconomics is based on full employment in the economy so it examines the equilibrium position of consumer and producer. It is called price theory because it deals mainly with prices of products and prices of productions factors.

Definition :

According to K. E. Boulding

Microeconomics is the study of particular firm, particular household, individual price, wage, income, industry and particular commodity.

According to R. H. Leftwitch

Microeconomics is concerned with the economic activities of such economic units as consumers, resource Owners and business firms.

According to Gardner Ackley

“Microeconomics deals with the division of total output among industrialists, producers and firms and the allocation of resources among competing groups. It considers problems of income distribution. Its interest is in relative prices of particular goods and services.”

According to Prof. Samuelson

“Micro economics studies the behaviour of individual parts and units of any economy, e. g., determination of the price of a product or study and observation of the behaviour of a consumer or a firm”.

Scope of Microeconomics:

In micro economics the following problems and theories are discussed:

1. Price Theory

According to Prof. Robbins, human wants are unlimited but the resources to satisfy them are limited. Therefore, we face the problem of choice in wants and economy in means. This problem is solved by the price mechanism automatically. In other words, prices of all goods are determined by the equilibrium of demand and supply. So, demand and supply are discussed in micro economics.

Each economic system has to make the decisions regarding what is to produced, how it is to be produced and how the resources to be allocated amongst the different competing uses. Such all, under capitalism, is performed with the help “Price Mechanism” i.e., those goods will be produced by the producers which maximize their profits; those techniques will be adopted which minimize their cost of production and the resources will be allocated in those uses where the resource command higher prices etc. Thus, in the micro economics, we deal with the problem of production, consumption, distribution and resource allocation.

2. Theory of Consumer Behaviour and Demand

In this part, consumer’s behaviour is studied. It is examined how he satisfies his multiple ends with his scarce means e.g., why consumers purchase goods and which factors influence their decisions. In other words, theory of utility, concepts of demand and elasticity of demand are studied in it.

As everyone has to face the problem of multiplicity of wants and limited money income. In such state of affairs, it is the desire of each consumer to maximize his satisfaction, when so happens the consumer is said to be in equilibrium. Much the micro economics deals with the problem of equilibrium.

In order to describe consumer equilibrium basically we have two school of thoughts-Classical and Neo-classical. The classical economists presented the “Utility Approach” or “Cardinal Approach” , while the Neo-classical economists presented”. Indifference Curve Approach” or “Ordinal Approach” . In addition to these two approaches Professor Paul. A. Samuelson has also presented a theory of consumer behaviour which is known as “Revealed Preference Theory” .

After having discussed the theories of “Satisfaction Maximization” the demand behaviour of a consumer with respect to a particular commodity is also considered in micro economic theory.

3. Theory of Production Behaviour

In capitalism factories are in private ownership. Therefore, quantity of production of goods is decided by different firms individually. Every firm tries to get equilibrium or maximize its profit. For this purpose, a firm tries to find optimum combination of factors. Each student of Economics is well aware of with the four factors of production like land, labor, capital and entrepreneur.

These factors are responsible for production activities. According to classical economists, in short run, the production depends upon the units of labor only while the capital etc. is kept fixed, In such state of affairs the total production increases at different rates. This phenomenon is known as “Law of Variable Proportions” in micro economic theory.

4. Theory of firm Behaviour:

Like a consumer, the firm also wants to attain equilibrium. While the equilibrium of the firm is attached with “Minimization of Costs” or “Maximization of Output”. Both these situations are also known as “Optimum Factor Combination of a firm”, Thus to describe firm’s equilibrium or “optimum factor combination”, we have two approaches in micro economics (1) Classical’s Marginal Productivity theory (2 Neo-Classical’s “Isoquant – Iso Cot Approach”.

5. Theory of Costs and Revenues:

In micro economics we study different types of costs of production. The analysis of costs of production may be from short run point of view as well as from long run point of view. In this context the traditional and modem approaches are adopted. Moreover, different types of revenues arc also considered in microeconomics.

6. Theory of Market Structure and Behaviour:

The types of market like Perfect Competition, Monopoly, Duopoly and Monopolistic Competition are of greater significance for the readers of micro economics. Accordingly, here it is analyzed that how the firms under different market conditions make decisions regarding the determination of price and output.

7. Theory of Income Distribution:

The national income of a country is the result of joint efforts of land, labor, capital and organization. Accordingly, the national income, has to be distributed amongst these factors. OR it is to be seen that how the factor prices like wages will determined in the competitive and nor competitive markets. Thus, for this purpose we have the classical and neo classical theories in microeconomics.

8. Theory of General Equilibrium:

The Consumer equilibrium and the Producer equilibrium are the representatives of partial equilibria. But the existence of equilibrium of all the consumers of the economy or all the producers of the economy generates General equilibrium of consumption or production. Such all along with different criteria of welfare economics are the important issues of microeconomics.

9. Theory of Welfare Economics:

In the present time, social as well as economic welfare has attained greater importance. Accordingly, the economists have to devise those measures and criteria which are aimed at creating efficiency and optimality in the economic system. Therefore, in microeconomics, we study different techniques which bring welfare to the people.

10. Economics of Uncertainty:

Most of the traditional or classical economics is based upon certainty, i.e., the economic agents do not have to face risk while making decisions. But in the present time the element of risk has attained a lot of importance. Accordingly, economic theories are also being devised on the basis of uncertainty. Therefore, in microeconomics, we also study the economics of uncertainty.

Uses / Importance / Advantages of Microeconomics :

We can realize the importance of the study of micro economics from the following points.

1. Utility Maximization:

It teaches us to purchase the required products in most suitable quantities so that the total utility obtained is maximized. Hence, Micro economic analysis explains us the optimum use of our income and by virtue of it enables us to avoid the wastage of hard-earned income.

2. Resource Allocation:

By the study of micro economics we come to know how millions of consumers and producers allocate their consumption and production resources in an attempt to achieve their optimum level.

3. Income Distribution:

By the distribution theories we learn the determination of rewards to factors of production in the form of rent, interest, wages and profit by which distribution of wealth takes place. Unequal distribution of income will lead to unequal distribution of wealth. It will then consequently provoke reaction to achieve fair and relatively equal distribution of income/wealth in a society.

4. Price Determination:

The study of micro economics is highly helpful in understanding the determination of relative prices for the productive services rendered by different factors of production.

5. Optimization:

It also helps entrepreneurs to achieve optimum production point with their budget constraint. By this, they can maximize their profit or at least they will minimize their losses.

6. Welfare Policies:

It also helps to frame economic policies aimed at achieving public welfare e.g. tax exemption for the poor, determination of rewards according to qualification and productive capabilities, minimum wage laws etc.

7. Guidance for Consumers:

It enables the consumers to allocate their 1ncome on different goods in such a way that total utility is maximized; thus, helping them to avoid the wastage of resources.

8. Guidance for Producers:

It enables entrepreneurs to achieve the optimum combination of factors of production and thereby it enables them to maximize their profit: or at least minimize their losses. When the rewards of factors of production are determined in accordance with their marginal productivity, the chances of their exploitation are minimized. Thus, it enables labourers as well to achieve suitable rewards for their productive services.

9. Coordination Between Small Units of Economy:

It also provides guidance for small segments of an economy to bear them well coordinated with each other. Moreover, the study of micro economics is essential to achieve the best outcome of macro policies.

10. Working of Economy:

Microeconomics provides idea about working of the economy. It tells us about behaviour of consumer or firm. All such consumers and firms are part of the whole economy.

11. Predictions:

Microeconomics is based on certain predictions. There are certain conditions that become basis of predictions. It explains that if some event happens then what. will be the result. If demand goes up the prices will go up.

12. Economic Policies:

Microeconomics is used to formulate policies. it tells us effect of government policies on allocation of resources. The people can oppose new taxes. The government can adjust its policies through reaction of individuals.

13. Basis of Welfare Economics:

Microeconomics is the basis of welfare economics. The individual firms and organisations pay taxes to the government. They can check whether the government has used that money for welfare of the people.

14. Management Decisions:

Business decisions re made with the help of microeconomics. The analysis of demand and cost is essential. The management can use facts and figures to arrive at most suitable decision.

15. Basis of Whole Economy:

Microeconomics is the basis of whole economy. Microeconomics studies small and individual units of the economy which later on becomes a base to study the economy as a whole.

16. Solves Problems of Firms:

Microeconomics is helpful in solving the problems of individual firms. The working of firm is examined to know the real problem. The solution is made to handle such problem.

Disadvantages / Limitations of Microeconomics:

Following are the demerits of micro economic analysis and policies related to it.

1. Free Market Economy :

Microeconomics is based on the idea of free market economy. In fact, there Is no free market economy after great depression of 1930.

2. Study of Parts:

Microeconomics is concerned with study of parts but not the whole. In terms of individual terms, it is impossible to describe large and complex universe of facts like economic system.

3. Misleading for Analysis:

Microeconomics is inadequate and misleading for analysis of economic problems. The principles relating to an individual household cannot be applied to the whole. economic system.

4. Full Employment:

Microeconomics assumes that there is full employment. There is no full employment at all times in this world. Full employment is an exception in practical life.

5. Economic Instability:

When every single firm it allowed to operate freely in an open economy, it would naturally go for self-interest; even at the cost of national interest. Thus, it would disrupt the cohesion between different productive units which will ultimately force the economy to move into depression. A free enterprise economy is therefore an unstable economy i.e. the economy which keep: on fluctuating with boom: and depressions.

6. Exploitation of Consumers:

Inspite of proper guidance for the consumers the real-life situation reveals that they are exploited. This happens with the rising rate of inflation iii an economy. With the pace of inflation, on one hand, wealth keeps on concentrating in a few hands while, on the other hand, consumers are deprived of their purchasing power. The natural inequality of income distribution in a free enterprise economy leads to exploitation of consumers.

7. Exploitation of Labourers:

Entrepreneurs exploit their labourers by keeping their wage rate low or even lower than their marginal productivity. This happens in three ways:

(i) By forcing labourers to work for more hours than required under labour laws.

(ii) By installing automatic and computerized plants to increase the marginal productivity of labour which is not followed by increase in their wage rate.

(iii) By setting up production units in remote areas to employ labour at notoriously low wage rate.

8. Absence of Large-Scale Production:

Micro economic analysis encourages setting up of small units for growth of economy. This could possibly be achieved more efficiently by initiating and encouraging large scale production.

9. Unrealistic Assumptions:

Micro economics is based on unrealistic assumptions, especially in case of full employment assumption which does not exist practically. Even behaviour of one individual cannot be generalised as the behaviour of all.

