Economics

First class
DR. GORDANA PESAKOVIC
Professor
 WHAT?

WHAT IS WHAT DO YOU

ECONOMICS ALL THINK
ABOUT
• SCARCITY

• OPPORTUNITY COST
• https://www.youtube.com/watch
?v=NwOYLV-L7pc
BASIC
• MARGINAL UNITS CONCEPT
• TRADEOFFS S
• LAW OF DIMINISHING RETURNS
• https://www.youtube.com/watch?v=
xLSRMt-wWAM
 The Scarcity Principle
Economics: The study of how people
make choices under scarcity and the
results of these choices for society.

The Scarcity Principle: We have

boundless wants, but resources are
limited. Having more of one good thing
usually means having less of another.

Also called No Free-Lunch Principle

© 2019 McGraw-Hill Education.

4
 • GENERALIZATION
THEORIES
, • OTHER THINGS EQUAL ASSUMPTION
PRINCIPLE
S AND • GRAPHICAL
PRESENTATION/EXPLANATION
MODELS
 MICROECONOMICS
VERSUS
MACROECONOMICS
• MICROECONOMICS: FIRM, HOUSEHOLDS

• MACROECONOMICS: ECONOMY AS A WHOLE

• ALL FIRMS
• ALL HOUSHOLDS
• PRIVATE AND PUBLIC
 Microeconomics and
Macroeconomics
 Microeconomics studies choice  Macroeconomics studies the
and its implications for price performance of national
and quantity in individual economies and the policies
markets that governments use to try to
 Sugar improve that performance
 Carpets  Inflation
 House cleaning services  Unemployment
 Microeconomics considers  Growth
topics such as  Macroeconomics considers
 Costs of production  Monetary policy
 Demand for a product  Deficits
 Exchange rates  Tax policy

© 2019 McGraw-Hill Education.

7
 Comparative vs. Absolute
Advantage
• An individual has a comparative advantage in
producing a good or service if the opportunity cost
of producing the good is lower for that individual
than for other people.

• An individual has an absolute advantage in an

activity if he or she can do it better than other
people. Having an absolute advantage is not the
same thing as having a comparative advantage.
• VIDEO
• https://www.youtube.com/watch?v=Vvfzaq72wd0
PRODUCTIO
• GUNS AND BUTTER EXAMPLE
N
POSSIBILITE • HOW CAN WE INCREASE PPF
S MODEL
 • The production possibility frontier
(PPF) illustrates the trade-offs facing
an economy that produces only two
Trade- goods. It shows the maximum quantity
of one good that can be produced for
offs: The any given production of the other.
Productio
n • The PPF improves our understanding of
trade-offs by considering a simplified
Possibility economy that produces only two goods
Frontier by showing this trade-off graphically.
 The Production Possibility
Quantity of coconuts

Frontier
30 D

Feasible and Not

efficient feasible
in production

A
15

Feasible B
9 but
C
not
Production possibility frontier
efficient
PPF

0 20 28 40
Quantity of fish
Quantity of coconuts

Increasing Opportunity Cost

Producing the first …requires giving
35 20 fish . . . up
5 coconuts

30 But producing
20 more fish . . .
A
25

20
…requires giving up
15 25 more coconuts…

10

5
PPF

0 10 20 30 40 50
Quantity of fish
 HOW IS IT
POSSIBLE TO
INCREASE PPF
HOW IS IT POSSIBLE TO INCREASE
PPF
 Economic Growth
Quantity of coconuts
Production
Economic
The economygrowth
is initially
can results
now at
in an outward
produce
point A (20
morefishshift
ofandof25the
PPF because
everything.
coconuts),  it
production
can move
35
possibilities
to point E (25 are
fish and 30
E
expanded.
coconuts).
30
A
25

20

15

10

5 Original New
PPF PPF

0 10 20 25 30 40 50
Quantity of fish
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• Production possibility frontier illustrates
opportunity cost, efficiency, and economic
growth.
• There are two basic sources of growth: an
increase in factors of production, resources
such as land, labor, capital, and human
capital, inputs that are not used up in
production, and improved technology.
 The Circular-Flow Diagram

• The circular-flow diagram is a model that

represents the transactions in an economy by
flows around a circle.
 Circular-Flow of Economic Activities
 A household is a person or a group of people that
share their income.

 A firm is an organization that produces goods and

services for sale.

 Firms sell goods and services that they produce to

households in markets for goods and services.

 Firms buy the resources they need to produce—

factors of production—in factor markets.

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 Circular-Flow of Economic Activities
 Ultimately, factor markets determine the economy’s
income distribution, how total income is divided
among the owners of the various factors of
production.

20 of 31
 Normative and Positive
Economics
Positive economic •
• Normative economic principle predicts how
principle says how people people will behave
should behave
• People will pollute
• People shouldn’t less if you tax
pollute so much pollution
• SpaceX should • SpaceX will choose
launch as many to launch rockets
rockets as possible that it thinks it will
turn a profit on
© 2019 McGraw-Hill Education.

22
 Using Models
 Positive economics is the branch of economic
analysis that describes the way the economy
actually works.

 Normative economics makes prescriptions about

the way the economy should work.

 A forecast is a simple prediction of the future.

23 of 31
Using Models
 Economists can determine correct answers for
positive questions, but typically not for normative
questions, which involve value judgments.

 The exceptions are when policies designed to

achieve a certain prescription can be clearly ranked
in terms of efficiency.

24 of 31
When and Why Economists Disagree

There are two main reasons economists disagree:

 Which simplifications to make in a model

 Values

25 of 31
 Incentive Principle
Incentives are central to people's choices

Benefits Costs
Actions are more Actions are less
likely to be taken if likely to be taken if
their benefits rise their costs rise

© 2019 McGraw-Hill Education.

26
 • WHAT MOTIVETES YOU?
WHAT • VIDEO

MOTIVATE • https://www.youtube.com/watch?v=u6
XAPnuFjJc
S US
 MACROECONOMICS IN
REVIEW

• https://www.youtube.com/watch?v=MKO1icFVtD
c
DIFFEREN • MAJOR QUESTIONS:

T
• WHAT TO PRODUCE
ECONOMI • HOW TO PRODUCE
C • TO WHOM TO PRODUCE
SYSTEMS • HOW THE PROGRESS IS PROMOTED
 • WHO MAKES THESE DECISION IN EACH
SYSTEM?
COMMAND
ECONOMY • COMMAND?

VERSUS
MARKET
• MARKET?
ECONOMY
• https://www.youtube.com/watch?v=B4
3YEW2FvDs