Economics Lecture PDF

Economics & the Economics of Climate Change  SECTION I: fundamental economic concepts How do fundamental economic concepts, such as scarcity, opportunity cost, and rational choice, influence the daily decisions of individuals & the broader functioning of economies? ...

Economics & the Economics of Climate Change  SECTION I: fundamental economic concepts How do fundamental economic concepts, such as scarcity, opportunity cost, and rational choice, influence the daily decisions of individuals & the broader functioning of economies?  Definition of economics Economics studies how individuals make choices about allocating scarce resources and how these choices affect interactions within society. Resources are limited, while human desires are virtually unlimited, making scarcity an inevitable part of economic life. Each choice involves trade-offs, where the opportunity cost is the value of what is forgone to pursue a chosen option. Rationality in decision-making, where people weigh benefits and opportunity costs to choose the option yielding the highest net benefit.  economic models & Positive/normative economics Models simplify complex real-world economic phenomena, focusing on essential details to provide insights while omitting irrelevant factors. Diagrams or mathematical formulas Positive vs Normative Economics Positive economics objectively describes and predicts economic events, while normative economics evaluates these events based on value judgments. pareto efficiency & Micro/macroeconomics Pareto efficiency is achieved when resources are allocated such that no one can be made better off without making someone else worse off, marking an important goal in economics. Microeconomics examines individual behavior and market dynamics, while macroeconomics addresses the broader economy's performance, including production, employment, and prices​ SECTION II: microeconomics How do supply and demand dynamics, market structures, and government interventions shape economic behavior and market outcomes in microeconomics? supply & demand interactions Central to microeconomics, focusing on how market prices and quantities are determined. A market consists of all buyers & sellers of a particular good or service. Perfect Competition: Characterized by a large number of buyers and sellers, standardized goods or services, and well-informed participants. Equilibrium in such markets occurs where supply and demand intersect, maximizing total surplus for market participants. demand & supply curves Demand Curve: Shows the quantity buyers are willing to purchase at various prices. Law of demand: quantity purchased varies inversely with price. The higher the price, the lower the quantity demanded. Influenced by income, related goods' prices, tastes, expectations, and the number of buyers. Supply Curve: Shows the quantity producers are willing to supply at various prices. Law of supply: as the price of a good/service increases, the quality of goods/services increases (& vice versa). Influenced by input prices, technology, expectations, and the number of sellers. market equilibrium & elasticity Market equilibrium is achieved when no participant wishes to change their behavior, marked by the intersection of supply and demand curves. Elasticity measures the responsiveness of supply and demand to price changes, important for understanding market reactions. government interventions & international trade Government interventions: Include price ceilings, price floors, & taxes aimed at revenue generation or regulating market outcomes. Can lead to changes in equilibrium & affect market efficiency. International trade: Increases total surplus & benefits economies, but not all participants may gain, leading to opposition to free trade. firm behavior & market structures Firms aim to maximize economic profits by combining inputs to produce goods and services. Entry & Exit: Drives economic profits to zero in the long run, as new entrants increase supply and lower prices, while exits decrease supply and raise prices Imperfect Competition: Includes monopoly (single supplier), oligopoly (few suppliers), and monopolistic competition (many suppliers with differentiated products). Arises from barriers to entry, leading to higher prices, lower output, and reduced total surplus compared to perfect competition. Economic profits incentivize innovation & market expansion. market failures & goods classification Market Failures and Externalities: Occur when non-market interactions lead to inefficient outcomes. Solutions include creating markets for these interactions or government regulation. Goods Classification: Defined by rivalry in consumption and excludability, leading to categories: private goods, common resources, collective goods, & public goods. role of institutions & government Organize human interactions with formal and informal rules. Governments enforce property rights and regulate markets but may lead to inefficiencies like pork barrel politics and rent-seeking. Pork barrel politics: Government spending aimed at pleasing voters or legislators through localized projects that may not be the most efficient use of resources. Rent-seeking: Efforts by individuals or organizations to gain economic benefits through political influence or manipulation rather than productive economic activity. SECTION III: macroeconomics What are the factors that influence both the long-term growth of an economy and the short-term economic fluctuations, such as unemployment and inflation? measurerment of economic output (GDP) Total output is measured by Gross Domestic Product (GDP), representing the market value of all final goods and services produced within a country in a specific period. In the U.S., GDP has grown at a much faster rate than population since 1900, suggesting rising living standards and productivity. At the economy level, GDP reflects production, which is equal to