Why Study Economics?

Transcription

1 Why Study Economics? Intro to Econ Lecture 1 Petar Stankov petar.stankov@gmail.com Sept P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

2 Why study the economy? The best time to analyze the economy Events in the past few years: Big banking and financial institutions failed > the worst financial crisis in 80 years Governments tried to help with more spending Debt crises in US, EU and Japan Decline in incomes, stagnated consumption and investment Persistently high unemployment Financial markets volatile ( ) Growth in financial markets since mid-2009 P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

3 Three central questions in Economics 1 Why is this happening (to me)? 2 What are the consequences? for interest rates you pay on your mortgages for the ability of governments to raise incomes for firms to hire more people and invest more for your own career perspectives for what goods you buy and where you invest your money... 3 Can the government and the central bank do something? P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

4 What is Economics? Economics: the intuitive definition A study of the reasons people, firms and governments act and of the consequences of these actions. Economics: the professional definition A study of economic events and agents by using economic models. theoretical models: use maths or intuition to predict patterns of behavior > build hypotheses empirical models: test these hypotheses by using real-life data Economics: the textbook definition A study of the production, exchange and consumption of goods and services, and of the distribution of income received from production and exchange. P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

5 Parts of Economics Microeconomics Part of Economics studying individual actions: consumers, firms, industries: how prices affect the quantities demanded how factor prices affect demand of inputs for production Macroeconomics Part of Economics studying aggregate behavior of consumers, firms and the government, and aggregate dynamics of economic variables: how much the entire economy produces, consumes, invests, exports how the overall price level changes how many people are unemployed Econometrics Part of Economics which uses maths and statistics to test hypotheses derived in Microand Macroeconomics P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

6 Microeconomics Examples Rational behavior of the individual: Coming to class? Applying to a university? Disco? Dumping a partner? Quit smoking? Rational behavior of the firm: Do I raise my prices? Do I produce more? Do I hire more people and machines? How do taxes affect my decisions? P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

7 Macroeconomics Examples GDP = Gross Domestic Product, Брутен вътрешен продукт Employment in the private sector Is there a link? P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

8 Econometrics Examples How does coming to class affect my grade? How much more I will earn if I stay in school for another year? If the government did not introduce this measure, where would the economy be now? What is the effect from a given policy? If I spend 100K on advertising, will it bring me more than 100K in revenues? If I quit smoking at 25, will I live significantly longer than if I quit at 35? P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

9 Approaches in Economics Positive approach > Positive Economics Describes the events as they are: If I get a 10% pay raise, then I will increase my consumption by more than 10%. If the government lowers taxes, then people will consume more. Normative approach > Normative Economics Prescribes actions: If you want to increase his consumption by more than 10%, you should give him a 10% raise. P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

10 Approaches in Economics Positive approach > Positive Economics Describes the events as they are: If I get a 10% pay raise, then I will increase my consumption by more than 10%. If the government lowers taxes, then people will consume more. Normative approach > Normative Economics Prescribes actions: If you want to increase his consumption by more than 10%, you should give him a 10% raise. If the government wants to make people consume more, it should lowers taxes. P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

11 So... Why study Economics? Economics helps in: making rational decisions understanding decisions of others explaining the reality around us: micro- and macro-environments analyzing government behavior proposing more effective measures than the current ones P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11

12 Further reading Reading: Sloman, Chapter 1: pp.3-16; C-F, Chapters 1-2. Do no miss: economist.com; wsj.com; the economic news on TV P.Stankov (UNWE, CERGE-EI) Lecture 01 Sept / 11