Principles of Economics. Copyright 2004 South-Western/Thomson Learning

Transcription

1 Principles of Economics 1

2 Introductory remarks This is an introductory course no previous knowledge of economics is assumed Textbook: Gregory Mankiw Principles of Economics

3 Introductory remarks ctd The course covers essentials of economics It is quite intensive so make sure you read the chapters from the book after every class You will also benefit more from the class if you read the chapters ahead of the class Test yourself link!

4 Requirements There will be 3 or 4 problem sets which are meant to help you develop better understanding of concepts covered in the class (you can work in groups of 3-4 students). They are mostly exercises from the textbook, but not only Exam: 14 December The exam will consist of multiple choice questions and exercises from PS, with some modifications Final grade: 0.7 Exam Problem sets

5 Dates: (Room B106) (Exam)

6 Office hours Wednesday: office B417 Please confirm by

7 Lets get to know each other Where are you from? What do you study in your home unversity? Why did you chose University of Warsaw?

8 Economy The word economy comes from a Greek word for one who manages a household.

9 THE ECONOMIC PROBLEM Society and Scarce Resources: The management of society s resources is important because resources are scarce. Scarcity... means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

10 ECONOMICS Economics is the study of how society manages its scarce resources.

11 THE ECONOMIST AS A SCIENTIST The economic way of thinking... Involves thinking analytically and objectively Makes use of the scientific method dispassionate development and testing of theories

12 The Scientific Method: Observation, Theory, and More Observation Uses abstract models to help explain how a complex, real world operates. Develops theories, collects, and analyzes data to evaluate the theories.

13 The Role of Assumptions Economists make assumptions in order to make the world easier to understand. The art in scientific thinking is deciding which assumptions to make. Economists use different assumptions to answer different questions.

14 Economic Models Economists use models to simplify reality in order to improve our understanding of the world Two of the most basic economic models include: The Circular Flow Diagram The Production Possibilities Frontier

15 Microeconomics and Macroeconomics Microeconomics focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets Macroeconomics looks at the economy as a whole. Economy-wide phenomena, including inflation, unemployment, and economic growth

16 POSITIVE VERSUS NORMATIVE ANALYSIS Positive statements are statements that attempt to describe the world as it is. Called descriptive analysis Normative statements are statements about how the world should be. Called prescriptive analysis

17 Ebay auction of a kidney Some years ago an auction of kidney took place The price went very high up to several millions of dollars Positive statement? Normative statement?

18 WHY ECONOMISTS DISAGREE They may disagree about the validity of alternative positive theories about how the world works. They may have different values and, therefore, different normative views about what policy should try to accomplish.

19 Our First Model: The Circular-Flow Diagram The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.

20 Copyright South-Western/Thomson Learning Figure 1 The Circular Flow Revenue Goods and services sold MARKETS FOR GOODS AND SERVICES Firms sell Households buy Spending Goods and services bought FIRMS Produce and sell goods and services Hire and use factors of production HOUSEHOLDS Buy and consume goods and services Own and sell factors of production Factors of production Wages, rent, and profit MARKETS FOR FACTORS OF PRODUCTION Households sell Firms buy Labor, land, and capital Income = Flow of inputs and outputs = Flow of dollars

21 Our First Model: The Circular-Flow Diagram Factors of Production Inputs used to produce goods and services Land, labor, and capital

22 Our Second Model: The Production Possibilities Frontier The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

23 Our Second Model: The Production Possibilities Frontier ctd Hunter gatherer economy Constant: factors of production and technology 2 goods: berries and rabbits Rabbits (x) Berries (y) Δx Δy A B C D E F

24 Points to consider: Which points are attainable? Which points are efficient? What is an opportunity cost of increasing production of rabbits from 1 to 2? And 4 to 5? What is an opportunity cost of increasing prodution of berries from 180 to 300?

25 How the Production Possibilities of and Economy are affected by: 1. Fire which destroyes part of the forest? 2. Immigration to the forest? 3. Electricity? 4. Growing own berries?

26 Our Second Model: The Production Possibilities Frontier Concepts Illustrated by the Production Possibilities Frontier Efficiency Tradeoffs Opportunity Cost Economic Growth

27 Opportunity cost The cost of something is what you give up to get it.

28 Reading Read chapters: 1. Ten Principles of Economics 2. Thinking Like an Economist Test yourself: Chapter 1 Chapter 2