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Introduction to economics

In this video, we introduce the field of economics using quotes from the person that many consider to be the "father" of economics: Adam Smith. Topics include the definition of economics, microeconomics, and macroeconomics as a field and the role of assumptions in economic decisionmaking. Created by Sal Khan.

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  • piceratops ultimate style avatar for user ∫∫ Greg Boyle  dG dB
    How important is it to understand people's behavior and potential reactions when it comes to making economic policy?
    (644 votes)
    • orange juice squid orange style avatar for user Dylan
      A lot of economists seems to use models that aim to predict people's behaviors logically based purely on things like price, interests rates, etc with theories such as aggregate supply and aggregate demand. But as you will see later in the playlist, Sal seems to think human emotions play a great role as well, i.e., how good they feel about the economy in determining whether they will spend or save. So, short answer, very important--but it is perhaps just as important as to what motivates said behavior or reaction.
      (672 votes)
  • marcimus pink style avatar for user prritha ray
    What is the difference between micro and macro economics?
    (54 votes)
  • hopper cool style avatar for user yunandarphyoe2004
    Why do people learn economics? Will it help one to maximize the gap between classes that most of us are suffering right now? I must admit all the problems happening in our world come from Capitalism and Policies. I like this class much more than programming. I could listen to this all day. But I have so many questions. May someone clear my thought?
    (11 votes)
    • male robot johnny style avatar for user Siddharth Muzumdar
      Since there are multiple questions here, I'll try to simplify my POV.

      Economics helps us understand individual behaviours (to an extent), and eventually understand national economies through macroeconomics.

      The gap between classes (assuming you mean socio-economic disparities) can be better understood through economic concepts. The emerging and evolving field of development economics focuses on disparities across countries on several parameters.

      Capitalism, as we witness it today, has problems, but so do other political and economic structures. This is a very philosophical question that I would not be able to do justice to in this short answer.
      (23 votes)
  • blobby green style avatar for user Emmanuel Chungu
    What the meaning of demand?
    (22 votes)
  • piceratops ultimate style avatar for user Kenny Kumar
    Sal is basically saying at the end of the video that it is good to have mathematical and rigorous thinking when making predictions, but also important to use common sense and logic or else the prediction will turn out wrong. Is that right?

    If yes, what are some examples of using too much mathematics and forgetting the obvious, logical stuff?
    (24 votes)
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    • starky tree style avatar for user melanie
      Unfortunately, there are many instances in which common sense has lost out to mathematical rigor in economics. An old joke is a quote from economist Kenneth Boulding that said something to the effect of "Mathematics brought rigor to economics. It also brought rigor mortis."

      This is why rigorous training in applied mathematics and statistics is a necessary, but not sufficient step in becoming a good economist. As the economist Dani Rodrik wrote in a blog post "To become a true economist, you need to do all sorts of reading – from history, sociology, and political science among other disciplines . . ."
      (39 votes)
  • piceratops seedling style avatar for user Fire
    The statement by Adam Smith is dangerous if taken to be, in any sense, absolute. This is a descriptive statement about something observed; unfortunately many people live this sentiment (the idea that taking care of only yourself can lead to a universally beneficial outcome) as if it is a moral imperative or causal in nature. It is not, and pretending that being selfish increases universal well being is a lie, and leads to the justification of evil. Just wanted to point that out.
    (28 votes)
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  • marcimus pink style avatar for user Alexa Breezy
    What is meant by "Adverse balance of trade"?
    (8 votes)
  • leaf green style avatar for user Simon Raskin
    Re: Adam Smith's contention that the small producer pursuing his own interest can benefit society at large because of the invisible hand (i.e., competition)--doesn't this argument disappear if the producer is ultra-large, controlling the invisible hand, and not subject to competition?
    (8 votes)
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    • aqualine ultimate style avatar for user Ariocie Liang
      oh no, critical reading.
      It feels as if the invisible hand guiding each enterprising individual is the demand of the consumers. Companies have to change their products according to the tastes of the public; otherwise, they wouldn't be able to sell anything.
      BUT if the company can change or take complete control of that hand, has brainwashed most of the population, and is bent on conquering the world for its own selfish, harmful needs, well...
      that's some major Orwell stuff going on there.
      Then again, we are being theoretical here, right?
      (7 votes)
  • blobby green style avatar for user Hari Shankar Karthik
    At , I disagree with Sal when he says that simplifications lead to a stronger deviation from actuality in the case of macroeconomics than in the case of microeconomics. One could argue that while each individual is unpredictable, the consideration of millions of such individuals would 'even out' these deviations from the ideal and hence provide an even more accurate picture. Kind of like how in physics experiments, we take a whole bunch of readings and consider their mean to be the true value, as opposed to taking a single reading and using it for further calculations.
    (9 votes)
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  • blobby green style avatar for user royaldream877
    Can you recommend for me some books relating to economics?
    (5 votes)
    Default Khan Academy avatar avatar for user

