introduction of economics
DESCRIPTION
microeconomicsTRANSCRIPT
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Society and Scarce Resources: ◦ The management of society’s resources is
important because resources are scarce.◦ Scarcity. . . means that society has limited resources
and therefore cannot produce all the goods and services people wish to have.
Economics is the study of how society manages its scarce resources.
What is economics?
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What products do we produce?◦ If the government rebuilds the sidewalk in Hanoi,
it has fewer resources to care for the poor. How do we produce the products?
◦ Labor-intensive or capital-intensive industries Who consumes the products?
◦ Decide how to distribute the products of society
Three key Economic questions
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Natural resources Labor Physical capital Human capital Technology Entrepreneurship
◦ Efforts to coordinate factors of production to produce and sell products
factors of production
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Macroeconomics vs. microeconomics
Macroeconomics Microeconomics
Macroeconomics is the study of the nation’s economy as a whole; it focuses on the issues of inflation, unemployment, and economic growth
Microeconomics is the study of the choices made by households, firms, and government and how these choices affect the markets for goods and services.
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Positive analysis predicts the consequences of alternative actions by answering the question “What is?” or “What will be?”
Normative analysis answers the question “What ought to be?”
Positive & Normative analysis
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Comparing positive and normative Questions
Positive questions Normative questions
If the government increases the minimum wages, how many workers will lose their jobs?
How does a college education affect a person’s productivity and earnings?
How do consumers respond to a cut in income taxes?
Should the government increase the minimum wage?
Should the government subsidize a college education?
Should the government cut taxes to stimulate the economy?
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An economic model is a simplified representation of an economic environment, with all but the essential features of the environment eliminated.
It is an abstraction from reality that enables us to focus our attention on what really matters.
Economic models
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Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
C
B
D
E
Figure 1: Supply & Demand Model
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FIGURE 2 THE CIRCULAR FLOW
Spending
Goods andservicesbought
Revenue
Goodsand servicessold
Labor, land,and capital
Income = Flow of inputs
and outputs = Flow of dollars
Factors ofproduction
Wages, rent,and profit
FIRMS•Produce and sellgoods and services
•Hire and use factorsof production
•Buy and consumegoods and services
•Own and sell factorsof production
HOUSEHOLDS
•Households sell•Firms buy
MARKETSFOR
FACTORS OF PRODUCTION
•Firms sell•Households buy
MARKETSFOR
GOODS AND SERVICES
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1. Use assumptions to simplify and focus attention on what really matters
The lesson is that we must think carefully about whether a simplifying assumption is truly harmless.
The economy way of thinking
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1. Principle of opportunity cost2. Real-nominal principle3. Marginal principle4. Principle of diminishing returns5. Rational people respond to incentives6. Principle of voluntary exchange
Key principles of economics
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Opportunity cost is what you sacrifice to get something◦ Example: A student spends total of $40,000 for
tuition and books. Instead of going to college, he could have worked as a bank clerk for $20,000 per year and earned $80,000 over four years. What is the total opportunity cost of this student’s college degree?
Opportunity cost
FIGURE 3 THE PRODUCTION POSSIBILITIES FRONTIER
Productionpossibilitiesfrontier
A
B
C
Quantity ofCars Produced
2,200
600
1,000
3000 700
2,000
3,000
1,000
Quantity ofComputers
Produced
D
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The nominal value of an amount of money is its face value.◦ The nominal tuition fee is $4,000 per year◦ The money wage is 5 million VND
The real value of an amount of money is measured in terms of the quantity of goods the money can buy.◦ The real value of tuition fee would fall as the prices of other
goods and services increase, even though the nominal tuition fee stayed the same
Real-nominal principle
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The marginal principle is based on a comparison of the marginal benefits and marginal costs of a particular activity.◦ The marginal benefit of an activity is the additional
benefit resulting from a small increase in the activity.
◦ The marginal cost of an activity is the additional cost resulting from a small increase in the activity
Marginal principle
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People make decisions by comparing costs and benefits at the margin
Marginal principle
No of products
Total costs
Total benefits
Marginal cost
Marginal benefit
1 10 20 10 20
2 22 36 12 16
3 36 50 14 14
4 52 62 16 12
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Marginal changes in costs or benefits motivate people to respond.
The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!
Marginal principle
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Figure 4: The marginal principle$
0 Quantity
Marginal cost
Marginal benefit
A
C
B
D
E
1 2 3
Diminishing marginal benefit
increasing marginal cost
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Suppose output is produced with two or more inputs, and we increase one input while holding the other input. Beyond some point – called the point of diminishing returns – output will increase at a decreasing rate.
Principle of diminishing returns
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Principle of diminishing returnsBags of nitrogen fertilizer
Bushels of corn per acre
Marginal returns
0 85 85
1 120 35
2 135 15
3 144 9
4 147 3
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How does law of fastening seat-belt when driving affect the number of deaths due to car accidents?
People respond to incentives
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People act in their own self-interest, therefore, they won’t exchange one thing for another unless the trade makes them better off.◦ Trade allows people to specialize in what they do best, so
you can enjoy a better standard of livings than producing everything themselves, or self-sufficiency.
Market is usually a good way to organize the economy
Principle of Voluntary exchange
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Market failure happens when a market doesn’t generate the most efficient outcome, then government interventions can be expected to improve the efficiency of market outcomes.◦ Externalities◦ Public goods◦ Imperfect information◦ Imperfect competition◦ Uncertainty
Market failure and role of government
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Externalities◦ The effects of a decision on a third party that are not
taken into account by the decision maker◦ They can be classified into either positive or
negative one.◦ Government can use direct regulation, incentive
policies such as tax or subsidy, or voluntary solutions to achieve the socially desirable outcomes.
Market failure and role of government
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Public goods◦ A good that is nonexclusive (no one can be excluded
from its benefits) and nonrival (consumption by one does not preclude consumption by others).
◦ Public goods could not be provided by the private business which only pays attention to its self-interest
◦ Government generally provides goods with significant public aspects to them.
Market failure and role of government
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Imperfect information◦ People could not gather enough information to
make informed decisions about how much to produce or consume most efficiently.
◦ Government can disseminate information and promote informed choices.
Market failure and role of government
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Imperfect competition◦ Some markets are dominated by a few large
firms, and the lack of competition leads to high prices and small quantities, which can be considered as social inefficiency.
◦ Government can foster competition to achieve socially optimal output.
Market failure and role of government
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A lot of risks and unfair allocations exist in the real life which are not considered by markets◦ Poor child has no education and continue with a life of
misery.◦ Natural disasters or human accidents◦ Unemployment due to recession
Government can reduce economic uncertainty by providing the poor with a “social safety net”, implementing stabilization policies.
Market failure and role of government