If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:9:59
MOD‑1 (EU)
MOD‑1.A (LO)
MOD‑1.A.1 (EK)
MKT‑1 (EU)
MKT‑1.A (LO)
MKT‑1.A.1 (EK)

Video transcript

as we begin our journey into the world of economics I thought I would begin with a quote from one of the most famous economists of all times the Scottish philosopher Adam Smith and he really is kind of the first real economist in the way that we view it now and this is from his The Wealth of Nations published in 1776 coincidentally the same years the American Declaration of Independence and it's one of his the most famous excerpts he generally indeed he being an economic actor neither intends to promote the public interest nor knows how much he is promoting it by directing that industry so the industry and control of that individual actor in such a manner as its produce may be of the greatest value he intends only his own gain he intends only his own gain and he is in this as in many other cases led by an invisible hand to promote an end which was no part of his intention and this term invisible hand is famous led by an invisible hand to promote an end which was no part of his intention he's saying look when individual actors just act in their own self-interest that often in aggregate leads to things that each of those individual actors did not intend and then he says nor is it always the worst for society that it was no part of it so it's not always necessarily a bad thing by pursuing his own interest he frequently promotes that of the society more effectually then when he really intends to promote it so this is a pretty strong statement it's really at the core of capitalism and that's why I point out that it was published the same year as the American Declaration of Independence because obviously America the founding fathers they wrote the Declaration of Independence the Constitution it really talks about what it means to be a democratic country what are the rights of its citizens but the United States and its overall the overall experience of an American is at least as influenced by the work of Adam Smith by these kind of foundational ideas of capitalism and they just both happened to happen around the same time but this idea it's not always that intuitive individual actors by essentially pursuing their own self interested ends might be doing more for society then when then if any of them actually try to promote the overall well-being of society and I don't think Adam Smith would say that it's always good for someone to act self-interested or that it's never good for people to actually think about the the implications of what they're doing in an aggregate sense but he's saying that frequently frequently the self-interested action could lead to the greater good could lead to more innovation could lead to better investment could lead to more productivity could lead to more wealth more more a larger pie for everyone and now economics is frequently and and when he makes a statement he's actually making a mix of a micro economic and a macroeconomic statement micro is that people individual actors are acting in their own self-interest and the macro is that it might be good for the economy or for the nation as a whole and so now modern economists tend to divide themselves into these two schools or into these two subjects micro economics micro economics which is the study of individual actors micro economics of those actors could be firms it could be people it could be households and you have macro economics which is the study of the economy and aggregate macro economics and you get it from their words micro the prefix refers to very small things macro refers to the larger the bigger picture and so microeconomics just to restate it is is essentially how actors actors make decisions make decisions or I guess we could say allocations allocations decisions / allocations allocations of scarce resources and you're going to hear the word scarce resources a lot when people talk about economics and a scarce resource is one that you don't have an infinite amount of for example love might not be a scarce resource you might have an infinite amount of love but a resource that wouldn't be scarce is something like food or water or money or time or labour these are all scarce resources and so microeconomics is well how do people decide where to put those scarce resources how do they decide where to deploy them and how does that how does that affect prices and mark and whatever else macroeconomics is the study of what happens in aggregate to an economy so aggregate what happens in aggregate to an economy from the millions of individual actors aggregate aggregate economy we have now have millions millions of actors and it often focuses on policy related questions so do you raise or lower taxes or what's going to happen when you raise or lower taxes do you regulate or deregulate how does that affect the overall productivity when you do these so it's policy top top down top down questions and in both macro and microeconomics there's a there especially in the modern sense of it there is an attempt to make them rigorous to make them mathematical so in either case you can start with some of the ideas some of the philosophical ideas or the logical ideas that say someone like an Adam Smith might have so you have kind of you have these and their basic ideas about about how people think how people make decisions so philosophy philosophy of people of decision making in the case of in the case of microeconomics decision making and then you make some assumptions about it or you simplify it so I'll do the right this you simplify it and you really are simplifying you say all people are rational or all people are gonna act in their own self-interest or all people are going to maximize their gain which isn't true human beings are motivated by a whole bunch of things but you simplify these things so that you can start to deal with it in kind of a mathematical way so you simplify it so you can start dealing it with it in a mathematical sense and this is valuable it can clarify your thinking it can allow you to prove things based on your assumptions and so and you can start to visualize things mathematically with charts and graphs and think about what will actually happen with the markets so it's very very valuable to have this mathematical rigorous thinking but at the same time it can be a little bit dangerous because you're making this huge simplifications and sometimes the math might lead you to some very strong conclusions conclusions which you might feel very strongly about because it looks like you proved you've proven them the same way that you might prove relativity but they were based on some some assumptions that either might be wrong or might be oversimplifications or might not be relevant to the context that you're trying to make conclusions about so it's very very very important to take it all with a grain of salt to remember that it's all based on some simplifying assumptions and macroeconomics is probably even more guilty of it in microeconomics you're taking these deeply complicated things the human brain how people act and respond to each other and you're and then you're aggregating it over millions of people so it's ultra complicated you have millions of these infinitely complicated people all interacting with each other so it's very complicated many millions of interactions and fundamentally unpredictable interactions and then trying to make assumptions on those trying to make assumptions and then doing and then doing math with that that could lead you to some conclusions or might lead you to some predictions and once again it's very important this is valuable it's valuable to make these mathematical models to make these mathematical assumptions these mathematical conclusions but it always needs to be taken with a grain of salt and so that you have a proper grain of salt and so that you are always focused on the true intuition and that's really the most important thing to get from a course on economics so that you can truly reason through what's likely to happen maybe even without the mathematics I'll leave you with two quotes and these quotes are a little bit they're a little bit funny but they really I think are helpful things to keep in mind as you start to especially go deep into the mathematical side of economics so this right over here is a quote by alfred knopf who is a publisher in who in the 1900s an economist is a man who states the obvious in terms of the incomprehensible and I'm assuming when he's talking about the incomprehensible he's referring to some of the mathy stuff that you see in economics and hopefully we'll make this as comprehensible as as possible and see that there is value in this but it's a very important statement he's making oftentimes it's stating a common sense thing it's dating something that's obvious it's obvious and it's very important to always keep that in mind to always make sure that you have the intuition for what's happening in the math or to know when the math is going in a direction that might be strange based on oversimplifications or wrong assumptions and then you have this quote over here by Laurence J Peter most famous for Peters principles professor at USC an economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today and once again important to keep in the back of one's mind because especially and this is especially relevant to macroeconomics because in macroeconomics there's all sorts of predictions about the state of the economy what needs to be done how long will the recession last what will be the economic growth next year what will inflation do and they often prove to be wrong in fact few economists even tend to agree on many of these things and it's very important to realize that because oftentimes when you're deep in the mathematics of the economics it might seem to be a science like physics but it's not a science like physics there is open it is open to subjectivity and a lot of that subjectivity is all around is all around the assumptions that you choose to make