ECON001 Introductory Economics

Lecture 1: Introduction
Christine Ho
Singapore Management University

Outline
The Course

Course information
Assessment

What is Economics?

The economic problem

The need for abstraction

Production Possibilities PPF

Opportunity cost
Gains from trade
Lecture 1

Absolute and comparative

advantage
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The Course
Logistics
Course
C
IInfo
f
Teaching
Assessment

Lecture 1

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Logistics
Course Instructor: Christine Ho
Office Hour: Mondays 1100-1200 SESS 5038
Email: christineho@smu.edu.sg

Course Website: https://elearn.smu.edu.sg/?logout=1

p
g g
Lecture notes, group projects, online quizzes, peer evaluation

Optional publisher website http://pearsonmylab.com

Your access code comes with the purchase of the main textbook
Course id: ho50964
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Teaching Assistants
Vivian Lau (eLearn)
Office Hour: Tuesdays 1130-1230
Venue: SESS Group Study Room 5-1
Email: vivianlau.2013@business.smu.edu.sg

Nam Trinh (MyLab)

Office Hour: Fridays 1200-1300

Venue: SESS Group Study Room 5-1
Email: hntrinh.2013@business.smu.edu.sg

Lecture 1

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Course Info
Objectives
Introduce Economic theories and applications
Prepare Econ-major students to enroll in higher level
Economics subjects
Equip non Econ-major students with economic concepts

Tools for economic analysis

Elementary calculus and algebra
Diagrammatic expositions
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Textbooks
Main textbook
Michael Parkin, Economics, Global Edition, Pearson
Education

Supplementary
pp
y textbooks
Paul Samuelson and William Nordhaus, Economics,
International Edition, McGraw-Hill
William A. McEachern, ECON MACRO 2, Student
Edition, Cengage Learning Asia Pte Ltd
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Lecture 1

Teaching
Weekly 3 hour sessions
Lecture slides will be available via the course website
Note that the slides provide only an outline of the course
Those have to be supplemented by

Your own notes taken in class

Readings from textbooks
Coursework

Weekly quizzes via the course website

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Lecture 1

Two Main Sections

Macroeconomics

Microeconomics
Household and firm
behaviour

Aggregate economy and

Taught in weeks 1-5

Taught in weeks 9-13

Mid-term exams in week

7 will be based on
Microeconomics topics

Final exams in week 15

will be based on All topics:
Microeconomics and
Macroeconomics

Lecture 1

business cycles

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Assessment
Work-in-Progress (20%)

Group Project (15%)

Class Participation (10%)

Peer evaluation
Self evaluation
Weekly Quizzes (10%)

Mid-term exams (25%)

Randomly assigned
20 minutes presentation
5 minutes discussion
Written report

Final exams (40%)

On All topics taught in
Lectures 1 to 10
Section A: quizzes
Section B: problem solving

On Micro topics taught in

Lectures 1 to 5
Section A: quizzes
Section B: problem solving

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What is Economics?
The Economic Problem
The
Th Need
N d ffor Abstraction
Ab
i
What is Microeconomics?
What is Macroeconomics?

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The Economic Problem

People have _____________
I want a house, a car, food, clothing, movies etc.
However, we have a limited amount of ________ at

p
our disposal
e.g. land is limited: shall we use a given plot of land to
build more flats or more offices?

Because of scarcity of resources, we have to make

________
Tradeoffs: more of one thing means less of another
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Resources
Resources are the inputs or
________________________used to produce
commodities and services that people want
Natural resources: land, oil reserves earns rent
Labour: human effort, time earns wages
Capital: human creations used to produce goods and
services e.g. tools, machinery earns interest
Entrepreneurial ability: ideas, ability to create and
organise a firm earns profit
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Economics
Economics is the study of how ________ agents
(individuals, firms, government, society) make choices
and how those choices ________________
one'ss own self-interest e.g.
eg
Rational means acting in one
firms want to maximize profits or minimize costs,
society wants to maximize welfare
So how do we study Economics?

