Ec102 - April 13

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  • 04/17/11
  • 04/17/11
  • Ec102 - April 13

    1. 1. INTRODUCTION TEN PRINCIPLES OF ECONOMICS NORMATIVE VS POSITIVE CIRCULAR FLOW DIAGRAM PRODUCTION POSSIBILITIES FRONTIER` April 13, 2011 Ec102 D
    2. 2. Overview <ul><li>Economics Defined </li></ul><ul><li>Ten Principles of Economics </li></ul><ul><li>Process in Economics </li></ul><ul><li>Theories and Models </li></ul><ul><li>Circular Flow Diagram </li></ul><ul><li>Production Possibilities Frontier (PPF) </li></ul>
    3. 3. Group Quiz #1 <ul><li>Economists use _______ to simplify the complex world and make it easier to understand. </li></ul><ul><li>Economists assume that all human beings are ________. </li></ul><ul><li>The “automatic adjustments” was called _________ by Adam Smith. </li></ul><ul><li>It means “all else equal”. </li></ul><ul><li>Accdg to Keynes, “In the long run, we are all ____.” </li></ul><ul><li>BONUS: Room number </li></ul>
    4. 4. ECONOMICS <ul><li>A social science of allocation of scarce resources among alternative uses to attain desired ends. </li></ul><ul><ul><li>How people make choices </li></ul></ul><ul><ul><li>Add it all up -- how society makes choices </li></ul></ul><ul><li>  </li></ul>
    5. 5. 1. PEOPLE FACE TRADE-OFFS <ul><li>No free lunch </li></ul><ul><li>To get one thing, you have to give up another </li></ul><ul><li>Example: </li></ul><ul><ul><li>Choice of attending class or sleeping </li></ul></ul>
    6. 6. 2. COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT <ul><li>Opportunity cost – the next best alternative foregone </li></ul><ul><ul><li>If you did not choose do “this”, then the opportunity cost is what you would have done instead </li></ul></ul><ul><ul><li>Example: </li></ul></ul><ul><ul><li>Opportunity cost of going to class – SLEEP </li></ul></ul><ul><ul><li>Study or be a rock star? </li></ul></ul>
    7. 7. 3. RATIONAL PEOPLE THINK AT THE MARGIN <ul><li>Rationality Principle </li></ul><ul><li>Decisions are not always between extremes </li></ul><ul><li>More often, in smaller increments </li></ul><ul><li>Marginal Changes – Incremental changes </li></ul><ul><ul><li>Around the edges </li></ul></ul><ul><ul><li>Additional </li></ul></ul>
    8. 8. 4. PEOPLE RESPOND TO INCENTIVES <ul><li>What induces you to act </li></ul><ul><li>Maybe be a punishment or reward </li></ul><ul><li>What do I get for it? </li></ul>
    9. 9. 5. TRADE CAN MAKE EVERYONE BETTER OFF
    10. 10. 6. MARKETS ARE A GOOD WAY TO ORGANIZE THE ECONOMY <ul><li>Market – a group of buyers and sellers </li></ul><ul><li>Economy – group of people dealing with one another as they go about their lives </li></ul><ul><li>Market Economy vs Centrally Planned Economy </li></ul><ul><li>Invisible Hand </li></ul>
    11. 11. 7. Governments can sometimes improve market outcomes <ul><li>Maintain rules and institutions </li></ul><ul><li>Step in when there are market failures </li></ul><ul><li>Choice between efficiency or equality </li></ul>
    12. 12. 8. A country’s standard of living depends on its ability to produce goods and services <ul><li>Differences in productivity  differences in average income </li></ul>
    13. 13. 9. Prices rise when governments print too much money <ul><li>Long Run </li></ul><ul><li>Inflation </li></ul><ul><li>Example </li></ul><ul><ul><li>Produce 1000 units, M = P10, 000 </li></ul></ul><ul><ul><ul><li>Price = P10,000/1000 = P10 </li></ul></ul></ul><ul><ul><li>Produce 1000 units, M = P15, 000 </li></ul></ul><ul><ul><ul><li>Price = P15,000/P1000 = P15 </li></ul></ul></ul><ul><li>Demand Pull Inflation </li></ul>
    14. 14. 10. Society faces a short-run trade-off between inflation and unemployment <ul><li>Short run </li></ul><ul><li>Increase M  increased income  increased demand  higher prices (INFLATION)  hire more workers  lessen unemployment </li></ul><ul><li>Phillips Curve </li></ul>
