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Economics intro

Economics intro






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    Economics intro Economics intro Presentation Transcript

    • Economics An introduction
    • Economic activity
    • Why study economics
      • Why the world is what it is…..
      • Soviet Union collapsed …. setting countries throughout Eastern Europe and Asia free
      • The nations of Latin America are struggling with progress and development
      • General Motors loses $4 billion and millions of workers worry that their jobs and pension plans
      • Housing bubble burst in USA and thousands in India lose their jobs
    • A true story
      • Spring 1996 – 19yr college sophomore, who had just finished taking introductory economics, was faced with a choice – to continue college education or to devote time to a job.
      • The job – become a professional golfer on the Pro Tour
      • Choice had to be made – time was scarce
      • Completing college had a great cost –
        • Two years of college expenses
        • Forgone tournament winnings
        • Advertising endorsements
      • The golfer made a choice – he became a pro.
      • Fall of 1996 – selected Sprotsman of the Year by Sports Illustrated
      • 1997 – record setting win of Masters Tournament
      • First player to hold all four major professional championships at the same time
      • 2005 – earned over $50 million in prizes worldwide + advertising & endorsements
    • The central idea
      • People make purposeful choices with scarce resources and interact with other people when they make these choices.
      • Economics is the study of how people deal with scarcity .
      • It is the study of how scarce resources are allocated among unlimited wants.
      • Scarcity
      • The shortage that exists when less of something is available than is wanted at a zero price.
      • Choice
      • A selection among alternative goods, services or actions.
    • Lord Lionel Robbins
      • 1898 – 1984
      • “ An Essay on the Nature and Significance of Economic Science ” (1932)
      • Economics is a Science which studies human behaviour as a relationship between ends and scarce means, which have alternative uses.
              • Lord Robbins
      • “ Economics is a social science which deals with human behaviour pertaining to production, exchange and consumption of goods and services (wealth)”
      Classical view
    • Adam Smith
      • Scottish Economist and Philosopher
      • 1723 - 1790
      • “ Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience.”
      • He became famous for his influential book " The Wealth of Nations " written in 1776 and launched the economic doctrine of free enterprise.
      • Economics is the study of the nature and causes of national wealth.
      • Adam Smith
    • Alfred Marshall
      • 1842 – 1924
      • Professor of Political Economy at the University of Cambridge from 1884-1908
      • Founder of the Cambridge School of Economics
      • A.C. Pigou and J.M. Keynes were among his pupils.
      • Principles of Economics was his magnum opus and the most influential treatise of its era.
      • Economics is a study of man’s actions in the ordinary business of life; it enquires how he gets his income and how he uses it. Thus, it on the one side a study of wealth and on the other, and more important side, a part of the study of man.
      • Alfred Marshall
      • E conomics is a social science that seeks to understand how different societies allocate scarce resources to meet the unlimited wants and needs of its members
    • Rational self-interest
      • People make choices that give them the greatest satisfaction given the information at that time
      • Measure and compare the costs and benefits of a decision
      • Individual’s perception of his/her best interest
    • Some Recent Definitions
      • The study of how in a civilized society one obtains the share of what other people have produced and of how the total product of a society changes and is determined.
      • Henry Smith
      • Economics is what economists do.
      • Jacob Viner
    • Cateris paribus
      • “ with other things (being) the same” or
      • “ all other things being equal”
      • Assumption applied to all economic analysis where causal relationship between two variables can be studied
    • The economic approach
      • Positive and Normative Analysis
      • Positive – analysis of what is – analysis that does not impose the value judgments of one individual on the decision of others
      • Normative – analysis of what ought to be
    • Central Problems of an Economy
      • What to produce
      • How to produce
      • For Whom to produce
      • What provision (if any) be made for economic growth.
    • Micro & Macro
      • In the 1930s Ragnar Frisch classified economics into two branches.
      • The terms are derived from the Greek terms micros and macros , meaning small and large respectively.
    • Microeconomics
      • Micro means a millionth part.
      • It deals with a small part or a small component of the national economy.
      • Studies economic actions of individual units and small groups like particular households , individual prices, wages , income , individual industry, particular commodities .
    • Macroeconomics
      • Studies the economy as a whole and its large aggregates, such as total national output and income, total employment, total consumption, aggregate investment .
    • John Maynard Keynes
      • 1883 – 1946