10. Inadequate Data:

Micro economics is based on the information dealing with individual behaviour, individual customers. Hence, it is difficult to get correct information. So, because of incorrect data Micro Economics may provide inaccurate results.

References:

Munir Ahmed Bhutta. Economics, Azeem Academy Publishers, Lahore.

Abdul Haleem Khawja. Economics, Khawja and Khawja Publishing House, Islamabad.

Manzoor Tahir Ch. Principles of Economics , Azeem Academy Publishers, Lahore.

Muhammad Irshad. Economics , Naveed Publications, Lahore.

K K Dewett & M H Navalur . Modern Economic Theory (Theory and Policy), S. Chand Publishing.

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ECON101: Principles of Microeconomics

Course introduction.

• Time: 32 hours
• College Credit Recommended ($25 Proctor Fee) -->
• Free Certificate

When discussing the economy, we refer to the marketplace or economic system where the choices of all economic agents interact. This course explores how and why we make economic decisions and how our choices affect the economy. Each unit is a building block. By the end of this course, you will be able to grasp the major issues microeconomists face, including consumer and producer behavior, supply and demand, how different markets function, and the welfare outcomes of consumers and producers. We also examine how formal principles and concepts apply to real-world issues.

Course Syllabus

First, read the course syllabus. Then, enroll in the course by clicking "Enroll me". Click Unit 1 to read its introduction and learning outcomes. You will then see the learning materials and instructions on how to use them.

Unit 1: Introduction to Economics

This unit sets the stage for our journey into the principles of microeconomics. We begin by defining economics and its foundations, emphasizing the concepts of scarcity, choice, and opportunity cost and the need for economic models and theories. Next, we delve into the trade-offs economic agents face when confronting scarcity and applying marginal analysis in their decision-making processes. Once we have discussed the introductory economic toolbox, we finish this unit by introducing basic economic models.

Completing this unit should take you approximately 5 hours.

Unit 2: Supply and Demand

In this unit, we introduce the demand and supply model and the resulting market equilibrium for price and quantity. We will explore how markets are constantly affected by changes that affect prices and quantities. If the market is unaffected by failures or government intervention, we will see that prices and quantities tend to move toward the equilibrium benchmark.

"During the last decades, several challenges have significantly affected the egg industry, such as the increasing consumer demand for animal welfare, the need for more sustainable food production, and the growing human health and food security issues related to egg consumption." (Agnese Rondoni et al., Trends in Food Science & Technology, 2020)

When you finish this unit, you will be able to analyze how these changes affect the prices of eggs and the quantity of eggs available in the market.

Unit 3: Elasticity and its Applications

In this unit, we delve into the concept of elasticity and its practical applications for how firms make pricing decisions and how governments analyze and make policy decisions. Put simply, elasticity measures responsiveness. It helps us understand why Netflix increases their prices for their Standard and Premium tiers more frequently, compared to their entry-level Basic plan. Government analysts also rely on elasticity to determine the extent of tax increases.

We can apply elasticity to demand and supply analysis. Elasticity measures how quantity responds to changes in the price of the product, the price of related goods, income, advertising, and more. Once you grasp the concept and its basic calculations, applications of elasticity in economic analysis are nearly limitless.

Completing this unit should take you approximately 4 hours.

Unit 4: Markets and Maximizing Individual Behavior

You are now familiar with the workings of the market. You understand how changes in demand or supply affect prices and quantities for firms and consumers. In this unit, we revisit the demand and supply model to explore economic efficiency. Economic efficiency occurs if "the optimal amount of each good and service is produced and consumed."

We introduce the concepts of consumer and producer surplus to analyze how free markets increase overall welfare. Then, we apply these concepts to analyze the effects of price controls on prices, quantities, and market efficiency.

The market, on its own, does not always allocate resources efficiently. Economists talk about market failure when it falls short. We analyze how the government can alleviate these market failures.

This unit concludes with an introduction to the causes and ramifications of income inequality. While much debate exists on long-term inequality, economists can objectively measure the problem's scope and offer options to manage this economic phenomenon. Protracted poverty and inequality can cause long-term harm to an economy's development.

Unit 5: Introduction to Consumer Choice

As you know, consumers are driven by their unique preferences when they seek to maximize their satisfaction (utility) while considering their limited budgets. Despite the subjectivity of preferences, choices are also influenced by income and prices. This Unit introduces the economic theories behind consumer decision-making. We build upon the budget constraint concept from Unit 1 and demonstrate how economic theory helps predict consumption responses to price and income changes.

Completing this unit should take you approximately 3 hours.

Unit 6: The Producer

In this unit, we dive into the world of production. Our focus is on understanding the behavior of producers and the costs associated with their operations in the short and long run. In other words, we explore the relationship between the quantity of output a firm produces and the cost of producing that output. We also analyze the relationship between various cost functions and identify the production function's characteristics in different timeframes. This chapter lays the foundation for a deeper understanding of how businesses operate and make crucial production-related decisions.

Unit 7: Market Structure: Competitive and Non-Competitive Markets

In this unit, we study how firms operate and compete within different market environments defined by the degree of competition. We introduce the concept of perfect competition, an ideal model that serves as a benchmark economists use to analyze real-world market structures. The model of perfect (or pure) competition results in an efficient allocation of resources. However, unregulated markets (which are central to perfect competition) often fail to create desired outcomes in the real world. Economists refer to these situations as examples of imperfect competition.

Keeping the perfect competition model as the analytical benchmark, we transition to its polar opposite, the monopoly model. Following that, we venture into the realm of imperfect competition, encompassing two distinct models: monopolistic competition and oligopoly. Within the context of oligopoly, we introduce some concepts of game theory, such as the prisoner's dilemma model and the Nash Equilibrium.

Unit 8: The Role of the Government in a Market Economy

In this unit, we delve into how government intervention can address market failures, such as the existence of public goods, externalities, and income and wealth inequality. We analyze decision-making in the public sector, comparing public interest theory with public choice theory. Finally, we explore the Coase Theorem to determine whether private bargaining is preferable to government intervention when dealing with external effects.

Study Guide

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Articles on Microeconomics

Displaying all articles.

10 reasons why Canadians are still dissatisfied with the economy, despite the upswing

Anup Srivastava , University of Calgary ; Felipe Bastos Gurgel Silva , University of Missouri-Columbia ; Luminita Enache , University of Calgary , and Manuela Dantas , California State University, Northridge

Microeconomics explains why people can never have enough of what they want and how that influences policies

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Albanese promises a ‘productivity project’ in an economic vision statement harking back to Hawke and Keating

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What Is Microeconomics?

Understanding microeconomics.

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Microeconomics Definition, Uses, and Concepts

Peter Westfall is a distinguished professor of information systems and quantitative sciences at Texas Tech University. He specializes in using statistics in investing, technical analysis, and trading.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

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Microeconomics is the social science that studies the implications of incentives and decisions and how they affect the utilization and distribution of resources on an individual level. Microeconomics shows how and why different goods have different values. It addresses how individuals and businesses conduct and benefit from efficient production and exchange and how individuals can best coordinate and cooperate with each other.

Microeconomics provides a more detailed understanding of individuals, firms, and markets. Macroeconomics provides a more aggregate view of economies.

Key Takeaways

• Microeconomics studies the decisions of individuals and firms to allocate resources of production, exchange, and consumption.
• Microeconomics deals with prices and production in single markets and the interaction between markets.
• Microeconomics leaves the study of economy-wide aggregates to macroeconomics.
• Microeconomists form various types of models based on logic and observed human behavior and they test the models against real-world observations.

Investopedia / Tara Anand

Microeconomics is the study of what's likely to happen when individuals make choices in response to changes in incentives, prices, resources, or methods of production. These scenarios are also known as tendencies. Individuals are often grouped into microeconomic subgroups such as buyers, sellers , and business owners. These groups create the supply and demand for resources, using money and interest rates as pricing mechanisms for coordination.

The Uses of Microeconomics

Microeconomics can be applied in a positive or normative sense. Positive microeconomics describes economic behavior and explains what to expect if certain conditions change. It theorizes that consumers will tend to buy fewer cars than before if a manufacturer raises the prices of cars.

The price of copper will tend to increase if a major copper mine collapses in South America because supply is restricted. Positive microeconomics could help an investor see why Apple Inc. ( AAPL ) stock prices might fall if consumers buy fewer iPhones. It could also explain why a higher minimum wage might force The Wendy's Company ( WEN ) to hire fewer workers.

These explanations, conclusions, and predictions of positive microeconomics can then be applied normatively to prescribe what people, businesses, and governments should do to attain the most valuable or beneficial patterns of production, exchange, and consumption among market participants.

This extension of the implications of microeconomics from what is to what ought to be or what people ought to do also requires at least the implicit application of some sort of ethical or moral theory or principles and some form of utilitarianism .

Method of Microeconomics

Microeconomic study has historically been performed according to general equilibrium theory , developed by Léon Walras in "Elements of Pure Economics," and partial equilibrium theory, introduced by Alfred Marshall in "Principles of Economics."

The Marshallian and Walrasian methods fall under the larger umbrella of neoclassical microeconomics. Neoclassical economics focuses on how consumers and producers make rational choices to maximize their economic well-being, subject to the constraints of how much income and resources they have available.

Neoclassical economists make simplifying assumptions about markets such as perfect knowledge, infinite numbers of buyers and sellers, homogeneous goods, or static variable relationships to construct mathematical models of economic behavior.

These methods attempt to represent human behavior in functional mathematical language. This allows economists to develop mathematically testable models of individual markets. Neoclassicals believe in constructing measurable hypotheses about economic events and then using empirical evidence to determine which hypotheses work best.

They follow the “logical positivism” or “logical empiricism” branch of philosophy in this way. Microeconomics applies a range of research methods depending on the question being studied and the behaviors involved.

Basic Concepts of Microeconomics

The study of microeconomics involves several key concepts, including but not limited to:

• Incentives and behaviors : This addresses how people as individuals or in firms react to the situations with which they're confronted.
• Utility theory : Consumers will choose to purchase and consume a combination of goods that will maximize their happiness or “utility” subject to the constraint of how much income they have available to spend.
• Production theory : This is the study of production or the process of converting inputs into outputs. Producers seek to choose a combination of inputs and methods of combining them that will minimize costs to maximize their profits.
• Price theory : Utility and production theory interact to produce the theory of supply and demand which determines prices in a competitive market. Price theory concludes that the price demanded by consumers is the same as that supplied by producers in a perfectly competitive market. This results in economic equilibrium .

