Economics 101: Introduction To Microeconomics Part 1 2024 PDF

ECONOMICS 101: INTRODUCTION TO MICROECONOMICS PART 1 - 2024 AM (2024)  Key concepts WHAT to produce: di erent types of goods and services HOW to produce: factors of production and ways of com...

ECONOMICS 101: INTRODUCTION TO MICROECONOMICS PART 1 - 2024 AM (2024)  Key concepts WHAT to produce: di erent types of goods and services HOW to produce: factors of production and ways of combining them SESSION 1: The basic factors of production: land, labour, What is capital and entrepreneurship FOR WHOM to produce: issues of distribution Economics? SELF-INTEREST versus the SOCIAL INTEREST: consonance or dissonance? ff  What is Economics? Economics: A social science that studies choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Divides into two main parts: Microeconomics - study of the choices that individuals and businesses make Macroeconomics - study of the performance of the national economy and the global economy. Two Big Economic Questions How do choices end up determining what, how, and for whom goods and services get produced? When do choices made in the pursuit of self-interest also promote the social interest? What, How, and For Whom? Economic Questions What? How? Goods and services are the objects Goods and services are produced that people value and produce to by using productive resources that satisfy human wants. economists call factors of production: What we produce changes over time Land What determines the quantities of Labour maize, DVDs, and haircuts and all the other millions of items that we Capital produce? Entrepreneurship Economic questions For Whom? Who gets the goods and services that are produced depends on the incomes that people earn. People earn their incomes by selling the services of the factors of production they own: Land earns Rent Labour earns Wages Capital earns Interest Entrepreneurship earns Pro t Which Factor of production earns the most income? fi When Is the Pursuit of Self-Interest in the Social Interest? Could it be possible that when each one of us makes choices that are in our own best interest, it turns out that these choices are also the best for society as a whole? Choices that are the best for society as a whole are said to be in the social interest. Economists have been trying to nd the answer to this question since 1776, the year in which Adam Smith’s, The Nature and the Causes of the Wealth of Nations, was published. fi  When Is the Pursuit of Self-Interest in the Social Interest? Privatization Is globalisation a good thing? Do publicly owned businesses Whom does it bene t? coordinated by central economic Globalisation is clearly in the planning (e.g. Cuba) serve the interest of the owners of social interest better than private multinational rms that pro t by businesses that trade freely in producing in low-cost regions and markets (USA)? selling in high-price regions. Or is it possible that privatisation But is globalisation in your interest serves the social interest more and the interest of the young e ectively? worker in Malaysia who sews your new running shoes? Globalisation: the expansion of international trade and investment Is it in the social interest? ff fi fi fi When Is the Pursuit of Self-Interest in the Social Interest? HIV/Aids Water shortages Unemployment  Key concepts The concept of scarcity The economic problem: choice (trade-o s) in the face of scarcity The coexistence of unlimited human wants versus scarce economic resources SESSION 2 - The relevance of the economic problem to all communities ECONOMIC WAY Individuals and aggregates: OF THINKING microeconomics versus macroeconomics Opportunity cost: sacri ce of the next best alternative fi ff  The Economic Way of Thinking A Choice Is a Trade-o The bene t of something is the gain or pleasure that it brings and is determined You can think about your choices as by preferences – by what a person likes trade-o s and dislikes and the intensity of those feelings A trade-o is an exchange – giving up one thing to get something else Cost: What You Must Give Up Making a Rational Choice The opportunity cost of something is the highest valued alternative that must be A rational choice is one that compares given up to get it costs and bene ts and achieves the greatest bene t over cost for the person It has two components: the things you making the choice cannot a ord to buy and the things you cannot do with your time Bene t: What You Gain fi ff ff fi ff fi fi ff  Economic Way of Thinking The questions what, how, and for whom goods and services are produced all involve trade-o s What tradeo s: What to produce, how to spend income – Individual, Company, Government How tradeo s: How goods and services get produced depends on choices made by the businesses that produce the things we buy. For Whom tradeo s: depends on the distribution of buying power. ff ff ff ff  Economic Way of Thinking MAKING A RATIONAL CHOICE A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice. Bene t - What you gain The bene t of something is the gain or pleasure that it brings and is determined by preferences - likes/dislikes Economists measure bene t as the most that a person is willing to give up to get something. Cost - What you must give up The opportunity cost of something is the highest valued alternative that must be given up to get it. fi fi fi  Opportunity Cost - Examples No such a thing as a free lunch Opportunity cost of something is the highest-valued alternative that we give up to get it OC of being at UKZN? Opportunity Cost Examples  Choosing at the Margin You can