      • He revolutionized economics with his classic book, The General Theory of Employment, Interest and Money (1936). 
      • Probably the most influential social science treatise of the 20th Century.
      • It quickly and permanently changed the way the world looked at the economy and the role of government in society.
    • Theory of Aggregation
      • Macro is the sum of micro
      • If an individual salary goes up, he is happy; if salaries of all go up proportionately, no one is happy.
      Fallacy of Composition
      • Increased savings by everyone may lead to decrease in total savings
      • Paradox of Thrift
    • Kenneth E. Boulding
      • 1910 – 1993
      • 1944 – produced a paper on liquidity preference
      • 1950 – “ Reconstruction of Economics ” on stock-flow distinction.
      • Forest, though an aggregation of trees, exhibits characteristics and behaviour patters different from individual trees:
      • An individual tree germinates, grows and decays, but forests go on forever.
      • A tree may not burn easily, but forests often catch fire.
      • An individual tree cannot affect the climate of the vicinity in which it grows, but forests can and do affect the climate.
    • Short-run and Long-run
      • Introduction of time periods in market analysis – Marshall’s contribution
      • Short-run : a time period not enough for consumers and producers to adjust completely to any new situation
      • Long-run : is the ‘planning horizon’ – consumers and producers can adjust to any new situation
    • Opportunity Cost
      • The problem of choice makes it necessary to sacrifice some of the alternatives against the one selected.
      • Opportunity cost is the benefit foregone from the alternative that is not selected.
    • Production Possibility Curve
      • Also called Transformation Curve
      • A graph that shows different combinations of the quantities of the two goods that can be produced (or consumed) in an economy, subject to limited resources.
      • It represents the Opportunity cost concept – if we want to have more of one good, we must have less of another good
      • Also measures the OC – slope of the curve
      • Applicable to an individual (microeconomics) – shows options of production or consumption
      • Used in macroeconomics – shows the production possibilities of a nation or economy as a whole.
    • PPC for individual
      • Different combinations of 2 goods given
        • Resources (income)
        • Prices
      • AB – PPC of individual
      • F- food, C – clothing
      • Pt. P => Fp of food and Cp of clothing
      • More of clothing with same income => move to pt. Q
      • Any pt. to the right of AB, e.g. M is unattainable => income constraint
      • Any pt. below AB, e.g. N is undesirable => violation of rationality
      A B F p F q O C p C q P Q N M
    • PPC for society
      • Assumptions:
        • Economy is operating at full employment
        • Factors of production are fixed in supply; they can however be reallocated among different uses
        • Technology remains the same
      • Economy must sacrifice some units of one product to obtain more units of another => trade-off
      • “ Substitution is the law of life in a full-employment economy. The PPC or frontier depicts the society’s menu of choices ” - Samuelson
      • Slopes downward – shows maximum feasible amount that can be produced given the factors of production and technology
      • It is concave to the origin – OC increases as more of one good is produced instead of another – shift specialised factors from food to clothing – cost will increase
      Food Clothing F p F q O C p C q Infeasible area Productively inefficient area P Q
    • Types of Macroeconomics
      • Macrostatics
      • Comparative Macrostatics
      • Macrodynamics
    • Macrostatics
      • Method to explain certain aggregative relations in a stationary state.
      • Does not explain the process by which the national economy reaches the final equilibrium. Deals with the final equilibrium at a particular point of time.
      • Provides a series of ‘still pictures’ at a point of time.
    • Example
      • Y = C + I
      • (Y = total income, C = total consumption,
      • I = total investment)
      • Equation merely explains that Income is equal to aggregate Consumption and Investment
      • Does not throw light on the process by which the equality is reached.
    • Comparative Macrostatics
      • Macro variables change with time
      • Economy reaches new level of equilibriums.
      • This method involves a comparative study of different equilibrium achieved
      • Does not detail the process by which economy moves from one equilibrium to another.
    • Macrodynamics
      • Developed by Frisch, Hicks, Kalecki, Tinbergen and Samuelson.
      • Studies how the equilibrium is reached consequent upon changes in macro variables and aggregates.
      • Presents a full picture of all the developments taking place in the transitional period.
    • Indian Economy
      • Per Capita Income (2004): Ranges from a low of US $ 90 for Burundi to a high of US $ 52,030 for Norway. India US $ 620; USA $ 41,400.
      • Ranges from Rs. 3557 in Bihar to Rs.33,047 for Chandigarh. India: Rs.11,799 (2003-04 at 93-94 prices)
      • Growth rate of real income: 1990-2001
      • – 3.7% Russian Federation, 10% China, India 5.9% (2005-06) (World average of 2.7%)
      • People Below poverty line: 2% Republic of Korea, 43% in Nigeria; India 28.6%
      • External Debt/GDP ratio: Sri Lanka 50%; India 20%