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 time, 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 year as the American Declaration of Independence, and it's one of his 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 that the industry in 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 "the invisible hand" is famous. Led by an invisible hand to promote an end which was no part of his intention. He is 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. Then he says: nor is it always the worst for society that it was no part of it. So, it was not necessarily a bad thing. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. So, this is really a pretty strong statement. It's really at the core of capitalism. And that's why I point out that it was published in the same year as the American Declaration of Independence, because obviously America, the Founding Fathers, they wrote the Declaration of Independence, the Constitution, that really talks about what it means to be a democratic country, what are the rights of its citizens. But the United States, with its overall experience of an American, is at least as influenced by the work of Adam Smith, by this kind of foundational ideas of capitalism. And they just both happened to happen around the same time. But this idea is not always that intuitive. Individual actors, by essentially pursuing their own self-interested ends might be doing more for society than than if any of them actually tried to promote the overall well-being of society. And I don't think that 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 implications of what they are doing in an aggregate sense, but he is saying that frequently .. frequently, this 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, a larger pie for everyone. And now Economics is frequently .. and when he makes a statement, he is actually making a mix of micro-economic and macro-economic statements. Micro is that people, individual actors are acting out of their own self-interest. And the macro is that it might be good for the economy, or the nation as a whole. And so, now, modern economists tend to divide themselves into these two schools, or into these two subjects: microeconomics, which is the study of individual actors. Microeconomics .. and those actors could be firms, could be people, it could be households. And you have macro-economics, which is the study of the economy in aggregate. Macro-economics. And you get it from the words. Micro -- the prefix refers to very small things. Macro refers to the larger, to the bigger picture. And so, micro-economics is essentially how actors .. actors make decisions or, you could actually say 'allocations', allocations .. decisions or allocations. Allocation .. of scarce resources. And you hear the words scarce resources a lot when people talk about economics. And a scarce resource is one 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 would be scarce is something like food, or water, or money, or time, or labor. These are all scarce resources. And so microeconomics is how do people decide where to put those scarce resource, how do they decide where to deploy them. And how does that .. does that affect prices and markets, and whatever else. Macro-economics is the study of what happens at the aggregate to an economy. So, 'aggregate', what happens in aggregate to an economy, from the millions of individual actors. Aggregate economy. We now have millions of actors. And 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 de-regulate? How does that affect the overall productivity when you do this. So, it's policy, top-down .. 'top-down' questions. And in both macro- and micro-economics, there is especially in the modern sense of it, there is an attempt to make them rigorous, to make them mathematical. So, in either case you could start with some of the ideas, some of the philosophical ideas, so of the logical ideas, to say someone like Adam Smith might have. So, you have these basic ideas about how people think, how people make decisions. So, philosophy, 'philosophy' of people, of decision-making, in the case of micro-economics -- 'decision-making' And then you make some assumptions about it. Or you simplify it .. let me write this .. you simplify it. And you really are simplifying. You say "oh, all people are rational", "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. We simplify things, so we can start to deal with it kind of a mathematical way. SO you simplify it, so you can start dealing with it in a mathematical sense. So, this is valuable to clarify your thinking. It can allow you to prove things based on your assumptions. And so, you can start to visualize things mathematically, with charts and graphs and think about what would actually happen with markets. So it's very valuable to have this mathematical, rigorous, thinking. But at the same time, it could be a little bit dangerous, because you are making these 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've proven them in the same way that you might prove relativity, but they were based on some assumptions that either might be wrong, or might be over-simplifications, 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 assumption. And macro-economics is probably more guilty of it. In micro-economics you are taking these deeply complicated things that are the human brain, how people act and respond to each other, and then you are aggregating it over millions of people, so it's ultra-complicated. You've 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 math with that -- that could lead you to some conclusions or might be leading you to some predictions. And, once again, this is very important. This is valuable, it is valuable to make these mathematical models, with these mathematical assumptions for these mathematical conclusions, but it always need to be taken with a grain of salt. So, then you have a proper grain of salt, 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 you can truly reason through what's likely to happen, maybe even without the mathematics. I'll leave you with two quotes. And thse quotes are a little bit .. a little bit funny, but they're really I think helpful things to keep in mind, especially when you go deep into the mathematical side of economics. So, this right over here is a quote by Aflred Knopf, who was publisher in the 1900s. "An economist is a man who states the obvious in terms of the incomprehensible." And I'm assuming what he is talking about as the incomprehensible, he is referring to some of the 'mathy' stuff that you see in economics, and hopefully we're going to make this as comprehensible as possible. You'll see there is value in this. But it's a very important statement he is making. Oftentimes, it's taking a common-sense thing. It's taking something that's obvious .. that'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 into a direction that might be strange based on over-simplifications or wrong assumptions. And then you have this quote here by Lawrence J. Peter, most famous for Peter's Principals, a professor at USC. "An economist is an expert know 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 relevant to macro-economics, because in macro-economics there is always all sorts of prediction about the state of the economy: about what need to be done, about how long the recession will 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 are deep in the mathematics, economics might *seem* to be a science, like physics, but it's not a science like physics. It is open .. it is open to subjectivity, and a lot of that subjectivity is all around the assumptions that you choose to make.