Where Is Microeconomics Used?

Microeconomics has a wide variety of uses. Policymakers may use microeconomics to understand the effect of setting a minimum wage or subsidizing the production of certain commodities. Businesses may use microeconomics to analyze pricing or production choices. Individuals may use it to assess purchasing and spending decisions.

What Is Utility in Microeconomics?

Utility refers to the degree of satisfaction that an individual receives when making an economic decision. The concept is important because decision-makers are often assumed to seek maximum utility when making choices within a market.

How Important Is Microeconomics in Our Daily Life?

Microeconomics is critical to daily life even in ways that may not be evident to those engaging in it. Take the case of someone who's looking to buy a car. Microeconomic principles play a central role in individual decision-making. They'll likely consider various incentives such as rebates or low interest rates when assessing whether to purchase a vehicle.

They'll probably select a make and model based on maximizing utility while also staying within their income constraints. A car company will have made similar microeconomic considerations in the production and supply of cars into the market.

Microeconomics is a field of study focused on the decision-making of individuals and firms within economies. It's in contrast with macroeconomics, a field that examines economies on a broader level.

Microeconomics may look at the incentives that influence individuals to make certain purchases, how they seek to maximize utility, and how they react to restraints.

Microeconomics for firms may look at how producers decide what to produce, in what quantities, and what inputs to use based on minimizing costs and maximizing profits. Microeconomists formulate various types of models based on logic and observed human behavior. They test the models against real-world observations.

CFI Education. " Microeconomics ."

S.P.S. Chauhan, via Google Books. " Microeconomics: Theory and Applications, Part 2 ." Page 224.

Oregon State University. " Intermediate Economics, Chapter 2, Utility ."

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Microeconomics: A Very Short Introduction

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Microeconomics — individuals' choices of where to live and work, how much to save, what to buy, and firms' decisions about location, hiring, firing, and investment — involves issues that concern us on a daily basis. But when people think about economics, they tend to place importance on the bigger picture — macroeconomics — including issues such as unemployment, inflation, and the competitiveness of nations. Microeconomics: A Very Short Introduction argues that the microeconomy has a large impact on the economic world. Using real-life examples from around the world, this VSI provides insights into economics from psychology and sociology to explain economic behaviour and rational choice.

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Why I Want You to Study Economics: Increasing Diversity, Inclusion, and Opportunity in Economics

I thank the organizers of this year's LEED program and Professor Fidelis Ikem, the dean of the College of Business, for inviting me to speak today. I am proud of the relationship that the Federal Reserve Bank of Cleveland is building with Central State University. It's great to be on campus today, where one feels a real sense of history. At the Federal Reserve, we are proud of the fact that while the first two attempts at central banks in the U.S. lasted only 20 years each, the Fed is in its 105th year. But Central State is even older. Founded in 1887, the university recently celebrated its 131st birthday. Central State's designation as a historically black college and its focus on providing a high-quality academic experience to all students are things to be proud of. They make this university a very good place for me to speak about the benefits of an education in economics and the importance of diversity in the field of economics. Before I continue, I should remind everyone that the views I'll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.

Why Study Economics

I didn't start out to be an economist. I majored in mathematics at Barnard College but also pursued a second major in economics because it seemed interesting and didn't require much additional course work. I applied to graduate school in math but ended up in the economics Ph.D. program at Princeton because two professors there wrote me letters explaining that Princeton's economics program was very mathematical and encouraging me to come there and study economics. I've always thought that I lucked into economics. It has provided me with a fascinating career, and I hope that at least in a small way I've been able to provide some good in return through economic research and policymaking.

Merriam-Webster defines economics as "a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services." Well, that's fine as far as it goes, but it sounds kind of dry. Others think of economics as a path to running a business or working in finance. That's also fine as far as it goes, but it is too limited a view. Instead, I like to think of economics as a social science that helps us think about how people use scarce resources, interact in markets or in other economic settings, respond to incentives, and make trade-offs. The fact that economics is a social science, one that involves people and their choices, makes economics complicated but also very interesting.

Because economics provides a rigorous way of thinking about trade-offs, incentives, and costs and benefits, it has many real-world applications. It can help a company be more profitable but it can also help policymakers formulate better public policies that affect people's lives. It can help us analyze the distribution of income across individuals, regions, and countries, and the causes for those differences. It can help us understand how a small financial shock might be propagated economy-wide or even globally, and what can be done to prevent such contagion. It can help us understand the issues facing people in or entering the workforce and provide evidence on which programs are most effective at helping them finance their education, develop new skills, and manage the changing job landscape driven by technological innovation. Economics can help us understand how people make financial decisions and how simple changes can result in better outcomes. For example, a simple change from making employees have to opt out of a company's savings plan, rather than opt in, can result in higher participation in the plan. 1 One well-formulated study of a Fortune 500 company's 401(k) savings plan found that switching to automatic enrollment increased employee participation from 49 percent to 86 percent. It also found that employees' savings decisions tend to be inert, so the default contribution rate and fund allocation are important features to consider in designing such a plan.

A default rule like this is an example of what behavioral economists call a nudge—something that isn't mandated but points people in the right direction and can change behavior. 2 Richard Thaler, an economics professor at the University of Chicago, won a Nobel Prize last year for his foundational work in behavioral economics, which combines aspects of psychology with economics. In his Nobel Prize lunch lecture, he mentioned that good work is being done around the world to, and I quote: "design and test scientifically informed policies that are working. People are being helped to save more for retirement, more poor kids—especially girls—are going to school, peasant farmers are retrieving more reliable harvests, and we are all being successfully nudged to use less energy." 3 That passage lists just a few of the areas in which economics is having a real-world impact and doing some good. In the policy realm, economics helps guide decisions about the country's monetary and fiscal policies, but also policies on health care, education, and trade. It helps in the design and evaluation of programs at the local community level too, including workforce development and transportation policy. In a nutshell, I believe that economics helps society.

I hope this piques your interest in studying economics. But if you need more convincing, you might want to know that economics offers a very good return on your education dollar. The ability to think critically, analyze a problem systematically, and deal with ambiguity are all skills developed through the study of economics and they are all skills highly valued in the job market. One recent study found that those with a bachelor's degree in economics earn about 20 percent more than graduates with degrees in other fields. 4 Some of the salary differences reflect the fact that economics majors have access to a wide variety of occupations, many of which are higher-paying. You'll find people with economics degrees employed in many sectors, including education, accounting, law, business, finance, and government. The Federal Reserve System—the 12 Reserve Banks and the Board of Governors—employs about 700 Ph.D. economists and also many others with undergraduate and master's degrees in economics, and I can tell you from experience that the Fed is a very productive and fascinating place to work.

The State of Diversity in Economics

The good news is that economics is a popular major in U.S. colleges and universities. In 2016, U.S. postsecondary schools awarded about 33,500 bachelor's degrees in economics. 5 While this represents less than 2 percent of all bachelor's degrees awarded by these schools, at the top 100 universities and top 100 liberal arts colleges without an undergraduate business major, about 10 to 20 percent of male undergraduates major in economics. 6 That's a high number when you consider how many different majors there are. But despite its popularity, the field has had less success in attracting women or historically under-represented racial and ethnic minorities. 7 While there has been some improvement compared to the 1970s, this under-representation has been going on for many years.

Using U.S. Department of Education data on four-year, non-profit colleges and universities over 2011-2015, Bayer and Wilcox found that while women earned more than half of all bachelor's degrees awarded across all fields, they earned less than a third of the bachelor's degrees in economics. 8 And the numbers are lower for under-represented minorities, who earned slightly more than 20 percent of bachelor's degrees and about 11 percent of economics degrees awarded. If you think about this in terms of the share of female graduates who choose to major in economics and the share of male graduates who choose to major in economics, according to Bayer and Wilcox's numbers, there is one female economics major for every 100 female bachelor's degrees compared to about three male economics majors for every 100 male bachelor's degrees. That means women are choosing to major in economics at only a third of the rate of men. 9 Similarly, minorities are choosing economics over other majors at only about half the rate of white students.

While you don't need to have majored in economics to enter a Ph.D. program in economics, it is a natural path. So given the under-representation of women and minorities at the undergraduate level, it is probably not surprising they are also under-represented at the Ph.D. level and in academia. The good news is that representation of women among the ranks of academia, from first-year graduate student through full professor, is higher now than in 1970. 10 The bad news is that progress has slowed. In 2017, females made up 32 percent of first-year grad students in economics compared to 30 percent in 1997. Almost a third of the new doctorates in 2017 were awarded to women, but gender diversity falls as one moves up the academic ranks. Women make up less than 30 percent of assistant professors, about 23 percent of tenured associates, and about 14 percent of full professors in economics. Unless there is a pickup in entry into graduate school, it is hard to see how these numbers can increase.

Analysis of minority representation in graduate economics is complicated a bit by the fact that almost 60 percent of doctorates awarded in economics are awarded to nonpermanent resident students. Some of these graduates return to their own countries, while others stay in the U.S. Restricting attention to U.S. citizens and permanent residents, of the 479 economics doctorates awarded in 2016, only 48, that is, 10 percent, were awarded to under-represented minorities: 15 were earned by African Americans and 33 by Hispanics or Latinos. 11 In the academic professorial ranks, under-represented minorities make up less than 10 percent of assistant professors and less than 5 percent of full professors.

There has been some progress: the percentages of undergraduate and graduate degrees awarded to minorities have increased over the past two decades. But the rate of change has been slower than the growth of the minority population in the U.S. and slower than the growth of minority representation across all fields and in the STEM fields of science, technology, engineering, and math. Indeed, minorities earn a greater share of the degrees awarded in the STEM fields than they do in economics. 12 Similarly, the representation of women in the STEM fields is also now higher than it is in economics. 13

Why Isn't Economics Diverse and Why Does It Matter?

An interesting question is why women and minorities are under-represented in economics. One potential explanation is the lack of role models in the field. Seeing someone of the same race or gender being successful in a field can be validating, and having someone like you to run ideas by or get advice from can be very helpful. So, the relative lack of women and minorities in economics could be perpetuating under-representation. This is a plausible explanation but it may be only one piece of the puzzle, as the empirical evidence on role models is somewhat mixed. 14 One study of a selective liberal arts college that essentially involved random assignment of students to instructors found that having an instructor of the same gender didn't increase the probability of a student taking more classes or majoring in the field, regardless of the gender distribution in the department, but it was associated with the student earning a higher grade in fields dominated by the opposite gender. 15 That is, female students received higher average grades from female instructors when taking courses in fields dominated by men (such as economics)—the difference was on the order of moving from a B-minus to a B. And there was a similar effect for males, who received higher average grades from male instructors when taking courses in female-dominated fields (such as education). A separate study in a different setting found evidence that such grade differentials reflected achievement differentials and not just inflated grading. 16 So the availability of role models appears to positively affect student achievement, but a lack of role models isn't the whole story about why some students choose not to continue in economics.

