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Principles of Economics

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Principles of Economics

  1. 1. Introducing
  2. 2. Course Description This course will cover: Basic economic principles that are applied to current social issues and problems.
  3. 3. Learning outcomes Upon completion of this course the student should: Have a good background about the theory of demand and supply. Analysis of costs.  Theory of production.
  4. 4. The role of the government intervention in the individual markets(Smith & Keynes) * Role of fiscal and monetary policy in macroeconomic management.
  5. 5. Be able to solve and manipulate a variety of simple diagrammatic and algebraic models in micro-and macroeconomics.
  6. 6. Try to Define Economics
  7. 7. Definition of 'Economics' A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants.
  8. 8. Approaches in economics Two major approaches: classical and Keynesian. Classical economists believe that markets:  function very well;  will quickly react to any changes in equilibrium and that a "laissez faire" government policy works best.
  9. 9. Approaches in economics Whereas, Keynesian economists believe that:  Markets react very slowly to changes in equilibrium (especial to changes in prices) and that active government intervention is important to get the economy back into equilibrium.
  10. 10. The Economic Problem How to allocate scarce given unlimited wants This forces choices to be made: (1) what to produce? (2) How to produce ? (3) For whom to produce? resources Capital Enterprise Land Labour
  11. 11. Scarcity In a class:
  12. 12. Scarcity means: There are only a limited amount of resources available; To produce the unlimited amount of goods and services we desire.
  13. 13. EXAMPLES OF SOME DECISIONS ECONOMISTS HAVE ANALYZED Whether to buy a car this week! Whether to buy a home or to rent a home! Whether to marry your sweetheart! Introduction slid e 14
  14. 14. Factors in decision making 1. People face tradeoffs 2. Opportunity cost 3. Making decisions at the margin 4. People respond to incentives Introduction
  15. 15.  Microeconomics, which deals with individual agents such as households and business.  Macroeconomics, which consider the economy. (GDP, Inflation….)
  16. 16. Aspects receiving attention in economics are: 1. resources allocation; 2. production; 3. distribution; 4.trade; 5. and competition.
  17. 17. Introduction MICROECONOMIC AGENTS Firms –Produce and sell goods and services –Buy inputs (labor, capital & raw materials) Consumers –Buy goods and services –Sell inputs (labor services, loanable funds)
  18. 18. Methodology: Positive v. Normative Economics Positive economic: Studies the way the world is Examples: How much will a new gasoline tax raise the price of gasoline? Will an increase in the minimum wage increase unemployment? Introduction
  19. 19. Introduction Normative economic:  Studies the way the world should be Example: Who Should solve the problem of unemployment? Methodology: Positive v. Normative Economics
  20. 20. Introduction slid e 21 Models and theories A model is a hypothesis about the relationships among variables.  theory is a plausible or scientifically acceptable general principle or body of principles offered to explain phenomena
  21. 21. Contents of models List of variables: Dependent v. independent variables Hypothesized relationships among the variables. (Income/Consumption) Using tables of values, graphs, or equations. Introduction
  22. 22. A model of Consumption Income Consumption TC = a + b(Y) a C Y b = C/Y
  23. 23. A better model? Consumption = f (income, taste, price of substitutes,….) Introduction
  24. 24. MODEL SUMMARY Three ways to describe models Graphs Tables of values Mathematical functions (equations) Important concepts Dependent and independent variables Linear function, intercept and slope
  25. 25. AN ECONOMIC MODEL The Production Possibility Curve Purposes of model Show scarcity constraint Illustrate economic efficiency Introduce opportunity cost concept  Variables Quantities of goods that may be produced  Givens Total amounts of inputs available Technology of production
  26. 26. PPF DEFINED The Production Possibility Curve (or frontier) shows the maximum amount of a good you can produce. given the total amounts of inputs available and given the technology of production.
  27. 27. PPC EXAMPLE Assumptions: There are only two goods, pizza and spaghetti. There are limited inputs and given technology of production. Definition: The PPC shows the maximum amount of pizza you can produce, given the amount of spaghetti to be produced. Introduction
  28. 28. PRODUCTION POSSIBILITY CURVE Introduction SPAGHETTI PIZZA Which points are attainable and which points are unattainable? 0 100 200 300 400 0 10 20 30 40 50 60 Go to hidden slide
  29. 29. PRODUCTION POSSIBILITY CURVE Introduction SPAGHETTI PIZZA What’s the effect of an improvement in the technology for producing spaghetti? 0 100 200 300 400 0 10 20 30 40 50 60 Go to hidden slide
  30. 30. PRODUCTION POSSIBILITY CURVE Introduction slid e 33 SPAGHETTI PIZZA What’s the effect of an increase in total resources (inputs)? 0 100 200 300 400 0 10 20 30 40 50 60 Go to hidden slide
  31. 31. Introduction Points “inside” the PPC are inefficient. Note that while points on the PPC are efficient, we cannot say at this time whether some are better for society than others.
  32. 32. The PPC can show opportunity cost Suppose you are at some point on a PPC. Then suppose you want to consume one more pizza. Introduction
  33. 33. PRODUCTION POSSIBILITY CURVE Introduction slid e 37 SPAGHETTI PIZZA More pizza means less spaghetti 0 100 200 300 400 0 10 20 30 40 50 60
  34. 34. OPPORTUNITY COST INCREASES AS MORE OF A GOOD IS PRODUCED Not only does more pizza mean less spaghetti, but each additional pizza costs more than the one before it. This idea shows up as the PPC being concave to the origin. (The curve bows out.) Introduction slid e 38
  35. 35. Introduction slid e 39 Opportunity cost of more pizza is constant. Production Possibility Curve 0 100 200 300 400 0 10 20 30 40 50 60 SPAGHETTI PIZZA
  36. 36. Introduction slid e 40 We will use Production Possibilities Curves that are straight lines (i.e., that have constant opportunity cost) to illustrate some important economic principles.
  37. 37. Exercise:
  38. 38. How to calculate the opportunity cost Point Chairs TVs A 10 5 0 10 B 5 5 10 10 C 0 20
  39. 39.  1/ calculate the difference  2/ write the sentence  3/ divide  The O.C of 10TVs is 5 chairs  Divide: the O.C of 10/10TVs is 5/10 chairs  the O.C of 1TV is ½ chair  Or the O.C of 1 chair is 2TVs 