income and expenditures. Expenditures are divided into four categories: Consumption, Investment, Government Purchases, and Net Exports. GDP per capita is closely tied to labor productivity, influenced by physical/human capital, technology, natural resources, and the political/legal environment. business cycles & international trade Economic activity naturally fluctuates between expansion (growth) and recession (decline). Fluctuations in the business cycle affect employment, income, and growth rates. Trade impacts national economies, with trade surpluses (exports > imports) and trade deficits (imports > exports) affecting economic stability and growth. labor force/unemployment & inflation Defined as the percentage of the labor force actively seeking work but unable to find it. Tends to rise during recessions and fall during expansions, but never reaches zero due to constant labor market changes. Types of unemployment include: Frictional - Short-term, transitional Structural - Mismatch of skills and jobs Cyclical - Linked to the business cycle Inflation, or the general increase in prices, is measured by indices such as the Consumer Price Index (CPI). It can affect purchasing power, distort price signals & economic planning, and inhibit economic growth. savings & investment Savings refers to income not spent on current consumption, while investment involves purchasing new capital equipment. Financial markets channel savings into investments, with interest rates adjusting to balance supply and demand for funds. In closed economies, savings equals investment; in open economies, it includes net capital outflows. role of money & the federal reserve Money functions as a medium of exchange, unit of account, and store of value, measured by M1 and M2. The Federal Reserve controls the money supply and serves as the lender of last resort, influencing credit conditions and economic activity. In the long run, money supply changes impact only prices, while in the short run, they alter credit and influence economic activity. potential output & output gaps Economists distinguish between potential output (full employment output) and actual output, with deviations from potential output creating an output gap. Short-run output depends on aggregate demand, while long-run output aligns with potential output. Fiscal and Monetary Policy for Stabilization: Policies can adjust to return the economy to potential output, though policy effects often lag and may sometimes exacerbate fluctuations rather than stabilize them. SECTION IV: climate change- economics meets ecoloy How can economic and ecological principles be integrated to address global climate change, given the challenges of externalities, public goods, and collective responsibility? economics & ecology of climate change Addressing global climate change requires a blend of economics and ecology, especially given that climate issues often involve large- scale externalities and shared resources. Climate policy must consider the climate commons, where the cumulative effects of individuals and nations affect shared atmospheric resources. externalities in climate impact Externalities, which are irregularities in market functioning, occur when market prices don't reflect the full impact of individual or national actions on others. Externalities can be one-way (affecting one party) or reciprocal (mutual impacts) and often require corrective measures, though local-level solutions are insufficient for global issues. Public Goods, Public Bads, & Free Riders Climate-related impacts can be public goods (non-rival benefits like cleaner air) or public bads (non-excludable harms like pollution). Free rider problem: People, firms, or countries benefit from public goods without bearing the cost, complicating global climate cooperation.  collective action & principal agent problem Climate change solutions involve collective action challenges, where responsibilities start locally but scale up to nations and beyond. The tragedy of the commons describes the risk of overusing shared resources; managing the climate commons requires building norms, expectations, institutions, and systems of enforcement. Principal-agent problem: arises in global governance when it’s hard for higher authorities (principals) to monitor and enforce climate actions among individual agents (countries or regions). discount rate & social cost of carbon The discount rate values present consumption more than future, impacting policies on conservation and investment. High discount rates undermine sustainability efforts, leading to present-day choices that affect future generations’ environmental conditions. Projected climate impacts include reduced agricultural productivity, higher mortality, extreme weather events, and energy demand. The social cost of carbon (SCC) estimates the economic damage of each additional ton of carbon, helping to quantify the benefits of emission reduction. technological advances & renewable energy Government subsidies have accelerated the adoption of wind and solar energy, with costs dropping faster than expected. Some economists advocate a "no regrets" policy, recommending action to reduce greenhouse gases (GHGs) even if worst-case scenarios don’t occur, as it still reduces public bads and enhances environmental outcomes.  policy responses & geoengineering Policy options include: Inaction – Deferring action, risking larger future costs. Geoengineering – Potentially effective but poses governance issues, with a "free driver" problem if any party acts unilaterally. Solar geoengineering reflect some incoming sunlight back into space, artificially lowering global temperatures. International Climate Negotiations – Ongoing for over 40 years, though challenging to enforce and ensure commitment. Global Environmental Organization (GEO) – Suggested to manage global climate externalities and provide a multilateral platform for coordinated action.