What about different preferences at the time students enroll? It is true that males are more likely than females to list economics as their planned major when accepted at college. But this gender difference for incoming students is not the full story because research that looks at the progression of students through the major has found that female students are relatively more likely to drop out of the major and switch to another field compared to male students. For example, one study found that women need to do well in their principles of economics course in order to continue in the major, and that's less true of men. 17

Other hypotheses have to do with the way economics is taught or with the content of the courses. Do large lecture classes, often found in introductory economics programs at large universities, turn off women and minorities more than men? Do the topics incorporated into the intro courses appeal to one group and not another? And, if so, how could the content be amended so that all students, regardless of race, ethnicity, or gender, feel included and take up the opportunity to be an economics major? Could it be that implicit biases come to play at each stage of the academic ladder, as has been shown in other types of settings?

As a college math major, I am happy to say that the theory that women may be more turned off by the heavy mathematical content in economics does not pan out. In fact, women earn over 40 percent of bachelor's degrees in math and statistics, a higher share than in economics; 18 women do well in math at the high school level; women are selecting other fields that are very quantitative, like psychology; and studies indicate that math aptitude doesn't explain gender differences in participation in upper-level economics courses. 19

So there are several different theories being explored, and I suspect that, at the end of the day, there are multiple drivers of the under-representation of women and minorities in the field of economics. But you might ask: why should we care? Shouldn't students be able to choose their field of study and career path? The low level of diversity in economics may just reflect people's preferences. That's a possibility, but if that's the case, then it is incumbent upon those of us in the field and upon educators to ensure that students can make informed choices and that they understand the value of an economics degree to the individual and to society.

Moreover, because economics is a field that influences policy, and policy affects all kinds of people, it's important to have diverse views inform that policy. As a public servant and Fed policymaker, I believe that policymakers need to consider the effects of our monetary, regulatory, and payments policies on all our constituents. In addition, I have seen firsthand how having a diversity of views expressed and discussed around the table can actually lead to better policy decisions, and there is actual research to back this up. Group dynamics are different when teams are diverse. Participants don't necessarily find it as comfortable to serve on a diverse team, but the diversity helps to avoid group-think. Diverse teams tend to be more objective and focus on the facts when making decisions; they may process information more carefully because they are forced to confront a different way of thinking and convince those with alternative views; and firms with more diversity tend to be more innovative. 20 Research also shows that firms with diverse management tend to have above-average earnings 21 Perhaps the better decision-making and innovation associated with diversity is showing up on the bottom line.

Beyond current policy and business outcomes, another reason I'd like to see more diversity in the field of economics is so the field itself doesn't get stymied by group-think. To expand our knowledge, economics needs to continually take on new research questions and develop innovative techniques and ways of analysis to arrive at answers to these questions. Broader representation in economics means a broader set of issues will be tackled and a broader set of research disseminated, resulting in better policy outcomes that will improve the economic well being of a greater share of the population.

Some Things Are Being Done

The American Economic Association, through its Committees on the Status of Women and the Status of Minority Groups in the Economics Profession, is taking a close look at diversity in the economics profession and is offering programs and resources aimed at increasing diversity at all levels. The association provides information to students who want to pursue careers or a graduate degree in economics, and also provides lesson plans to teachers. It offers a summer training and scholarship program to help prepare students for graduate school and, with the National Science Foundation, offers a Summer Economics Fellows Program, which is designed to increase the participation and advancement of women and under-represented minorities in economics.

I serve on the board of the Council for Economic Education. This nonprofit organization's mission is to educate students in kindergarten through high school about economics and personal finance so they can make better decisions for themselves, their families, and their communities. The council provides many materials to teachers and also runs the National Economics Challenge, a quiz bowl competition, which reaches a wide population of students in terms of gender, race, and income. Last year, over 11,000 high school students participated in the challenge; of these, 42 percent were girls and 22 percent were under-represented minorities, and participation from these groups has been increasing over time. A recent survey found that participants' performance on advanced placement exams exceeds the national average, with especially strong gains shown by female and minority students, and that participants are more likely than nonparticipants to choose to major in economics.

At the Cleveland Fed, we strive for excellence in all that we do. And that means we are taking actions to foster a culture that champions diversity, inclusion, and opportunity throughout the organization. To increase our ability to recruit high-quality talent in a variety of positions, including banking, computer programming, data science, accounting, as well as economics, we are developing relationships with schools in our District, including Central State. Last June, we hosted a number of Central State students and several faculty members as part of your school's eight-week summer Banking Institute program, and we will host another group of CSU students again next month. You may have attended one of the guest lectures that some of our economists have given in your economics and business classes, and representatives are here today to tell you about paid internships and other employment opportunities at the Cleveland Fed. As a contribution to strengthening the pipeline of future economists, the Cleveland Fed will be hosting a workshop this summer for the research assistants across the Federal Reserve System to help them prepare for graduate school. The Cleveland Fed has also been promoting pre- and post-college education. Our Learning Center distributes lesson plans on economics and financial literacy to teachers in kindergarten through high school, and our Money Museum, which is open to the public, offers interactive exhibits on the financial system and the economy. These may be small steps, but economics can help solve many real-world problems while providing individuals with a rewarding career, and we want to ensure that the widest group of people enter the field.

Fifty years ago today, this country lost a great leader, Dr. Martin Luther King, Jr. The tragedy of his death must not overshadow his many accomplishments and the lessons conveyed by his words and deeds. As I've discussed, there has been some progress over the past 50 years in increasing diversity, inclusiveness, and opportunity within the economics profession, but that progress has been slow. It is easy to get discouraged and accept the status quo. But we all must remember a key lesson from Dr. King's legacy: changing institutions is hard work and takes time. It must be met by perseverance and endurance. As a member of the economics profession, I will continue to seek ways to increase diversity, inclusion, and opportunity because I believe it will strengthen economic research and policymaking, and thereby help promote a healthier economy for a wider group of people. I encourage the students of Central State University to enter the field of economics and to join me in that mission.

• See Chetty, et al. (2017). Return to 1
• For accessible descriptions and examples of nudging, see Committee for the Prize in Economic Sciences in Memory of Alfred Nobel (2017), Thaler (2017a), and Sunstein (2017). Return to 2
• Thaler (2017b). Return to 3
• Carroll, et al. (2014). Return to 4
• The data on the number and proportion of bachelor's degrees in economics in U.S. postgraduate institutions are derived from Tables 325.92 and 322.10 from U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS). Return to 5
• Goldin (2013, 2015). Return to 6
• The U.S. Department of Education's Integrated Postsecondary Education Data System (IPEDS) classifies as historically under-represented minorities members of the following groups: Hispanic or Latino (non-Hispanic), (non-Hispanic) Black or African American, and American Indian or Native Alaskan. The IPEDS data are used by the American Economic Association's Committee on the Status of Minority Groups in the Economics Profession (CSMGEP) to assess minority representation in the field. Return to 7
• Bayer and Wilcox (2017). Return to 8
• Among schools in the top 100 that offer both business and economics degrees, regardless of gender, students prefer the business degree over economics, but women do so to a greater extent. See Goldin (2013, 2015). Return to 9
• The statistics cited in this paragraph are the preliminary statistics for 2017 compiled by the American Economic Association's Committee on the Status of Women in the Economics Profession. See Lundberg (2017). Return to 10
• These statistics are from the U.S. Department of Education IPEDS data as reported in Committee on the Status of Minority Groups in the Economics Profession (CSMGEP) (2017). Return to 11
• Committee on the Status of Minority Groups in the Economics Profession (CSMGEP) (2017). Return to 12
• Goldin (2013, 2015). Return to 13
• Goldin (2013) and Griffith (2013). Return to 14
• Griffith (2014). Return to 15
• Carrell, et al. (2010). Return to 16
• Goldin (2013, 2015) and Avilova and Goldin (2018). Return to 17
• Table 325.65, U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS). Return to 18
• See Goldin (2013), and Bayer and Rouse (2016). Return to 19
• See Rock and Grant (2016). Return to 20
• Rock and Grant (2016) cite a Credit Suisse analysis of 2,400 companies worldwide that found that organizations with at least one female board member had higher return on equity and higher net income growth than firms with no female board members. In addition, Hunt, et al. (2015) report on a McKinsey & Company analysis of 366 companies that found that those in the top quartile in terms of management's ethnic and racial diversity were 35 percent more likely to have financial returns above their industry mean, while those in the top quartile in terms of management's gender diversity were 15 percent more likely to have financial returns above their industry mean. Return to 21
• Avilova, Tatyana, and Claudia Goldin, "What Can UWE Do for Economics?" National Bureau of Economic Research Working Paper 24189, January 2018. ( https://www.nber.org/papers/w24189.pdf )
• Bayer, Amanda, and Cecilia Elena Rouse, "Diversity in the Economics Profession: A New Attack on an Old Problem," Journal of Economic Perspectives 30 (Fall 2016), pp. 221-242. ( https://doi.org/10.1257/jep.30.4.221 )
• Bayer, Amanda, and David Wilcox, "The Unequal Distribution of Economic Education: A Report on the Race, Ethnicity, and Gender of Economics Majors at US Colleges and Universities," Finance and Economics Discussion Series 2017-105, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, D.C. ( https://www.federalreserve.gov/econres/feds/files/2017105pap.pdf )
• Carrell, Scott E., Marianne E. Page, and James E. West, "Sex and Science: How Professor Gender Perpetuates the Gender Gap," Quarterly Journal of Economics 125 (2010), pp. 1101-1144. ( https://doi.org/10.1162/qjec.2010.125.3.1101 )
• Carroll, Thomas, Djeto Assane, and Jared Busker, "Why it Pays to Major in Economics," Journal of Economics Education 45 (2014), pp. 251-261. ( https://doi.org/10.1080/00220485.2014.917906 )
• Chetty, Raj, John Friedman, Søren Leth-Petersen, Torben Nielsen, and Tore Olsen, "Active vs. Passive Decision and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark," Quarterly Journal of Economics 129 (2017), pp 1141-1219. ( https://doi.org/10.1093/qje/qju013 )
• Committee for the Prize in Economic Sciences in Memory of Alfred Nobel, "Scientific Background on the Sveriges Riksbank Prize in Economics in Memory of Alfred Nobel 2017, Richard H. Thaler: Integrating Economics with Psychology," October 9, 2017. ( https://www.nobelprize.org/uploads/2018/06/advanced-economicsciences2017-1.pdf )
• Committee on the Status of Minority Groups in the Economics Profession, Annual Report, American Economic Association, December 2017. ( https://www.aeaweb.org/content/file?id=6592 )
• Goldin, Claudia, "Notes on Women and the Economics Undergraduate Major," Newsletter of the Committee on the Status of Women in the Economics Profession (CSWEP) (Summer 2013), pp. 4-6, 15. ( https://www.aeaweb.org/content/file?id=570 )
• Goldin, Claudia, "Gender and the Undergraduate Economics Major: Notes on the Undergraduate Economics Major at a Highly Selective Liberal Arts College," manuscript, April 12, 2015 (update of Goldin, Summer 2013).
• Griffith, Amanda L., "The Importance of Role Models," Newsletter of the Committee on the Status of Women in the Economics Profession (CSWEP) (Summer 2013), pp. 9-10, 16. ( https://www.aeaweb.org/content/file?id=570 )
• Griffith, Amanda L., "Faculty Gender in the College Classroom: Does it Matter for Achievement and Major Choice?" Southern Economic Journal 81 (2014), pp. 211-231. ( https://doi.org/10.4284/0038-4038-2012.100 )
• Hunt, Vivian, Dennis Layton, and Sara Prince, "Why Diversity Matters," McKinsey & Company, January 2015. ( https://www.mckinsey.com/business-functions/organization/our-insights/why-diversity-matters )
• Lundberg, Shelly, "The 2017 Report of the Committee on the Status of Women in the Economics Profession," American Economic Association, December 6, 2017. ( https://www.aeaweb.org/content/file?id=6388 )
• Rock, David, and Heidi Grant, "Why Diverse Teams Are Smarter," Harvard Business Review , November 4, 2016. ( https://hbr.org/2016/11/why-diverse-teams-are-smarter )
• Sunstein, Cass R., "Nudging: A Very Short Guide," manuscript, September 22, 2017. ( http://www.tif.us.edu.pl/download/2015010893532Nudge_Sunstein.pdf )
• Thaler, Richard H., "From Cashews to Nudges: The Evolution of Behavioral Economics," Nobel Prize Lecture slides, December 8, 2017a. ( https://www.nobelprize.org/uploads/2018/06/thaler-lecture-slides.pdf )
• Thaler, Richard H., "Speech at the Nobel Banquet," December 10, 2017b. ( https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2017/thaler-speech.html )
• U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS), Digest of Education Statistics : 2016. ( https://nces.ed.gov/programs/digest/d16/index.asp )