allocate the next hour between studying and e-mailing your friends. But the choice is not all or nothing. To make this decision, you compare the bene t of a little bit more study time with its cost – you make your choice at the margin. Bene t that arises from an increase in an activity is called marginal bene t Cost of an increase in an activity is called marginal cost If Marginal Bene t (MB) exceeds Marginal Cost (MC) you undertake the activity If MC exceeds MB you do not undertake the activity fi fi fi fi  Key concepts Economics as a human and behavioural science Positive and normative economic statements: WHAT IS and WHAT OUGHT TOBE SESSION 3 - Some common mistakes and pitfalls in ECONOMICS AS reasoning about economic issues The “scienti c method” and simple A SOCIAL model-building in economic analysis Coping with complex reality: assumptions SCIENCE and ceteris paribus techniques in economic models Testing economic theories: predictive power as the principal goal? Why economists disagree Graphical techniques in economics fi Economics: a Social Science Positive statements: what is – Can be tested Normative statements: what ought to be Economics uses positive statements to understand economic world by: Observation and measurement Model building Testing models Obstacles and Pitfalls in Economics 1. Unscrambling cause and e ect: use ceteris paribus assumption 2. Fallacy of composition 3. Post hoc Fallacy 1. Unscrambling cause and e ect By changing one factor at a time and holding all the other relevant factors constant, we isolate the factor of interest and are able to investigate its e ects in the clearest possible way. Called ceteris paribus - a Latin term that means “other things being equal” or “if all other relevant things remain the same.” Ensuring that other things are equal is crucial in many activities, and all successful attempts to make scienti c progress use this device. fi ff ff ff  Economics as a social science 2. Fallacy of composition The fallacy of composition is the (false) statement that what is true of the parts is true of the whole or that what is true of the whole is true of the parts. Standing at a soccer match to get a better view works for one person but not for all – what is true for a part of a crowd is not true for the whole crowd. A rm res some workers to cut costs and improve its pro ts. If all rms take similar actions, income falls and so does spending. The rm sells less, and its pro ts don’t improve. fi fi fi fi fi fi Economics as a social science 3. Post hoc Fallacy post hoc, “after this, therefore because of this.” The post hoc fallacy is the error of reasoning that a rst event causes a second event because the rst occurred before the second. The stock market booms, and some months later the economy expands. Did the stock market boom cause the economy to expand? Possibly, but perhaps businesses started to plan the expansion of production because a new technology that lowered costs had become available. As knowledge of the plans spread, the stock market reacted to anticipate the economic expansion. fi fi  Key concepts Graphs used in economic models The function as a rule: a constant and a variable SESSION 4 & 5 - De nition and calculation of the slope of a straight line GRAPHS Positive and negative slope, slope of (ECONOMIC a curve: across an arc and at a point Slope of a curve, marginal values MODELS) and tangents fi Graphs used in Economic models Variables That Move in the Same Direction A relationship between two variables that move in the same direction is called a positive relationship or a direct relationship A line that slopes upward shows such a relationship Variables That Move in Opposite Directions A relationship between variables that move in opposite directions is called a negative relationship or an inverse relationship Positive relationship Negative relationship Graphs used in Economic models Variables That Have a Maximum or a Minimum Many relationships in economic models have a maximum or a minimum Graphs used in Economic models Variables That Are Unrelated There are many situations in which no matter what happens to the value of one variable, the other variable remains constant Graphs used in economic models The Slope of a Relationship The Slope of a Curved Line The slope of a relationship is the Slope at a Point change in the value of the variable measured on the y-axis divided by To calculate the slope at a point on a the change in the value of the curve, you need to construct a variable measured on the x-axis straight line that has the same slope as the curve at the point in question The Slope of a Straight Line Slope Across an Arc The slope of a straight line is the same regardless of where on the line An arc of a curve is a piece of a curve you calculate it The slope of a straight line is constant Position of Line The y-axis intercept determines the position of the line on the graph Positive Relationships When the two variables x and y move in the same direction All positive relationships have a slope that is positive Negative Relationships When the two variables x and y move in the opposite direction  Key concepts covered in sessions 6, 7 and 8 Scarcity, choice and opportunity cost revisited A graphical representation of an economy’s production possibilities SESSION 6 - 8 : Concave versus linear frontiers: the “law” of increasing opportunity costs SCARCITY AND Full employment and unemployment of resources CHOICE Marginal costs and marginal bene ts An introduction to productive & allocative e ciency Capital formation, technological progress and economic growth