INTRODUCTION TO MICRO ECONOMICS. Zoubida SAMLAL - MBA, CFA Member, PHD candidate for HBS program

Transcription

1 INTRODUCTION TO MICRO ECONOMICS Zoubida SAMLAL - MBA, CFA Member, PHD candidate for HBS program

2 Plan Module chapter Task Introduction Introduction to Microeconomics Fondamentals Midterm Consumer and markets Final Demand and supply Elasticity Economic theory, market and covernment Consumer choice Production costs Perfect competition Monopoly and oligopoly Cases and exercies 1 h30 minutes ÉCases and exercies 2h30 minutes

3 Grading system 15% participation 50% Final exam 35% midterm

4 Course Objectives Develop Analytical Thinking Skills Through the development of theoretical economic models and concepts Through reference to statistical information Through the application of these models to real world events in order to understand these events and devise policy solutions To Learn To Think Like An Economist

5 What do Economists Study? Economic variables and behavior -- prices, employment, production, profits, labor supply, consumption and savings Non Economic variables behavior -- marriage, fertility, crime, discrimination, health, politics and voting Institutions and Social Norms

6 What is Economics? The study of economies, at both the level of the individual and the society as a whole Economies -- the system of coordinating society s productive activities Market economies -- decentralized decision making coordinated through prices Command Economies -- centralized decision making

7 Micro versus Macro Micro -- study of how individuals make decisions and interact with others in society Macro -- study of aggregate behavior of the Macro -- study of aggregate behavior of the economy (inflation, unemployment, growth)

8 Introduction to Microeconomics Introduction implies an overview of the issues and methods used by economists to study how individuals make decisions and interact with each other to pursue their self interest. Intermediate Micro Theory -- same issues, more attention to assumptions underlying the analysis Graduate Level Micro Theory -- mostly math

9 Chapter 1: The Economic Way of Thinking The Economic Problem Production Possibilities Economic Analysis

10 You bought a product? Who made it? How was it made? How did you get it?

11 I. The Economic Problem the basic economic problem is scarcity: -- wants are unlimited, but resources are limited so with scarcity, we must make choices, and with choices, come costs

12 Cost is the opportunity cost -- what you give up when you make a choice -- there s no such thing as a free lunch

13 Cost of going to college -- what you can buy with tuition & fees -- what you could earn by working -- what you could do with the free time

14 you are willing to give up -- tuition -- wages -- leisure time to go to college -- b/c you expect higher income or more rewarding career

15 economics is the study of choices of how to allocate scarce resources choices made by -- consumers -- businesses -- governments

16 What are resources? use resources to produce goods and services factors of production -- land -- labor -- capital -- entrepreneurship

17 Land all natural resources -- land -- minerals -- water -- wildlife

18 Labor size of labor force (quantity) skills of labor force (quality) -- human capital the value of time

19 physical capital Capital -- goods used to make other goods -- factories -- machines -- infrastructure

20 NOT financial capital -- stocks, bonds, bank loans financial capital facilitates building of physical capital

21 Entrepreneurship human resource ideas -- doing things better -- e-commerce -- new products

22 Three Questions to answer: 1. What to produce? 2. How to produce the stuff in #1? 3. For whom to produce? (who gets the product in #1?)

23 Example: A Lexus 1. What to produce? Toyota designs a luxury car with buyers in mind Toyota decides how much to produce give the price and their costs Buyers decide how many to buy, based on price, their income, tastes, etc.

24 Specialization How do we get the most out of our resources? We specialize in what we do best and trade that for what we need

25 Who specializes in what? Comparative advantage if you produce a good at a lower opportunity cost then you should specialize in it

26 Example: married couple Husband: surgeon $250,000 /year Wife: 5th grade teacher $50,000 /year who should run the household? Who has lower opportunity cost? The wife

27 with specialization division of labor different people specialize in different things people become very good at their task efficiency gains -- get more out of same resources

28 specialization is everywhere doctors neurosurgeon, obstetrics, pediatrics, lawyers divorce, real estate, patent law, personal injury...

29 The bottom line: Scarcity & opportunity cost are unavoidable. BUT efficiency & specialization make the most of scarce resources

30 II. Production Possibilities Frontier (PPF) model of scarcity, choice, & opportunity cost choice between 2 goods PPF shows maximum possible output combos of 2 goods, given current resources

31 PPF example 2 goods: -- CDs -- bottled water use land, labor, capital to make these goods

32 Bottled CDs Water Suppose these are 6 possible pairs: A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5

33 We can graph the table & get the PPF: CDs bottled water

34 Using the PPF CDs points on or inside the PPF are possible points INSIDE the PPF are inefficient -- do not use all resources 9 6 points ON the PPF are efficient -- use all resources 2 3 bottled water

35 Using the PPF points outside the PPF are NOT possible at this time CDs 15 cannot produce 15 CDs AND 6 bottles of water bottled water

36 Scarcity & tradeoffs the PPF shows limits to production so must choose between bottled water & CD combinations -- give up water to get more CDs -- give up CDs to get more water -- TRADEOFF

37 Opportunity Cost on PPF there are tradeoffs -- how much is given up? = opportunity cost

38 A to B = 1 CD B to C = 2 CDs C to D = 3 CDs Opportunity cost of 1 bottle of water: CDs (millions per yr.) Bottled Water (millions per yr.) A 15 0 B 14 1 C 12 2 D 9 3 E 5 4 F 0 5

39 Opportunity Cost CDs Bottled Water Opp. cost of 1 bottle (CDs) A 15 0 B C D E F 0 5 5

40 Opportunity Cost cost (in CDs) increases as water production increases PPF is concave (bowed out) why? -- harder to switch resources between CDs and water

41 Opportunity Cost At first when making more water switch the best resources from CD production But as we make more water resources switched are less and less suitable for water production

42 Shifts in the PPF if we get more resources OR if technology improves then the PPF will shift out produce more CDs and more water economic growth!

43 CDs 15 With economic growth, the unattainable becomes attainable bottled water