Suggested Citation

Mester, Loretta J. 2018. “Why I Want You to Study Economics: Increasing Diversity, Inclusion, and Opportunity in Economics.” Speech, Leaders, Executives, Entrepreneurs and Directors (LEED) Program - Central State University College of Business - Wilberforce OH.

• Scope of Economics
• Post last modified: 21 January 2021
• Reading time: 22 mins read
• Post category: Economics

Earlier, the scope of economics was limited to the utilisation of scarce resources to meet the needs and wants of people and society.

Over the years, the scope of economics has been broadened to many areas, which are shown in Figure

Table of Content

• 1.1 Micro Economics
• 1.2 Macro Economics
• 1.3 International Economics
• 1.4 Public finance
• 1.5 Welfare Economics
• 1.6 Health Economics
• 1.7 Environmental Economics
• 1.8 Urban and rural Economics
• 2 Business Economics Tutorial

Micro Economics

Macro economics, international economics, public finance, welfare economics, health economics, environmental economics, urban and rural economics.

This is considered to be basic economics . Microeconomics may be defined as that branch of economic analysis which studies the economic behaviour of the individual unit, maybe a person, a particular household, or a particular firm.

Macroeconomics may be defined as that branch of economic analysis which studies the behaviour of not one particular unit, but of all the units combined together. Macroeconomics is a study in aggregates.

With the advent of globalisation and cross-border integration, economic concepts are applied in order to conduct successful business dealings between countries. Economic concepts can be used in areas, such as foreign trade (exports and imports), foreign exchange (trading currency), the balance of payments, and balance of trade.

Economic concepts are also applied to assess the government’s collection of taxes from the users of public goods as well as expenditure on production and distribution of these goods to the general public.

Economic theories and concepts are used to analyse the growth and development of low-income countries. This helps in improving the living standard of people in less developed and developing societies by understanding their needs for various facilities and utilities, such as health and education facilities and good working conditions.

Economic concepts are also applicable in assessing the problems faced in promoting health in different countries. These concepts help the government in making decisions for defining appropriate health packages and programs for the general public.

Economic concepts are used to analyse the utilisation and depletion of natural resources. Moreover, they are applied to study the impact of increasing ecological imbalance on society.

In urban development, the scope of economics covers the analysis of different urban issues such as crime, education, public transit, housing, and local government finance. On the other hand, in rural development, economics can be used to analyse the shortage of natural resources, obtain the best price for production, study constraints of productivity, adapt to climate change, etc.

Also Read: What is Economics?

• Brigham, & Pappas, (1972). Managerial economics , 13ed. Hinsdale, Ill.: Dryden Press.
• Dean, J. (1951). Managerial economics (1st ed.). New York: Prentice-Hall.

Business Economics Tutorial

( Click on Topic to Read )

• What is Economics?
• Nature of Economics
• What is Business Economics?
• Micro vs Macro Economics
• Laws of Economics
• Economic Statics and Dynamics
• Gross National Product (GNP)
• What is Business Cycle?
• W hat is Inflation?
• What is Demand?
• Types of Demand
• Determinants of Demand 
• Law of Demand
• What is Demand Schedule?
• What is Demand Curve?
• What is Demand Function?
• Demand Curve Shifts
• What is Supply?
• Determinants of Supply
• Law of Supply
• What is Supply Schedule?
• What is Supply Curve?
• Supply Curve Shifts
• What is Market Equilibrium?

Consumer Demand Analysis

• Consumer Demand
• Utility in Economics
• Law of Diminishing Marginal Utility
• Cardinal and Ordinal Utility
• Indifference Curve
• Marginal Rate of Substitution
• Budget Line
• Consumer Equilibrium
• Revealed Preference Theory

Elasticity of Demand & Supply

• Elasticity of Demand
• Price Elasticity of Demand
• Types of Price Elasticity of Demand
• Factors Affecting Price Elasticity of Demand
• Importance of Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Advertisement Elasticity of Demand
• Elasticity of Supply

Cost & Production Analysis

• Production in Economics
• Production Possibility Curve
• Production Function
• Types of Production Functions
• Production in the Short Run
• Law of Diminishing Returns
• Isoquant Curve
• Producer Equilibrium
• Returns to Scale

Cost and Revenue Analysis

• Types of Cost
• Short Run Cost
• Long Run Cost
• Economies and Diseconomies of Scale
• What is Revenue?

Market Structure

• Types of Market Structures
• Profit Maximization
• What is Market Power?
• Demand Forecasting
• Methods of Demand Forecasting

Criteria for Good Demand Forecasting

Market Failure

• What Market Failure?

Price Ceiling and Price Floor

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Did we miss something in Business Economics Tutorial? Come on! Tell us what you think about our article on Scope of Economics | Business Economics in the comments section.

• What is Inflation?
• Determinants of Demand

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Nature of Economics: as a Science, Art, Social Science

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What is Indifference Curve? Properties, Assumption, Analysis

Difference Between Micro and Macro Economics

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Movement and Shift In Demand Curve

What is Law of Diminishing Marginal Utility? Example, Definition

What is Demand Schedule? Definition, Example, Graph, Types

Economic Statics and Dynamics: Definition, What, Importance

What is Law of Demand? Definition, Exceptions, Assumptions

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Transcript: Exceptional Uncertainty and the Global Economy: A Conversation with David Malpass and Adam Posen

You can watch a replay of the event here .

MR. ADAM POSEN:   It is my honor and pleasure to be hosting a conversation with David Malpass, the 13th President of the World Bank Group.  And I will introduce him in slightly more fulsome form in a moment. Just to say that the occasion for this is the release of the World Bank's Global Economic Prospects Report, which is one of their flagship documents published regularly and, at this moment, as President Malpass will outline, is addressing the very big divergences we're seeing between the developing countries and the developed world in terms of their economic recovery from COVID, as well as the damage done, but also, facing a world of, as they put it, unprecedented macroeconomic imbalances, rising income inequality, and exceptional uncertainty.  

I encourage everyone to download and read the report, which is freely available from the World Bank's website, also with links from the Peterson website, and have at it with the data and the projections and the analyses, which represents the work of a lot of good staff at the Bank.

We are fortunate today to have with us David Malpass back to the Peterson Institute, in this case, virtual stage. David, in addition to serving as the World Bank President since April 2019, has previously served recently in the Trump administration as Undersecretary of the Treasury for International Affairs for the U.S. Of course, in that role, he represented the United States in a variety of international settings, including in the G7, G20 Finance Deputies meeting, the IMF/World Bank Spring and Annual Meetings.  Importantly, in 2018, David successfully advocated for a capital increase for the IBRD and the IFC, including domestically in the U.S., as well as globally, and he was also instrumental in advancing the debt transparency initiative previously adopted, I think, to good effect by the World Bank and the IMF.                  

David had a long, successful career in economic analysis in the private sector, in financial markets, but he has long been concerned with issues of development and debt. Earlier in his career, he served as the U.S. Deputy Assistant Secretary of State--Secretary of the Treasury, excuse me--for Developing Nations, and the Deputy Assistant Secretary of State for Latin America when-- in those roles, he focused on a variety of issues but, very importantly, including the Latin American debt crisis and the issues of U.S. involvement in the World Bank and other international financial institutions at that time. 

With that, David brings a practitioner's and committed view to the importance of macroeconomics and debt management to the world and to the developing world, and I'd like to ask him to lead off with what he wants us to take away from the global economic outlook of the World Bank-- Global Economic Prospects, excuse me.

MR. DAVID MALPASS:   Thanks very much, Adam. Well, one thing to take away is thanks, Peterson Institute, for the work that you do, and Adam, for your work.

