EC2100 Microeconomics: Behaviour and Organisations Lectures 1-2 PDF

EC2100 Microeconomics: Behaviour and Organisations Dr Julia le Maitre [email protected] Lectures 1-2: Microeconomics and Behaviour Content Overview What will this course cover? Topic 1: Introduction to Microeconomics and Behaviour Topic 2: Choices and Budget...

EC2100 Microeconomics: Behaviour and Organisations Dr Julia le Maitre [email protected] Lectures 1-2: Microeconomics and Behaviour Content Overview What will this course cover? Topic 1: Introduction to Microeconomics and Behaviour Topic 2: Choices and Budget constraints Topic 3: Demand and Supply Topic 4: Perfect Competition Topic 5: Monopoly Topic 6: Monopolistic Competition and Oligopoly Topic 7: Monopolies and Antitrust Policy Additional Material What materials should I review? The Lecture Materials on Canvas contain the relevant topics and material. These are based on the recommended readings for the course, but students are welcome and encouraged to review the text books proposed for the course as additional reference guides, or to refer to additional Microeconomics text book chapters relating to the topics on the previous slide. Recommended reading and supporting texts are included under Modules. Additional examples available in suggested material and supporting text books are included as recommended reading. The Library is able to help you identify suitable material and any additional reading if you would like additional reading. Some topics suggest quick revision guides, e.g. YouTube clips or articles. Where relevant, the course notes will point you to references which are quick to review and can help to solidify concepts covered in the course. These are intended to support the learning process and to help illustrate the real-case Learning & Examination What is the course outline and exam breakdown? The EC2100 course outline is available on the UCC Book of Modules. The EC2100 timetable is available on the UCC Timetables site. The Home and Module Overview > About this Module sections on Canvas also provide information about the structure of the course and exams. Learning & Examination Learning Objectives On successful completion of this module, students should be able to: 1. Examine the theoretical background to consumer choice. 2. Use consumer choice theory to describe individual and market demand. 3. Explain why markets fail to achieve competitive outcomes and evaluate policy responses by governments which might help 'correct' these types of market failure. 4. Examine examples of strategic decision making among firms. How this Module is Assessed Total Marks: 100 Continuous Assessment: 20 Marks (end of October) In-Class Test - 1 x In-class Test (20 Marks) Written Examination: 80 Marks (Semester 1 Written Exam) Paper 1: 1.5hr paper - Written Questions (80 Marks)  EC2100 Microeconomics: Behaviour and Organisations TOPIC 1 Dr Julia le Maitre [email protected] Lectures 1-2: Microeconomics and Behaviour Topic 1 Learning Objectives Consider the role of Microeconomics in everyday life: Provide examples of how costs and benefits shape all decisions and consumption behaviours. Consider different approaches concerning the exchange of goods and services in different types of economies e.g. command economies, traditional economies and market economies. Describe the circular flow diagram to illustrate how firms and households participate in a market economy. Discuss how our economies are affected by rules nationally and internationally, for instance through monetary and fiscal policies, in an increasingly globalized world. 7 How Economists Use Theories and Models to Understand Economic Issues One of the most influential economists in modern times was John Maynard Keynes. Keynes thought that economics teaches you how to think, not what to think. What is Economics? Why does it matter? Economics is the study of how humans make decisions in the face of scarcity. These can be individual decisions, family decisions, business decisions or societal decisions. Scarcity means that human wants for goods, services and resources exceed what is available. What is Economics? Why does it matter? “There’s no such thing as a free lunch…” This principle is a cornerstone of Economics. How people perceive costs affect all their decisions and consumption behaviour. Some costs are explicit – some costs are implicit. All choices provide some benefit/welfare to the consumer. Some things that appear to be free will always have some hidden or implicit cost to someone (even if this isn’t the consumer). Microeconomics and Macroeconomics Economics is concerned with the well-being of all people, including those with jobs and those without jobs, as well as those with high incomes and those with low incomes. Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. Macroeconomics is the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance. Microeconomics studies choice and its Macroeconomics studies the performance implications for price and quantity in of national economies and the policies that individual markets: governments use to try to improve it: Sugar. Inflation. Carpets. Unemployment. House cleaning services. Growth. Microeconomics considers topics such as: Macroeconomics considers topics such Costs of production. as: Demand for a product. Monetary policy. Exchange rates. Deficits. Tax. The Division of Labour Adam Smith introduced the idea of dividing labor into discrete tasks, in his famous 1776 book, titled The Wealth of Nations. Based on Smith’s view of the Industrial Revolution. It is a fundamental work in classical economics that examines how nations build wealth. Key theories include the division of labour, productivity, and free markets. 12 Why the Division of Labor Increases Production Dividing and subdividing the tasks involved with producing a good or service, produces a greater quantity of output. Specialization - when workers or firms focus on particular tasks for which they are well-suited within the overall production process. – Specialization allows businesses to take advantage of economies of scale, which means that for many goods, as the level of production increases, the average cost of producing each individual unit declines. Economic Theories and Models A theory is a simplified representation of how two or more variables interact with each other. – A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying. Economists use models to test theories, but for this course we will use the terms model and theory interchangeably. Image Credit: Oliver Canning https://olivercanning.wordpress.com /2020/04/15/the-relationship- between-theories-and-models/ Circular Flow Diagram The circular flow diagram shows how households and firms interact in the goods and services market, and in the labor market. – The direction of the arrows shows that in the goods and services market, households receive goods and services and pay firms for them. – In the labor market, households provide labor and receive payment from firms through wages, salaries, and benefits. How Economies Can Be Organized: An Overview of Economic Systems There are at least three ways that societies organize an economy: Traditional Economy, Command Economy, Market Economy ___________________________________ 1. Traditional economy - typically an agricultural economy where things are done the same as they have always been done. Oldest economic system Used in parts of Asia, Africa, and South Traditional economy America Occupations tend to stay in the family What you produce is what you consume Little economic progress or development An Overview of Economic Systems 2. Command economy - an economy where economic decisions are passed down from government authority and where the government owns the resources. Government decides what goods and services will be produced and what prices it will charge for them. The government decides what methods of production to use and sets wages for workers. Command economy: The government provides many e.g. Ancient Egypt necessities like healthcare and education for free. An Overview of Economic Systems 3. Market economy - an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand. Market - interaction between potential buyers and sellers; a combination of Market economy: demand and supply. New York Stock Exchange Private enterprise - system where private individuals or groups of private individuals own and operate the means of production (resources and businesses). Real World Economies Most economies in the real world are mixed. They combine elements of command, traditional, and market systems. The U.S. economy is positioned toward the market-oriented end of the spectrum. Many countries in Europe and Latin America, while primarily market-oriented, have a greater degree of government involvement in economic decisions than the U.S. economy. China and Russia, while they have moved more in the direction of having a market-oriented system, remain closer to the command economy end of the spectrum. Regulations: The Rules of the Game There is no such thing as an absolutely free market. Regulations always define the “rules of the game” in the economy. Economies that are primarily market-oriented have fewer regulations—ideally just enough to maintain an even playing field for participants. Heavily regulated economies often have underground economies (or black markets), which are markets where the buyers and sellers make transactions without the government’s approval.  Other Economic Terms Monetary policy - policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing. – Determined by a nation’s central bank Fiscal policy - economic policies that involve government spending and taxes. – Determined by a nation’s legislative body The Rise of Globalization Globalization - the trend in which buying and selling in markets have increasingly crossed national borders. Exports - the goods and services that a nation produces domestically and sells abroad. Imports - the goods and services that are produced abroad and then sold domestically. Gross domestic product (GDP) - measures the size of total production in an economy. Reflection Question: What are examples of products and services in the modern economy? How has this contributed to globalization? Cargo ships are one mode of transportation for shipping goods in the global economy.