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Lecture 2

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15 views29 pages

Lecture 2

Uploaded by

sahinoglucahit0
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture 3

Ten Principles of Economics


&
Thinking like an Economist
What is Economics?

• Economics is the study of how society


manages its scarce resources.
• Resources
• Land
• Labor
• Capital
• Time
• The management of society’s resources is
important because resources are scarce.
Economy & Economics

• The economy’ refers to all the


production and exchange activities that
take place every day - all the buying and
selling.
• The economy exists at different scales
• Local
• National e.g. the Turkish
• International e.g. EU
Principle #1: People Face trade-offs.
To get one thing, we usually have to give up
another thing.
Making decisions requires trading off one goal
against another.
Efficiency vs. Equity
Efficiency means society gets the most that it can from its
scarce resources.
Equity means the benefits of those resources are distributed
fairly among the members of society.
Principle #2: The Cost of Something Is What You Give Up to
Get It.

The opportunity cost of an item is what you give


up to obtain that item.
Principle #3: Rational People Think at the Margin.

People make decisions by comparing costs and


benefits at the margin.
Principle #4: People
Respond to
Incentives.

Marginal changes in costs or


benefits motivate people to
respond.
Public policies can create
incentives or disincentives that
alter behavior.
Principle #5: Trade Can Make Everyone Better Off.

People gain from their ability to trade with one


another.
Competition results in gains from trading.
Trade allows people to specialize in what they do
best.
Principle #6:
Markets Are
Usually a Good
Way to Organize
Economic Activity.

Market economy
Planned economy
Adam Smith made the
observation that
households and firms
interacting in markets act
as if guided by an
“invisible hand.”
Principle #7:
Governments Can
Sometimes
Improve Market
Outcomes.

• Market failure occurs


when the market fails to
allocate resources
efficiently.
• Market failure may be
caused by
• externality,
• market power.
Microeconomics
&

Macroeconomics
• Microeconomics is the study of how
households and firms make decisions
and how they interact in markets.
• Macroeconomics is the study of
economy-wide phenomena, including
inflation, unemployment and economic
growth.
Principle #8: The Standard of Living
Depends on a Country’s Production.

• Standard of living - a measure of


welfare based on the amount of goods
and services a person’s income can buy.
• Productivity is the amount of goods and
services produced from each hour of a
worker’s time.
Principle #9: Prices Rise When the Government Prints Too
Much Money.

Inflation is an increase in the overall level of prices in the


economy.
When the government creates large quantities of money,
the value of the money falls.
Principle #10: Society Faces a Short-run trade-off Between
Inflation and Unemployment.

The Phillips Curve illustrates the trade-off between inflation and


unemployment.
It’s a short-run trade-off!
Why do we learn
economics?

• Economics trains you


to. . . .
• Think in terms of
alternatives.
• Evaluate the cost of
individual and social
choices.
• Examine and understand
how certain events and
issues are related.
How does an economist
work?
• Uses abstract models to help explain
how a complex, real world operates.

• Develops theories, collects, and analyses


data to evaluate the theories.
The Role of Assumptions

• Economists make assumptions in order


to make the world easier to understand.
• The art in scientific thinking is deciding
which assumptions to make.
Models in economics

• Economists use models to simplify


reality in order to improve our
understanding of the world.
• A model will contain a number of
variables:
• endogenous variable
• exogenous variable
• Cause and effect
MARKETS
Revenue FOR Spending
GOODS AND SERVICES
•Firms sell
Goods Goods and
•Households buy
and services services
sold bought

FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production

Factors of MARKETS Labour, land,


production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of money
The economist: a scientist or a policy advisor?

• When economists are trying to explain the world, they


are scientists.
• Positive statements
• Descriptive analysis
• When economists are trying to change the world, they
are policy advisors.
• Normative statements
• Prescriptive analysis
Why economists disagree
• They may disagree about the validity of alternative
positive theories about how the world works.
• They may have different values and, therefore,
different normative views about what policy should
try to accomplish.
Exercise

• Define the conflict between “efficiency”


and “equity” using the following
keywords:
• scarcity
• trade-off
• oppurtunity cost

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