It is really important, I think, in the world to have voices, because it is a complicated world scenario that we're facing. That was brought out in the GEP that came out last week. The global growth rate is slowing some, but the bigger impact is that the developing countries are falling further behind. One way we can measure that is in the poverty numbers, which are rising. Extreme poverty is rising--that's less than $1.90 a day--but also, poverty in general, or very low income, is rising under the pressures of the world. And then, as we think about it on a per capita basis, it's even more dramatic. One statistic that we think we have is for the poorest countries, the IDA countries, which is about 75 countries, the per capita income is growing just 0.5 percent, even in the recovery, whereas, in the advanced economies, it's a full 5 percent per capita. That may be less on a real basis, but it gives you the sense that the poorer countries are falling further behind, which is the challenge and what we want to talk about.

That's made worse-- added challenges from the macro side, with the inflation rate in advanced economies spreading to developing countries, and it's a big challenge as the supply chains close in or redirect themselves toward the advanced economies. And now, we expect to be facing multiple interest rate hikes from the advanced economies, and those are often amplified in developing countries. And it's already going on. A third of the developing countries have already raised interest rates, and more will come, and that puts particular pressure on new businesses, small businesses, women-owned businesses, and the lifeblood of the global supply chain. That's the reason for the concern that we've been expressing. 

With that, Adam, the GEP -- we do it twice a year. I've spoken on it in previous years. I think we have to recognize the pandemic, the inflation, the interest rate hikes, and also what I'll call misallocation of capital going on in the world right now. And it means that these inequality problems are likely to extend for years to come. 

I didn't mention the importance of the health care systems and the education systems. If we look out five years, 10 years forward, things that are important are nutrition for children, advanced care for people as part of a health care system, and then, education. And our data-- we have data on the education that there's been a substantial backsliding in children's ability to read. That's one statistic that we track in terms of learning poverty, and it's gone up from some 53 percent of 10-year-olds that can't read a basic text. That's gone all the way to 70 percent now with the school closures. And that problem will weigh on the world for years and years to come, and it's vital, really, that we begin to get resources to people in the poorest countries. Thanks.

MR. POSEN:   Thank you, David. There's so much to talk about, and I really appreciate you framing some of the issues in terms of capital reallocation, not just net flows, and we'll return to that.

I first just want to tell our audience since this is going out livestream around the world, obviously, those of you who are registered participants may put questions to President Malpass in the Q&A function on Zoom, and I will be bringing those--as many as I can--to his attention later in the program.

But I want to go back to where you ended, which is the devastating effects on what you're referring rightly to as the IDA countries, the 75 or so countries that are truly poor. The World Bank is dedicated to eliminating poverty. Where do we go from here? I mean, how much is debt restructuring or debt forgiveness a part of the way to get out of this mess? How much is it if the rich countries were to deliver on vaccinations? What is the priority for addressing those lasting costs of the COVID pandemic in the emerging world?

MR. MALPASS: Each of those is important. On vaccinations, what the World Bank has done is tried to have-- we have programs in some nearly 70 countries where they can actually have contracts to get vaccines and to deploy the vaccines. 

We think a country-based model is very important in actually delivering goods and services to people, so we work a lot with the governments of countries to try to have a noncorrupt environment that allows procurement, for example, with clear contracts. That was one of the big problems with vaccines, because countries were not entering into actual contracts, and then there wasn't the preparation that was needed to deploy those. We are expanding every day the contracts with countries and also encouraging the health ministers and the finance ministers of the under-vaccinated countries to seek contracts. And we can finance; we have practically unlimited financing available if they will enter into contracts for vaccines and for the deployment, importantly, which we can help them with, and for the therapeutics, as well.

With regard to the debt payments, these are staggering. In about March of 2020, I called for a moratorium. As the pandemic struck, it made sense for the poorest countries to be given a hiatus in their payments. Working with the IMF, the G20 declared the Debt Service Suspension Initiative, the DSSI. Unfortunately, it didn't extend far enough through the G20 process to get to the private sector or to some of the official credits that were out. And so, it had limited impact in terms of the savings on debt service. And now we are faced with it-- it expired at the end of 2021. So, the countries not only will have to resume those payments, but then pay interest on the unpaid-- on the amounts that they deferred. It's really a compounding of the amount of debt on the developing countries and especially on the poorest. 

The G20 also initiated what's called the Common Framework. It sets out to provide, to help countries achieve sustainability through debt relief. But unfortunately, it stalled. Only three countries applied and there hasn't been much progress on those. 

We are making some progress on Chad, where the World Bank has a big concessional program. The World Bank operates in these poorest countries often through grants or zero-interest-rate loans. We have a sizable program, and have had, in Chad, and that will continue, but the amount of the debt payments going to creditors is large compared to the amount of money that can be put in. There is an IMF program now and an intention to try to get the large, private sector creditors who are oil-related to provide relief.  Chad is seeing difficulty in producing or keeping up its volumes of oil production because of the challenges there. That gives you a sense of where the debt stands.

One statistic that we looked at is, for the IDA countries--this is the poorest countries in the world--they are expected to pay, in 2022 alone, $35 billion to creditors largely in much better off countries. And so, that compares-- we just went through the IDA replenishment cycle. The entirety of the three-year commitments by the whole world for these countries was $24 billion. That's over a three-year period; meaning, roughly $8 billion per year from all of the advanced countries, the countries around the world put money into IDA. That's roughly $8 billion per year. But in 2022 alone, the creditors will take up $35 billion from the same set of countries. That puts into perspective the negative flow that's going on the debt side.

And then, final point, Adam, is the policies themselves, meaning it's okay to complain about the world inequality and then in addition, some countries are really taking steps to increase their level of vaccination, to be more transparent in the debt that they take on, and to make the regulatory changes that are more encouraging to the private sector. The World Bank is deeply committed to enabling the private sectors in countries or to helping countries create an environment that enables private sector investment. We have to keep focused on that. The long-term solution, even for the poorest countries, is to have an environment where their own citizens want to invest and outsiders want to invest in business in these countries. 

And we work on that every day. Frankly, the going is challenging. There's often laws that have been on the books for a long time that need to be changed, and there's business practices that don't attract private businesses. We work with governments daily to try to improve those.

MR. POSEN: It's a huge agenda, and I just want to go back a moment on the debt restructuring, the, I won't say "failures," but incompleteness of the DSSI and the Common Framework. The kinds of numbers you raise, David, about the $35 billion coming out and the $8 billion a year going in in the IDA countries, are not unprecedented, but in this particular context of the COVID crisis--and, as you say, large amounts of private capital will be available and large amounts of debt issuance by the rich countries--this mismatch seems all the worse.

Can you say a bit more about, then, the process? In the sense of, for the private creditors, who should be at the table? How can the Bank or the Fund or, in general, member governments get the private sector better allocating capital? But also public sector. We talk about Paris Club. Is the issue that some of the most important official sector lenders are not part of the Paris Club, or is the Paris Club itself having misfunctions that you'd like to see change?

MR. MALPASS:   Each of those is a challenge. One, to give you the context, there's been a very big shift in the composition of the debt over the last 10 years. Ten years ago, the Paris Club-- I have a slide which I'll show you, though you won't be able to read it very well. It kind of looks like this. The bar on the left-hand side is-- in 2010, the amount of debt--official, bilateral, and private sector debt for the DSSI-eligible countries, which is very close to the same as IDA countries--and then in 2020. What's happened is there's lots more debt, but the amount of debt owed to the Paris Club, which is the official creditors that used to be the majority of the debt of these poorer countries, that's shifted. Now, there's much more owed to China. And China is not in the Paris Club, nor is India, nor Saudi Arabia. So three of the big creditors are not part of the Paris Club. As you look to do a restructuring, they are brought in separately, which is a challenge. 

There's even a challenge under the Common Framework of debt reconciliation. If you say, how much debt does Chad have, to external debt. That took, seems like, over a year for people to find a table to sit around and compare notes. Within the debt sector in advanced economies, there's a bankruptcy process where, when a debtor hits the wall, they can sit under a bankruptcy process and compare how much debt each of them is owed and then come up with a restructuring proposal. There's no corresponding availability of process for sovereign debt, and I don't think there could be, but what we need is better facilitation for restructuring processes for countries. 

And the reason for that: many more countries are in a situation where their debt is unsustainable. They took on the debt pre-COVID, and oftentimes too much debt with non-transparent terms. And now, in the post-COVID environment, there's just not going to be enough money for them to pay the debt service, and they get into very difficult restructurings because the contracts are under nondisclosure agreements, which is problematic. We are facing that in many countries, where the contracts themselves are not available to the various institutions to help the country try to reschedule the debt. Under the Common Framework, the debtor, and under the Paris Club process, debtors don't sit at the table themselves. Here, they've got outsiders deciding what to do in terms of a restructuring process where some of the key contracts-- the biggest contracts-- the terms are not public. 

In the most recent Chad comment from the creditors committee, which came out on January 7th, it talked about good-faith efforts by the private sector creditors to try to reschedule the debt. That's not encouraging. A key goal for developing countries is to have light at the end of the tunnel so they can invite new investment from their own citizens and outsiders to invest in their country. And investment is way too low, and part of that is because investors realize that a lot of their funds are going to have to go for debt service payments to previous contracts that are maybe not disclosed.

Another issue that's challenging within the debt environment is ESCROW accounts. The countries have sometimes given collateral or ESCROW arrangements, which means that it makes the restructuring of the debt much harder than it was in previous cycles. The World Bank has issued several reports, now, one in 2019, pre-pandemic, which said four waves of debt have already occurred and we're worried about another one.  We followed up in 2020 and 2021 with more reports on debt transparency and the steps that could be taken and the World Bank keeps a massive database called the DRS, the debt reporting system.  We put out an annual report called the IDS, which is one of the base sources of information on debt, and we've been expanding the definitions of debt to what are called debt-like instruments. 

I'll give you one example, and that's central bank swaps. The countries have been taking on debt through swaps that were not recorded as debt because they were swaps. But the effect of them is very similar to debt. That's now being picked up in the debt reporting system, the DRS, and made public on our databases. 

I know that was a long answer, Adam, but it's critical that we have more transparency and that we work toward restructuring processes. For countries that have unsustainable debt levels, it simply is not enough to address the short-term liquidity needs of the country.  You have to address the medium-term debt sustainability if you are to attract new investment.  

MR. POSEN: Thank you, David. This is obviously at the core of the World Bank's mission and decisions.  And so, I appreciate the depth of your answer.

Just a reminder to our audience, if you're a registered guest, which anyone could have done ahead of time, you're able to post questions in the Q&A function, and I'll be coming to some of those questions shortly.

