Introduction To Economics PDF

Part 1 INTRODUCTION TO ECONOMICS FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 1 WHAT IS ECONOMICS? FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 What is Economics? …...

Part 1 INTRODUCTION TO ECONOMICS FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 1 WHAT IS ECONOMICS? FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 What is Economics? …is NOT the study of money or getting rich. ….is NOT the stock market. What is Economics? …is an 20 year old girl who is deciding whether to work or go to university and how that affects her future income. …is a company deciding whether to produce smartphones or tables and how that’s influenced by what we consumers want to buy. …is the government deciding whether to increase its spending when there is a recession and if it is worth going into debt. No matter who you are, you will be using economics! Economy...... The word economy comes from a Greek word for “one who manages a household.” The Economy and Economic Systems In the economy we are faced with many decisions; many of them involves an exchange sometimes using money as the medium. Households purchase final goods and services for final consumption and also provide the inputs into production – land, labor and capital The organizations which buy these factors and use them to produce goods and services are referred to collectively as firms. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 The Economy and Economic Systems The economy is all the production and exchange activities that take place every day (all the buying and selling). Economic activity is how much buying and selling goes on in the economy over a period of time. The economy exists at different scales Local, İstanbul National e.g. the UK, Turkey International e.g. EU FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 The Economic Problem The four big questions are: ◦ What goods and services should be produced? ◦ How should it be produced (see resources)? ◦ Who should get the goods and services produced? ◦ At what price should the goods be sold? FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Scarcity and Choice Society and Scarce Resources: ◦ The management of society’s resources is important because resources are scarce. ◦ Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. ◦ If everybody could reach whatever they want: then there will be no need to economics ◦ Economics is the study of how society manages its scarce resources. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 What is Economics? Economics is a social science that aims at the study of production, distribution, consumption and accumulation of wealth in society.  What is Economics? Production: What to produce? How much? Which technology do we need and how to produce? Distribution: Who gets what portion of total production? How to distribute total income amongst different social groups (religion, region, gender, etnical) Consumption: How individuals get consumption and saving decisions? What type of goods and services are consumed by individuals? Accumulation: How fast can wealth be accumulated (economic growth)? What factors cause rapid growth? Why economic crises ocur? How can individuals living conditions be improved? FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 E ECONOMY AS A WHOLE WORKS Macroeconomics and Microeconomics Microeconomics Branch of economics that deals with the behavior of individual economic units—consumers, firms, workers, and investors— as well as the markets that these units comprise. Macroeconomics. Branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Economic Agents Households/Individuals: the decisions of consumption, savings and labor supply ◦ Households: All persons living under one roof or occupying a separate housing unit – co-consumption decisions Firms: the decisions of production, investment and labor demand Government: economic policies (fiscal, monetary, social, development plans, macroeconomic targets) FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 How People Make Decisions ◦ People face tradeoffs. ◦ The cost of something is what you give up to get it. ◦ Rational people think at the margin. ◦ People respond to incentives. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Principle #1: People Face trade-offs Principle Tradeoffs. “There is no such thing as a free lunch!” FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 People Face trade-offs To get one thing, we usually have to give up another thing. ◦ Food v. clothing ◦ Leisure time v. work ◦ Efficiency v. equity Making decisions requires trading off one goal against another.  People Face trade-offs Society and Scarce Resources: The management of society’s resources is important because resources are scarce. Consumers Consumers have limited incomes, which can be spent on a wide variety of goods and services, or saved for the future. Workers Workers also face constraints and make trade-offs. First, people must decide whether and when to enter the workforce. Second, workers face trade-offs in their choice of employment. Finally, workers must sometimes decide how many hours per week they wish to work, thereby trading off labor for leisure. Firms Firms also face limits in terms of the kinds of products that they can produce, and the resources available to produce them. People Face trade-offs Efficiency v. 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. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017  Principle #2: The Cost of Something Is What You Give Up to Get It. Opportunity Cost Decisions require comparing costs and benefits of alternatives. ◦ Whether to go to university or to work? ◦ Whether to study or go out on a date? ◦ Whether to go to class or sleep in? The opportunity cost of an item is what you give up to obtain that item. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 The Cost of Something Is What You Give Up to Get It. LA Laker basketball star Kobe Bryant (former basketball player) chose to skip college and go straight from high school to the pros where he has earned millions of dollars. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Principle #3: Rational People Think at the Margin. Marginal changes are small, incremental adjustments to an existing plan of action. People make decisions by comparing costs and benefits at the margin. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Principle #4: People Respond to Incentives Marginal changes in costs or benefits motivate people to respond. The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs! Public policies can create incentives or disincentives that alter behaviour. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Markets Can Be a Good Way to Organize Economic Activity Market a shorthand expression for the process by which … households’ decisions about consumption of alternative goods firms’ decisions about what and how to produce and workers’ decisions about how much and for whom to work … are all reconciled by adjustment of prices. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017  Economic agents of society and their economic decisions 1. Households / Individuals as consumers and suppliers of labor ◦ a household (HH): group of individuals living under the same roof and hence sharing a common budget 2. Firms (the private sector) as producers; employers of labor; and investors, users of technology and capital 3. The Government (the public sector) as decision-maker on legal framework and policies (fiscal, monetary, industrial and social welfare policies, macro programs, development plans, etc.) 4. Rest of the world (the international sector) Markets Can Be a Good Way to Organize Economic Activity Prices and Markets How prices are determined? The price is an important factor for resource allocation. Resource allocation is crucial for a society and is handled in different ways in different societies, e.g.: Central planned economy Mixed economy Free market economy FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Markets Can Be a Good Way to Organize Economic Activity Prices and Markets How prices are determined? The price is an important factor for resource allocation. Resource allocation is crucial for a society and is handled in different ways in different societies, e.g.: Central planned economy: by government Mixed economy Free market economy: by economic agents FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Markets Can Be a Good Way to Organize Economic Activity Efficiency or Equity? In market economies, efficiency is more of a concern whereas the planned economies gives more emphasis on equity. Since the prices are not free in the planned economies a central office decides the prices and the production. A heavy bureaucracy is required for this process. Lack of competition decreases the productivity and quality in planned economies.  Markets Can Be a Good Way to Organize Economic Activity Market Orientation China Sweden USA Hungary Cuba United Kingdom Free Market Central Planned Economy Economy FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Markets Can Be a Good Way to Organize Economic Activity Pure market economy has no government intervention. Centrally planned economy is where those in charge guide economic activity. ◦ They have failed because they did not allow the market to work. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Markets Can Be a Good Way to Organize Economic Activity Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.” ◦ Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions. ◦ As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Market Structures Market characteristics that determine the economic environment in which firms and individuals operate ◦ Number & size of firms in market ◦ Degree of product differentiation ◦ Likelihood of new firms entering market Market Structures Perfect Competition: ◦ Large number of relatively small firms ◦ Homogeneous product ◦ No barriers to entry Monopoly: ◦ Single firm ◦ Produces product with no close substitutes ◦ Protected by a barrier to entry Monopolistic Competition: ◦ Large number of relatively small firms ◦ Differentiated products ◦ No barriers to entry Oligopoly: ◦ Few firms produce all or most of market output ◦ Homogeneous or heterogeneous products ◦ Actions by any one firm will affect sales & profits of the other firms  Governments Can Sometimes Improve Market Outcomes Market failure occurs when the market fails to allocate resources efficiently. When the market fails government can intervene to promote efficiency and equity. Market failure may be caused by ◦ an externality, which is the impact of one person or firm’s actions on the well-being of a bystander. ◦ market power, which is the ability of a single person or firm to unduly influence market prices. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 An Economy’s Standard of Living Depends on its ability to produce goods and services Economic growth - the increase in the amount of goods and services in an economy over a period of time. Gross domestic product per head - the market value of all final goods and services produced within a country in a given period of time divided by the population of a country to give a per capita figure FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 An Economy’s Standard of Living Depends on its ability to produce goods and services Standard of living - a measure of welfare based on the amount of goods and services a person’s income can buy. ◦ Usually measured by the inflation adjusted (real) income per head of the population. ◦ Most variations in living standards are explained by differences in countries’ productivities. Productivity is the amount of goods and services produced from each hour of a worker’s time. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017 Summary ① When individuals make decisions, they face trade-offs among alternative goals. ② The cost of any action is measured in terms of foregone opportunities. ③ People often make decisions by comparing marginal costs and marginal benefits. ④ People change their behavior in response to the incentives they face. ⑤ Government can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable. ⑧ Productivity is the ultimate source of living standards. FOR USE WITH MANKIW AND TAYLOR, ECONOMICS 4TH EDITION 9781473725331 © CENGAGE EMEA 2017