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Abstraction, Theory and Models

The real world is very complicated
Need for simplification and abstraction
Different models are adequate for different problems

A non
non-economic
economic example
You have a foreign friend visiting Singapore for a day
You are currently in your Introductory Econ class and
have limited time to show your friend around
You would however like to have some dim sum together
before rushing to the library to do homework
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Analogy with the Economic Problem

Wants: spend time with your friend
Scarcity: limited time
Tradeoffs:
Options

Benefit

Cost

Skip class

Have fun

Dont learn Econ

Ignore friend

Learn about Econ

Lose a friend

Friend comes to SMU

You save time

Friend might get lost

Choice: friend comes to visit you at SMU

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A Non Economic Model

Aim: Due to your limited time, it is up to your friend
to come and join you at SMU
Problem: How to get to SMU?
Model: A map
Issue: Which type of map?
From the big picture to the specifics
From the specifics to the big picture
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Satellite Image of Singapore

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A General Model: Map of Singapore

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A More Specific Model: Map of SMU

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Micro and Macro

Microeconomics is the study of choices that
individuals and businesses make, the way those
choices interact in markets, and the influence of
governments.
Macroeconomics is the study of the performance of
the national and global economies.

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Microeconomics
How do individuals make decisions?
Shall I buy a house or a car?
How may hours should I work in a day?

How
H ddo firms
fi
make
k ddecisions?
ii ?
How many workers to employ?
How much to produce?

How does the government make decisions?

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Interaction between Markets

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Economic Model
An Economic model is a description of some aspect
of the economy
It includes only those features that are needed for the
purpose at hand
E.g. in our non-economic example, a map of SMU was a
more appropriate model as opposed to the satellite picture
of Singapore

Ceteris Paribus: if all other things remain the ____

To focus on some aspect of the economy, we have to be
able to ignore the other details
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The Scientific Method

Identify the question

Specify assumptions

Formulate a hypothesis

Test the hypothesis

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Positive and Normative Statements

A positive statement is a ________ statement
Predictions from economic models are testable against
facts
E.g. A rise in income taxes will lead to a lower supply
of labour
A normative statement is a statement about ______
________ or ________
Not testable since they express an opinion
E.g. We should increase income taxes
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Some Economic Terminology

Goods: commodities that people value and produce to satisfy wants
Services: tasks performed for people e.g. haircuts, babysitting
Agent: an entity who makes choices in the economy e.g. people, firms
Consumer: an agent who wants or demands goods or services
An individual
i di id l who
h buys
b
dim
di sum is
i a consumer off dim
di sum
A firm which employs workers is a consumer of labour services
Supplier: an agent who provides goods or services
An individual who supplies labour hours
A firm which supplies commodities
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Class Exercise 1
Assignment
1. Think of an issue in your everyday life
2. Provide the analogy to economics in terms
of wants
wants, scarcity of resources,
resources trade-offs
trade offs
and choice
3. Try to come up with an adequate model to
study your issue
You can discuss with your neighbour
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Production Possibilities and

Opportunity Cost
Production
P d i P
Possibilities
ibili i
Production Possibility Frontier
Opportunity Cost

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Production Possibilities
Scarcity: the quantities of goods and services that we
can produce are limited by available resources and
technology
The
Th sett off production
d ti possibilities
ibiliti shows
h
us th
the
combination of goods and services that can be
produced given available resources and technology

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10

Production Possibility Frontier

The production possibilities frontier (PPF) is the
________ between those combination of goods and
services that can be produced and those that cannot
Production efficiency: the PPF illustrates the
combinations of goods and services that can be
produced at the ________ possible costs
Trade-off: producing more of one good means
producing less of another
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Diagrammatic Illustration of PPF

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Numerical Example 1
Two goods: rice and meat
One factor of production: 40 hours of labor available
Productivity and labor requirement:

Rice
Meat

Lecture 1

Kg per hour Hours per kg

0.1
10
0.05
20

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11

Numerical Example 1 Contd

Production possibilities with 40 hours of labour:
40 hours on rice
0 hours on meat
Rice
Meat

20 hours on rice
0 hours on rice
20 hours on meat 40 hours on meat

4
0

2
1

0
2

If I devote 40 hours on rice, I can produce 4kg of rice and 0kg of meat
If I devote 20 hours on each, I can produce 2kg of rice and 1kg of meat
If I devote 40 hours on meat, I can produce 0kg of rice and 2kg of meat
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Numerical Example 1 Contd