Before we turn to some of the more macro aspects of the prospects that your team at the Bank and you have put out, let me just go back to one thing you said and one thing you didn't say.  So, one thing you said was you mentioned the contracts-based approach at country level that the World Bank has pursued for getting vaccines not just purchased but into the hands and distributed. That's obviously somewhat in contrast to the COVAX approach of donations and other means of getting it out there.

As we're finding and as we were warned to expect, COVID, as we have it, is both a recurring pandemic, or endemic, in part because we're not vaccinating enough people fast enough; but also, it may not be the last--and certainly is not the last pandemic we're going to have.  So, going forward, we know there was the G20 working group with Ngozi, Carmen, Larry Summers talking about preparation for future pandemics. You have this experience at the Bank of contracts--I don't want to say "versus"--but as compared to the COVAX approach of donations. What do you want to see going forward in terms of pandemic financing, pandemic preparedness, vaccine distribution, and so on?

MR. MALPASS: Thanks. It's vital that more countries prepare for crises. I think we can do that country by country, and also with some global support for their efforts.  That's a core part of the World Bank mission. One way to do that is to expand that and expect more country by country.  We work with the health ministers and then connect those health ministers with finance ministers in order to try to bridge gaps in the funding that the countries are providing. Oftentimes, the countries are facing tight budgets.  Health preparedness gets too little in terms of funding. That can be worked on through country programs.

With regard to our contracts, we also work with a group in Africa called AVAT, which had contracts. In other words, the critical missing step in 2021 was the availability of vaccines that could be entered into contracts. We were able to finance a large number of African countries working with AVAT and we sought the same kinds of opportunities with COVAX throughout. We have worked closely with COVAX.

But to your point, one of the challenges was to match the countries or what the countries were willing to use as vaccines--remember, early on, some countries wanted AstraZeneca; some wanted Johnson & Johnson.  And only a few had capabilities to deploy Moderna and Pfizer because of the cold chain. There needed to be, and we put in place, systems to assess the capacity of countries for the various types of vaccines, and then to match that with delivery schedules. That's been our focus and we worked with both AVAT and with COVAX to try do that as well. 

And there were some successes in that, country by country, but there were also a lot of frustrations because some countries were receiving vaccines that their people did not want to take because the communications efforts had not been done to persuade people that that particular vaccine that was arriving at their airport was usable. There were a lot of vaccines that were returned to the senders with due dates, the eligibility dates not met.  Just frustration all around, and I think as we look to go forward, I think there has to be a priority put on what the countries are able to use and want to use. The people of the country have preferences and they have the ability to use different types of vaccines and therapeutics. I think we have to have a system of distribution and engagement with the countries that's sensitive to that, which takes-- the World Bank has people on the ground in almost all of the countries that are working daily with the health ministers, the finance ministers, in order to assess those needs and the hesitancy and then break through it and encourage use of vaccines and therapeutics in countering COVID.  

MR. POSEN:   Okay--I--

MR. MALPASS:   Thanks.

MR. POSEN:   No, no.  There's so much to cover and I want to get to the group questions.

MR. MALPASS:   That's [audio distortion]--

MR. POSEN:   The one thing which is mentioned, of course, in the GEP is not--you have not mentioned so far is aspects of climate change and climate change finance for emerging markets and developing countries.  And your report does go in-depth into issues of commodity exporters and boom-bust cycles of commodity prices. And so, I was wondering if you could say a bit more about how countries that are dependent on commodity exports, in particular but in general, can rebalance in a world where, God willing, we are moving away from fossil fuel usage, and the Bank's role in that. 

MR. MALPASS:   Yeah, climate change occupies World Bank every day. 35 percent of our funding goes to climate finance. You can imagine the pressure that puts then on health finance and education, nutrition, and all the other programs of the Bank. 

What we did in 2021 was the Climate Change Action Plan, which was specific, detailed, and made commitments of the Bank, which are huge within the global context. In Glasgow, there was the search for $100 billion of financing for climate finance. The World Bank alone is a quarter of that. The whole rest of the world, the other three quarters. The World Bank alone is providing more than the entire G7 for this climate finance. And it was a challenge in Glasgow to have people recognize the need to have actual projects that will reduce greenhouse gas emissions and will add to the adaptation of countries.

Again, we want to look at projects that will actually have impact and make a difference, and then bring together global funding for those through private foundations, through carbon offsets. That's a major effort to have an impact where the World Bank can play an important role in the middle of bringing in that global community funding to global public goods. Within the GEP, it takes account of that but recognizing that quite a few of the countries produce oil and natural gas and those are in huge demand right now. The World Bank doesn't fund coal, doesn't fund upstream fossil fuel investments. What we are doing is creating action plans for countries, with countries, so that they can reduce their greenhouse gas emissions, and that means identifying the major sources of emissions and then working away from that. One of the starting points is to help the countries stop subsidizing the use of fossil fuels. That's a mainstream effort within our country programs. And then, also finding development avenues for the countries that aren't dependent on greenhouse gas emissions.

A big step--I know--is coal. Helping countries transition in a holistic way away from a dependence on coal-fired power plants.  For the world, we've set out as a major challenge, huge amounts of funding that need to go into that transition.

MR. POSEN:   And just once more, for the record, the monies going to that, they do not become part of the debt--unsustainable debt burden.  This is on a separate account or is this part of--is this grants?  Is this lending?  I mean, I know this is obvious to you but, please, spell it out.

MR. MALPASS:   Well, one thing about the multilateral development banks is they are on the basis of--and the World Bank, especially--of grants, and then of zero percent interest rate loans for the poorest countries.

Even for the middle-income countries, these are very low--these are very deeply concessional interest rate loans. And because of the way that it's working, we put net flows into those countries, meaning it's a positive contribution from the World Bank. 

The challenge on the debt side that we were discussing before is that a lot of those loans are at high interest rates. One of the challenges is the creditors are making a big return from the poorest countries, and that's the situation that we are trying to put pressure on the private sector creditors, also some major official bilateral creditors, to provide debt relief in the form of reduced stock of debt and reduced payment.  And so, I'm making that distinction.  As the World Bank makes loans to countries for climate finance, those are going to be concessional interest rate loans that are very long term.  It's a difference in substance in the type of debt that's being put out.

MR. POSEN:   Okay.  And so, let me now take you back and then go to the audience, but I'm going to take you back one last piece, which is obviously the GEP as a prospects exercise as you said, twice yearly, is partly about the conjuncture, the shorter-term flows. And so, there's a lot of attention, including from Chinese President Xi, I think, in his last public speech, about the potential impact of Federal Reserve and other advanced economies central bank tightening on the developing world. 

You've--obviously tracking that issue and have opinions on that, but you've also spoken about issues of capital misallocation as opposed to just surges in and out. Coming at it from that perspective, how do you view the issue of, say, Fed aggressive tightening and how we should be thinking about that?

MR. MALPASS:   Well, obviously, a complicated question; a lot of very, very engaged people thinking about it.

One observation I have is the advanced countries having had interest rates at or near zero has to be viewed historically as an anomaly.  In order to have a growing world where capital is allocated through markets, there really needs to be a positive interest rate; that's the core of how markets work, and we haven't had that.  That leads to then an allocation based on something other than markets.  A lot of it’s in terms of regulatory policy but also risk aversion by the investors. That gets you into a situation where a huge amount of the capital is being allocated to already capital-intensive parts of the world, the advanced economies building more and more on top of already heavily built infrastructure and real estate, for example. And that is the problem that I've tried to identify. There needs to be a broader allocation of capital worldwide in order to achieve the goal that everybody has, which is that developing countries actually develop.  That has to be a core part of the global system in order to address the refugee flow, the malnutrition that's going on, and so on. There has to be more money and growth flowing into the developing countries and we've had the opposite case.

I was struck this morning by the Microsoft investment, $75 billion, in a video gaming company at a time when, to put it in perspective, the entire IDA20 commitment that we were just able to achieve in December was $24 billion spread over three years. That's $8 billion per year to 75 of the poorest countries. $8 billion, compared to a $75-billion, single-shot investment in a gaming company.  And you have to wonder-- wait a minute, is this the best allocation of capital? This goes to the bond market. Huge amounts of flows are going to the bond market, and basically that's a very small portion of the world that has access to bond financing.

MR. POSEN:   Absolutely. So, that's a great bridge for me to bring in some of the questions from our audience, because a number of them--Federico Sukeda [phonetic], an anonymous attendee, Patrick Flynn [phonetic], a number of our audience are asking questions about how to get the private capital off the sidelines.

So, for example, Rami Osmond [phonetic] asks about, "What is your point of view on the inclusion of the developing countries and LDCs in global value chains to get--to help alleviate some of the unique quality issues?"

Patrick Flynn talks about--asks about the ambition to promote and establish smart business practices in developing countries to attract private capital.  Is their own capital sitting on the sidelines?  Is there a possibility of a race between developing countries to get ahead on that front?  And again, just to pull together just a few of the very good questions, from Federico Sukeda, I mean, how do you see the role of commercial financing in helping IDA countries develop?  Should these countries give up--not be planning on using commercial financing, or is there something to get them into commercial financing, if not bonds, per se. 

So, that whole nexus of issues, if you could expand, David, on your and the Bank's vision for that aspect.

MR. MALPASS:   I know there has been the hope of market access for the poorest countries, and I think some of them will achieve that.  But in the current environment, I think it’s difficult to have market access before--until you have a system that attracts small business financing, commercial financing.  And that means the availability of floating rate financing for businesses around the world.

Notable over this last decade is the very low amount of small business financing that's occurred even in the advanced economies.  This was a major challenge facing Europe in 2012, 2013, and 2014, where the European Central Bank tried to put in various mechanisms to subsidize the finance into small businesses, and with only mixed success.  For really this last decade, there's been the odd situation of the central banks holding very long-duration portfolios financed by bank reserves.  This challenges the concept of commercial financing and I think some of the echoes from that are in the developing world. 

What we tried to do in the pandemic from the World Bank side is really beef up our trade finance and our short-term commercial finance for existing businesses.  IFC had a book of business and could go back to those businesses and said: do you need floating-rate financing?  There was a big uptake of that, which helped.  But frankly, we're small compared to the needs of the developing world.

