Thinking Like an Economist

Economics & Law - NIT Northern Institute of Technology / TUHH, Hamburg · part of my Technology Management MBA · study notes for revision.

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Before any supply-and-demand diagrams, this first chapter installs the mindset. Economics is often mistaken for “the study of money and the stock market”. It’s much broader than that: it’s really the study of how people make choices under scarcity. Once you see it that way, the same toolkit explains prices, crime, marriage, pollution and politics.

Tip

The whole discipline in one line: people want things, resources are scarce, so every choice means giving something up - and people respond to incentives. Change the costs and benefits of an option, and you change what people do. That’s the lever economics (and law) pulls.

1 · What economics is (and its two halves)

Economics splits into two big branches:

Branch	Studies	Example questions
Microeconomics	How individual “economic units” (people, firms) make decisions	How does a monopoly set its output? How is a wage determined? How do criminals respond to bigger penalties?
Macroeconomics	The economy as a whole	GDP, inflation, unemployment, international trade

This course lives almost entirely in microeconomics - the decisions of individuals and firms - because that’s the level at which law changes behaviour.

2 · The rational actor: “homo economicus”

Traditional (neoclassical) economics models people as a homo economicus - a deliberately simplified decision-maker. It’s not a claim that people are like this, but a useful baseline for prediction.

Preferenceswhat I value

+

Constraintsbudget, laws, time

↓

Rank all optionsassign “utility” to each

↓

Choose the top onemaximise utility

The homo economicus is self-interested, ranks every available option by the utility it gives, and picks the best one - subject to constraints like a limited budget and the law.

A homo economicus:

• is self-interested - does what’s best for themselves;
• ranks all the alternatives and can assign a utility (a “value”) to each;
• maximises that utility, given the constraints they face.

Note

Preferences vs constraints - the key split. Economics usually assumes preferences are fixed (“Roee hates spoilers, always will”), but constraints can be changed. A tax, a subsidy, or a fine doesn’t change what you want - it changes the cost of an option, which shifts what you choose. This is exactly the hinge on which law operates.

3 · Where the “Law” comes in: Law & Economics

The course is Economics & Law, and the bridge between them is a field called Law & Economics (L&E) - “the economic analysis of law”. Its core move: treat a legal rule as something that changes people’s costs and benefits, then predict how behaviour changes and ask whether the result is good.

Two lenses run through all of L&E:

Positive what IS

• Describes and predicts: how will people behave if the law says X?
• Factual, testable - no value judgement

Normative what SHOULD be

• Evaluates and recommends: what should the law be?
• Needs a goal - usually efficiency (welfare)

L&E asks three questions of any legal rule:

Question	What it’s about
Behavioural prediction	How will people behave if the law says “X”?
Efficiency	Which rules make the “pie” of total welfare bigger?
Distribution	How is wealth split between individuals as a result?

Note

Lawyer vs economist. A lawyer asks what the rule means and whether it’s just; an economist asks what the rule does to behaviour, and whether the outcome is efficient. Classic example: should a barber be allowed to “hum”? A lawyer debates the wording; an economist notes that banning humming may just push barbers to play loud music instead - worse for customers - so allowing it is better. Same problem, different question.

4 · A first worked model: the economics of crime

To see the mindset in action, here’s a famous L&E model (Becker, 1968). A would-be criminal weighs the benefit of a crime against its expected cost - the punishment, discounted by the chance of actually being caught and convicted:

Commit the crime if…B > P × S

B the benefit from the crime (e.g. the loot)

P the probability of being caught and convicted

S the size of the sanction (e.g. years in prison)

The insight: to deter crime you can raise P (more policing) or S (harsher sentences). It also explains why a wealthy fine-dodger and a desperate thief respond differently - their B differs. This one inequality is the whole “economic way of thinking” in miniature: name the costs and benefits, then predict the choice.

5 · One market or the whole economy? Partial vs general equilibrium

A crucial distinction for the rest of the course:

• Partial equilibrium looks at one market in isolation - e.g. just the market for coffee, holding everything else fixed.
• General equilibrium looks at many markets and how they feed back on each other.

Why it matters: a change in one market ripples into others. A positive shock to product demand makes firms hire more workers → wages rise → production costs rise → product supply falls. Sometimes that feedback effect is small (partial analysis is fine); sometimes it dominates and you must think in general equilibrium.

Caution

The crime example, continued. In partial equilibrium, raising the penalty S for a crime always deters it. But in general equilibrium, judges - afraid of sending an innocent person away for a very long time - may convict less often, lowering P. The feedback can partly (or fully) undo the intended effect. Ignoring other markets can give you exactly the wrong answer.

Revision summary

Tip

The one-minute recap

• Economics is the study of choice under scarcity; every choice has an opportunity cost (what you gave up).
• The homo economicus is self-interested, ranks options by utility, and maximises it subject to constraints. Preferences are assumed fixed; constraints (incentives) are what law changes.
• Law & Economics treats legal rules as incentives and asks three questions: behavioural prediction, efficiency, distribution - through a positive (what is) or normative (what should be) lens.
• The Becker crime model (B > P × S) shows the mindset: name the costs and benefits, predict the choice - and note you can deter by raising the probability or the severity of punishment.
• Partial equilibrium studies one market; general equilibrium adds the feedback effects between markets, which sometimes reverse the naive conclusion.

Next: Demand, Supply & Equilibrium → - how a market actually settles on a price and a quantity.