Production possibilities in rich and poor countries ffi fi Production Possibilities and Opportunity Cost The amount of goods and services we can produce is limited by: 1. Resources (L, K, etc) L-labour, K- capital 2. Technology 3. Tradeo – if we want to produce more of one good we need to produce less of other goods. PPF assumptions 1. Resources are xed 2. All resources are fully and e ciently employed 3. Technology is xed ff fi fi ffi Production Possibilities and Opportunity Cost Production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot be produced. Focus is on two goods at a time and hold the quantities produced of all the other goods and services constant. The PPF illustrates scarcity because we cannot attain the points outside the frontier. Production Possibilities and Opportunity Cost Production Possibilities and Opportunity Cost Production Possibilities and Opportunity Cost Production e ciency – if we cannot produce more of one good without producing less of some other good. Trade-O Along the PPF Every choice along the PPF involves a trade-o. Opportunity cost Opportunity cost is the cost of the highest-valued alternative foregone Opportunity Cost Is a Ratio: the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier. ff ffi ff Production Possibilities and Opportunity Cost Increasing Opportunity Cost: The opportunity cost of a pizza increases as the quantity of pizzas produced increases and Vice Versa Increasing opportunity cost is re ected in the shape of the PPF – it is bowed outward. Reason is that resources are not all equally productive in all activities. Increasing Opportunity Costs Are Everywhere Opportunity cost will increase as more of a particular good is produced fl Using resources efficiently Point on the PPF means we are using resources e ciently We have no misallocation of resources. But where on the PPF should we produce? Which point is best? To answer this questions, we must nd a way of measuring and comparing costs and bene ts. fi ffi fi The PPF and Marginal cost The marginal cost of a good is the opportunity cost of producing one more unit of it. It’s calculated from the slope of the PPF. Preferences and Marginal Bene t The marginal bene t from a good or service is the bene t received from consuming one more unit of it – this bene t is subjective It depends on people’s preferences – people’s likes and dislikes and the intensity of those feelings fi fi fi fi Preferences and Marginal Bene t The marginal bene t curve shows the relationship between marginal bene t from a good and the quantity consumed of that good. Marginal bene t is measured by the most that people are willing to pay for it- willingness to pay. The principle of decreasing marginal bene t Marginal bene t decreases because we like variety. The more you consume of any one good/service, the more we tire of it and would prefer to switch to something else. fi fi fi fi fi fi Allocative efficiency At any point on the PPF, we cannot produce more of one good without giving up some other good At the best point on the PPF, we cannot produce more of one good without giving up some other good that provides greater bene t. We are producing at the point of allocative e ciency – the point on the PPF that we prefer above all other points. ffi fi ECONOMIC GROWTH A Nation’s Economic Growth To expand production possibilities in the future, a nation must devote fewer resources to producing current consumption goods and services and some resources to accumulating capital and developing new technologies As production possibilities expand, consumption in the future can increase ECONOMIC GROWTH The Cost of Economic Growth Economic growth comes from technological change and capital accumulation Technological change is the development of new goods and of better ways of producing goods and services Capital accumulation is the growth of capital resources, including human capital  ECONOMIC GROWTH E ects of growth in capital stock and land resources ff  GAINS FROM TRADE Comparative Advantage and Absolute advantage A person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else. A person who is more productive than others has an absolute advantage. A person who has an absolute advantage does not have a comparative advantage in every activity.  GAINS FROM TRADE Liz 1. What is Liz's opportunity cost of producing 1 smoothie? 2. What is Liz's opportunity cost of producing 1 pizza? 3. In which of the two activities does Liz have an absolute advantage? 4. In which of the two activities does Liz have comparative advantage?  GAINS FROM TRADE Joe 1. What is Joe's opportunity cost of producing 1 smoothie? 2. What is Joe's opportunity cost of producing 1 pizza? 3. In which of the two activities does Joe have an absolute advantage? 4. In which of the two activities does Joe have comparative advantage?  Key concepts: An introduction to di erent economic coordination systems: Central economic planning & decentralised markets SESSION 9 & A simple circular ow of economic activity A simple model economy without a government 10 - sector Markets as places that facilitate exchange (trade) SOLUTIONS TO Product (Goods) markets and factor markets BASIC The role of prices as allocative signals: measures of willingness to pay and indicators of scarcity ECONOMIC Early ideas of “free” market mechanisms: Adam Smith’s “Invisible Hand” and the notion of laissez QUESTIONS faire Are “free” market forces the optimal way of solving the basic economic questions? fl ff Economic Coordination People gain by specialising in the production of those goods and services in which they have a comparative advantage and then trading with each other. Two competing economic co-ordination systems; 1. Central economic planning 2. Decentralised markets Decentralised coordination works best but to so it needs four complementary social institutions Firms Markets Property rights Money  Economic Coordination 1. Firms A rm is an economic unit that hires factors of production and organises those factors to produce and sell goods and services – examples of rms are your fuel station, Builders’ Warehouse, and Edgars Firms coordinate a huge amount of economic activity. 