I wanted to mention, Adam, digitalization is very important.  It's something that can help even the poorest countries leapfrog.  The farmers in the poorest countries have, in many cases, access to cell phones that can show them planting cycles, which is really helpful information.  I think one of the high priorities for the World Bank over the next year and two and three years is to push, to help digitalization and the breakdown of the monopolies.  There's been a monopoly on undersea cable access in West Africa.  That's beginning to break down and that creates really important opportunities for inclusion in the value chains so, people in the developing countries can get included in global value chains, but they need digitalization and access to short-term finance which, right now, is in really short supply.

MR. POSEN:   No, thank you.  I mean, at Peterson Institute, one of the ways we contributed in the past is working on the importance of trade finance, and our board member--one of your predecessors--Bob Zoellick, pushed very hard on that during the previous financial crisis, to good effect.  So, I'm delighted to hear you emphasizing that. 

Let me turn--there were a bunch of questions on China as an official lender.  So, again, from our audience, Leric Hale [phonetic] asks, how does undisclosed, nontransparent debt related to China's BRI initiative reinforce other indebtedness in emerging markets?

We also have Barry Wood asking, of that debt, the $35 billion in payments out from the IDA countries you were talking about, how much of that is owed to China?  And of the amount that you think is actually going to be repaid, how much do we expect China to receive in repayments from that?

And then, I believe there's one more in this vein on this topic.  So, Shabtai Gold asked, is China interested in helping other G20 countries force some kind of private sector deal? 

So, I realize that there are political sensitivities in your role talking about China, but there's a great deal of interest.  Our colleague, Anna Gelpern, led a multiauthor study on issues of transparency in lending from China.  So, if you could say a few words about China's role in all this.

MR. MALPASS:   And we should.  I think the world should talk about it. China has been pretty forthcoming in being willing to talk about it.  We've seen President Xi make statements on it.  I had two conversations with Premier Li Keqiang in December, or toward the end of 2021.

I think it is okay for people to talk about this.  My impression: China would like to see developing countries--other developing countries, it's considered still a developing country itself in some of the definitions.  But I should note from the World Bank's perspective, they're a net payer into the World Bank and they were a big participant as a donor into IDA20, the just-completed IDA20.  We welcome that.  We have a big relationship with China. 

Now having said that, many of their past contracts had nondisclosure clauses.  That's one challenge.  Starting in 2014, they made most of their contracts have NDAs in them.  That means that the debt--not only is the debt not transparent, but the connection with the investment that is being made is often--it's hard to separate the pricing of the debt from the pricing of the investment.  And that gets to the question of are you getting a good quality investment for the debt that's being taken on, and then what are the surprise terms for the debt as you uncover it.

Uganda has been in the news, and the contract that the airport was not a fully public contract.  It plays out over a period of time that then limits the options under various restructuring agreements.

I wanted to mention that--with regard to how the G20 operates, then, it's one part of this debt question, but I think we have to also bring in the private sector markets, as well.  London and New York continue to be the center for bonds, and I think there's quite a bit of progress that could be made on collective action clauses.  There's been the proposal for aggregated collective action clauses, which I think would then empower.

Let me give you some data.  I mentioned the $35 billion of the debt service from IDA countries. Of that, China is 37 percent; so, $13.1 billion of that which-- by and large, throughout the crisis-- China has taken full payments through its various creditors.  That's China ExIm Bank, China Development Bank, and some of the other creditors. 

Adding up to the 35, I mentioned 13.1 to China, 13.4 of private sector debt.  A lot of that is bond payments that are coming due on the interest on the bonds, and then, the official bilateral debt not counting China is 8.6.  That shows you that the Paris Club portion of the debt that's coming due even for the IDA countries is small.  And so, that poses a challenge for the world.  The London Club that used to operate that collected private sector payments--or private sector creditors--hasn't been functioning very much.  It's not giving guidance. 

One example of that, under the DSSI, the G20 said it expected private sector creditors to participate.  In reality, there was none by the private sector.  So, there's not much of a cohesion of the private sector creditors.  China took note of that and some of its institutions were not fully participating in the DSSI, as well. 

I think that gives you a set of the challenges.  I proposed and have been outspoken on the need for more

Transparency, and also for the money centers-- the financial centers of the world-- to look at statutory changes that would help with the restructuring process.  One key takeaway for people is that the creditors have many, many more tools, much more powerful, than the debtors in this environment.  By and large, the creditors are taking full payments for--under contracts that may not be public and may not have been very wise for the countries to enter into.  And yet, the full payments are being made even at a time when the countries need health and education expenditures and climate expenditures.

MR. POSEN:   Great, thank you.  Following up on--I appreciate your spelling out for--I mean, a lot of our audience are expert but a lot are not on the issues of Paris versus London Club and who's in the world and which really matters.

Another follow-up question, in the China regard but on a broader point, Simon Lester [phonetic] asks, "You've argued in the past, Mr. Malpass, that, quote, the World Bank can do a better job meeting its commitments to poorer countries.  Can you talk a little bit about your efforts to shift World Bank lending priorities towards these poorer countries and away from middle-income countries such as China?"

And just to follow up on that on my own, as I mentioned at the start you served in U.S. Treasury twice.  You've been engaged in public life domestically in the U.S. on these issues for a long time.  Obviously, China being treated as a developing country or called a developing country has been a hot-button issue in U.S. domestic politics, particularly in relation to the WTO, but also the World Bank.  So, if you could say a little bit, sort of with your Washington audience in mind, how do you think the World Bank should handle this and how much room do you think the Washington types have to give the World Bank for dealing with this?

MR. MALPASS:   Yeah, thanks.  So, the World Bank doesn't have a definition of someone as a developing country.  So, we continue to lend some to China through IBRD.  That was agreed to in the capital increase of 2018.  It's a scaling-down of the lending to China through IBRD. 

And as I mentioned, China is making past payments.  They're actually a net contributor to the Bank, even though they're getting some limited lending from the World Bank under the capital increase that was negotiated really by the world shareholders.  And there's been a major shift in the type of lending to China, to have it be very focused on global public goods.  For example, we're making loans in marine plastics; also, in carbon--reduction of coal-fired power plants.  Tthose are the types of loans that probably the world wants and China has welcomed.

And they have a very specific reason for wanting the loans.  They say in the past the World Bank helped them create pilot concepts that they themselves then expanded around China and had success in things like solid waste disposal and sewage treatment into the river systems, just to give one example.  So, with that, I'm comfortable with where we stand on that.

Now, your opening point was: is the World Bank shifting away from middle-income countries toward the poorest?  That's not the right phrasing.  We've been expanding in recent years toward IDA as a principal form--IDA is getting bigger relative to IBRD.  What that means is there's a natural shift toward the World Bank supporting the low-income countries.  We continue to be engaged in middle-income countries. By the way, China, I think is classified as an upper middle-income country.  The World Bank continues to want to be engaged in middle-income countries where there's demand and where there's benefit to the country.

With global interest rates as low as they are, quite a few middle-income countries have said we can borrow from markets and don't need to from IBRD, and that's okay with the World Bank as well.  So, there's a little bit of a demand pull, or supply push.  We look for ways that we can help countries.  My feeling is there's an okay balance going on between IBRD and IDA and the annual-- one of the unique things is IDA is replenished every three years in consultation with donors and with the recipients of the grants and the zero interest rate loans, and that's powerful.  That's somewhat unique in the world where there's this dialogue between the two, and then there's an agreement on a large amount for the replenishment.  So, I think it's tested every three years.  It's a good, healthy process going on.

Final point, Adam. The challenge, then, is how do we get good outcomes for the countries?  That's what I came into the World Bank to try to do.  That's been an age-old problem for development assistance.  How do you really help people in the poorest countries, or in developing countries in general?  And that challenge is still before us.  We have a hard time identifying and working with governments to actually put in the changes.  And IFC has trouble finding business environments, private sector investments. 

We've expanded--I mean, I should brag a little.  During the pandemic, we had the fastest growth and the highest lending volumes ever for the World Bank.  We expanded 60 percent in the 15 months through June, which is the biggest expansion of the World Bank.  But still, we have quite a few countries where we have trouble making fast-disbursing loans because the policy environment is simply not attractive to making new investments.  And in those cases, we slow it down.  We're reluctant to put in a lot of money upfront to a country that's not really doing all it can to help itself.

MR. POSEN:   Okay, wow.  So, we've covered a lot of ground.  I'm going to circle back with maybe the last question from the audience, something more short-term, related to the GEP. 

Nicole Bastian [phonetic] asks, "How do you see the rise in food prices for developing and emerging markets?  What can governments do and what are you projecting this year?"  And obviously, that relates to the general question of how inflation in the U.S. and other large, rich economies, how that transmits across the rest of the world.  So, how do you see that?

MR. MALPASS:   Yeah, challenging.  So, food prices are up in the U.S.  They're up the same amount or more in developing countries.  The inflation rates are up and they are raising interest rates in order to try to keep their currency stable. 

One problem is the markets tend to go toward the--or fall away from the weaker player.  So, that means currencies come under pressure and capital outflow is coming from the developing countries.  When food is more expensive, that means children are eating less who already have malnutrition, a giant problem.  We've accelerated the IDA cycle from three years to this first time in history it was a two-year cycleThat allows us to add more money through that particular program.  We invite other bilateral aid agencies to increase their aid dramatically during this challenging time.  We work on seeds. Actual things that can help farmers and agriculture produce crops locally, that's an important part of surviving this challenging time. 

And I come back, Adam: I think the global macro policies need to have a stronger focus on this inequality problem.  The capital is concentrating to the smaller and smaller groups, and both the fiscal policy and the monetary policies are doing what helps the people at the upper end, rather than things that would increase the median incomes for people around the world, and especially for developing countries. 

I mean, think about it:  Do you really want a situation where the major central banks are borrowing money from banks in order to buy bonds?  That concentrates wealth, and we see it in the data everywhere in the world.

MR. POSEN:   Okay.  A lot of challenges, a lot of sad news, but obviously a lot of work to be done.

MR. MALPASS:   Can I say, on a positive side: technology is amazing, and the availability of digitalization to the poorest countries is huge.  I mentioned the breakdown of the monopolies in West Africa and I hope in other places will be really powerful because it allows people to actually get access to information which is going to be, I think, the long-term solution, whether for pandemics or for farmers.  It's global in scope and really powerful.

MR. POSEN:   Okay.  Well, thank you again to David Malpass, the 13th President of the World Bank, and to the whole World Bank Group for helping us get the word out about the state of the world, particularly the developing world, based on the Global Economic Prospects Report of the World Bank.

And speaking from the Peterson Institute and our global audience, we appreciate this chance to ask you questions and converse with you, David.

MR. MALPASS:   Thank you, Adam and Peterson Institute.