LECTURE 1 Introduction to Economics What is economics? • Economics is the science of how people respond to incentives and make decisions about allocating scarce resources. Microeconomics • studies decision-making by individual economic agents: – When does it make sense for one firm to merge with or take-over another? – How does a firm decide whether or not to enter a new market? – Should Australia join free trade agreements? – What is the likely impact of high petrol prices on an individual’s car usage? Macroeconomics • studies the aggregate impact of individual decisions (objectively): – What determines interest rates and exchange rates? How are they linked? – What determines a country’s rate of economic growth and aggregate unemployment rate? – How will global warming (and government policy responses to this issue) impact on the Australian economy • Microeconomics provides a foundation for macroeconomics