2. Markets A market is any arrangement that enables buyers and sellers to get information and to do business with each other Markets have evolved because they facilitate trade Without organised markets, we would miss out on a substantial part of the potential gains from trade Markets can work only when property rights exist fi fi Economic Coordination 3. Property Rights The social arrangements that govern the ownership, use, and disposal of anything that people value are called property rights. Real property includes land and buildings – the things we call property in ordinary speech – and durable goods such as plant and equipment. Financial property includes stocks and bonds and money in the bank. Intellectual property is the intangible product of creative e ort – this type of property includes books, music, computer programs, and inventions of all kinds and is protected by copyrights and patents ff Economic Coordination Where property rights are enforced, people have an incentive to specialise and produce the goods in which they have a comparative advantage. Where people can steal the production of others, resources are devoted not to production but to protecting possessions 4. Money Money is any commodity or token that is generally acceptable as a means of payment. In principle, trade in markets can exchange any item for any other item Economic Coordination  Circular Flows in the Market Figure 2.7 shows the ows that result from the choices that households and rms make Households specialise and choose the quantities of labour, land, capital, and entrepreneurial services to sell or rent to rms Firms choose the quantities of factors of production to hire – these (red) ows go through the factor markets go through the factor markets. Households choose the quantities of goods and services to buy, and rms choose the quantities to produce These (red) ows go through the goods markets fi fl fl fi fi fl Economic Coordination Households receive incomes and make expenditures on goods and services (the green ows) How do markets coordinate all these decisions? Coordinating Decisions Markets coordinate decisions through price adjustments. fl  Key concepts Shortcomings of the “free” market solution The role of government in a mixed economy Market failure: the partial or total breakdown of the price signalling mechanism SESSION 11 & 12 Sources of market failure #1:private versus public goods and the operation of the exclusion principle - THE MIXED Sources of market failure #2: externalities - negative and positive spill overs from the market ECONOMY & Sources of market failure #3: monopolies and the breakdown of competitive forces ROLE OF Equity and re-distribution as a basis for government intervention GOVERNMENT The business cycle and the need for stabilising intervention The mixed economy and the role of government A public choice is a decision that has consequences for many people and perhaps for an entire society Why Governments Exist Governments exist for three major reasons: 1. They establish and maintain property rights 2. They provide non-market mechanisms for allocating scarce resources 3. They implement arrangements that redistribute income and wealth Sometimes the market results in ine ciency – market failure Just as there can be market failure, there can also be government failure Government failure is a situation in which government actions lead to ine ciency – either underprovision or overprovision ffi ffi The mixed economy and the role of government What is a Public Good? To see what makes a good a public good, we distinguish two features of all goods: the extent to which people can be excluded from consuming them and the extent to which one person’s consumption rivals the consumption of others. Excludable A good is excludable if it is possible to prevent someone from enjoying its bene ts A good is non-excludable if it is impossible (or extremely costly) to prevent anyone from bene tting from it fi fi The mixed economy and the role of government Rival A good is rival if one person’s use of it decreases the quantity available for someone else A good is non-rival if one person’s use of it does not decrease the quantity available for someone else A Fourfold Classi cation fi The mixed economy and the role of government Private Goods Both rival and excludable Public Goods Both non-rival and non-excludable Common Resources Rival and non-excludable Natural Monopoly Goods Non-rival and excludable Externalities A cost or bene t that arises from production and falls on someone other than the producer, or a cost or bene t that arises from consumption and falls on someone other than the consumer is called an externality An externality can arise from either production or consumption A negative externality, imposes an external cost, or a positive externality, provides an external bene t fi fi fi There are four types of externalities Negative production externalities Positive production externalities Negative consumption externalities Positive consumption externalities THE END!!!