    15. 15. METHODOLOGY OF ECONOMICS <ul><ul><li>Positive Economics - attempts to understand behavior and operation of economic systems without making judgments </li></ul></ul><ul><ul><ul><li>Describes what exists and how it works </li></ul></ul></ul><ul><ul><ul><li>Facts, cause and effects </li></ul></ul></ul><ul><ul><ul><li>Descriptive -- WHAT IS </li></ul></ul></ul><ul><ul><ul><li>Example: Minimum wage laws cause unemployment. </li></ul></ul></ul>
    16. 16. METHODOLOGY OF ECONOMICS <ul><ul><li>Normative Economics - Looks at outcomes of economic behavior and asks whether they are good or bad </li></ul></ul><ul><ul><ul><li>May prescribe courses of action </li></ul></ul></ul><ul><ul><ul><li>Policy economics </li></ul></ul></ul><ul><ul><ul><li>Prescriptive -- WHAT OUGHT TO BE </li></ul></ul></ul><ul><ul><ul><li>Example: The government should raise the minimum wage. </li></ul></ul></ul>
    17. 17. METHODOLOGY OF ECONOMICS <ul><li>Economists cannot simply do experiments </li></ul><ul><li>Role of Assumptions </li></ul><ul><ul><li>Example: Trade between two countries producing only two goods </li></ul></ul>
    18. 18. POSITIVE ECONOMICS <ul><li>Descriptive economics - compilation of data that describe phenomena and facts </li></ul><ul><li>NSO Publications </li></ul>
    19. 19. POSITIVE ECONOMICS <ul><ul><ul><li>Economic Theory - statement or set of related statements about cause and effect, action and reaction </li></ul></ul></ul><ul><ul><ul><li>Model - formal statement of a theory, usually a mathematical statement of a presumed relationship between two variables </li></ul></ul></ul><ul><ul><ul><li>Variables - measure that can change from time to time </li></ul></ul></ul>
    20. 20. POSITIVE ECONOMICS <ul><li>Example: </li></ul><ul><li>Theory: Law of Demand </li></ul><ul><li>Model: Graph (equation) </li></ul><ul><li>Variables: Price and Quantity </li></ul><ul><li>Models are abstractions. </li></ul>
    21. 21. CETERIS PARIBUS <ul><li>“ All else equal” </li></ul><ul><li>Assume that all other factors do not change </li></ul><ul><li>Isolate effects </li></ul><ul><li>Focus on the relationship </li></ul>
    22. 22. CIRCULAR FLOW DIAGRAM
    23. 23. CIRCULAR FLOW DIAGRAM <ul><li>Visual model of how money flows through markets among households and firms </li></ul><ul><li>How economy is organized and how participants interact </li></ul>
    24. 24. CIRCULAR FLOW DIAGRAM <ul><li>Firms – produce goods and services using inputs (labor, land, capital, entrepreneurial activity) </li></ul><ul><ul><li>Factors of production </li></ul></ul><ul><li>Households – own factors of production and consume goods and services (g/s) </li></ul>
    25. 25. CIRCULAR FLOW DIAGRAM <ul><li>Two kinds of markets </li></ul><ul><li>Market for g/s: </li></ul><ul><ul><li>Firms – sellers </li></ul></ul><ul><ul><li>HH – buyers </li></ul></ul><ul><li>Market for factors of prod’n </li></ul><ul><ul><li>Firms – buyers </li></ul></ul><ul><ul><li>HH – sellers </li></ul></ul>
    26. 26. CIRCULAR FLOW DIAGRAM <ul><li>Two loops: </li></ul><ul><li>Inside – movement of inputs and output </li></ul><ul><ul><li>HH sell use of factors of prod’n to firms in mkt for factors of prod’n. Firms use this to produce g/s in the mkt for g/s. </li></ul></ul><ul><li>Outer – movement of money </li></ul><ul><ul><li>HH spend money to buy g/s from firms in mkt for g/s. Firms use revenue to pay for factors of prod’n </li></ul></ul>
    27. 27. CIRCULAR FLOW DIAGRAM
    28. 28. CIRCULAR FLOW DIAGRAM
    29. 29. CIRCULAR FLOW DIAGRAM <ul><li>Wallet (HH) </li></ul><ul><li>Buy food at the caf (firm) </li></ul><ul><li>Firm use resource to buy inputs (example: wages) </li></ul><ul><li>Wages  wallets (HH) </li></ul>

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