Meat

Production Possibility Frontier

Meat 2 0.5Rice
2

1
Production
possibility set

2
Lecture 1

Rice

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Opportunity Cost
The slope of the PPF is negative because more of one
good means less of another
The opportunity cost of a good or an action is the
________ valued ________ forgone

OC

loss in highest valued alternative

gain in current action

The slopes of the PPF are the negative of the

opportunity costs
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12

PPF and Opportunity Cost

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Numerical Example 1 Contd

OC rice

loss in meat
gain in rice

OC meat

loss in rice
gain in meat

The opportunity cost of 1 kg of meat is 2 kg of rice

The opportunity cost of 1 kg of rice is 0.5 kg of meat

Rice
Meat

Lecture 1

Opportunity Cost
0.5 kg of meat
2 kg of rice

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Gains from Trade

Absolute Advantage
Comparative
C
i Advantage
Ad
Specialisation
Gains from trade

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13

Specialization
Individual agents seldom produce for themselves
everything they use
Instead, they ________ in the production of certain
goods and then ________
Export goods that they produce
Import goods produced by others

Specialization and trade enable individuals to

________ consumption relative to the case where they
try to be self-sufficient
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Absolute and Comparative Advantage

A person has an absolute advantage in an activity if
that person can ______________ than anyone else
given the same amount of resources
A person has a comparative advantage in an
activity if that person can perform the activity at a
_____________________ than anyone else
Note that it is possible for a person to have an
absolute advantage in an activity but not a
comparative advantage in that activity
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Numerical Example 2
Two individuals: Mary and Tom
Two goods: rice and meat
Each individual has one factor of production: 40 hours of
labor available
Productivity and labor requirements:

Rice
Meat
Lecture 1

Mary: kg per hour

0.1
0.05
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Tom: kg per hour

0.125
1
44

14

Numerical Example 2 Contd

Tom has an absolute advantage in both production
of rice and meat
Production possibilities with 40 hours of labor:
Mary

Tom

40 hours 20 hours 40 hours 40 hours

on rice
on each on meat
on rice

20 hours
on each

40 hours
on meat

Rice

2.5

Meat

20

40

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Meat
Toms Production
possibility frontier
40

Marys Production
possibility frontier

Rice

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Numerical Example 2 Contd

Opportunity costs:

Rice
Meat

Mary
0.5 kg of meat
2 kg
g of rice

Tom
8 kg of meat
0.125 kg
g of rice

Mary has a comparative advantage in rice

Tom has a comparative advantage in meat

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15

Numerical Example 2 Contd

Notice that even though Tom has an absolute
advantage in both rice and meat, he has a comparative
advantage only in meat
Each individual needs to specialize in the production
of the product where he/she has a comparative
advantage
Mary needs to specialize in rice production
Tom needs to specialize in meat production

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Numerical Example 2 Contd

Suppose that under self-sufficiency,
Mary devotes 20 hours to production of each
Tom devotes 8 hours to production of rice and 32 hours to
production of meat

Consumption in kg under self-sufficiency:

Mary
2
1

Rice
Meat

Tom
1
32

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Numerical Example 2 Contd

A potential outcome with trade:
Mary

Tom

Produce

Trade

Consume Produce

Rice

-1.5

2.5

M
Meat

+6
6

Trade

Consume

+1.5

1.5

40

-6
6

34

Relative price: 1 kg of rice = 4 kg of meat

Gains from trade: with trade, both parties can
consume more of both goods than under selfsufficiency
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16

Meat

Toms Consumption
P
possibilities at P 4
rice

meat

Toms Production
possibility frontier
40

Marys Consumption
P
possibilities at P 4
rice

meat

24

Marys Production
possibility frontier

16

Rice

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Relative Prices
In our numerical example

6
4 kg of meat
1.5
If 1 kg of meat cost $1, then 1 kg of rice would cost $4
Price
4
Pmeat
1 kg of rice

For trade to be beneficial to both parties, relative prices must

lie between the opportunity costs
P
P
0.5 rice 8 0.125 meat 2
Pmeat
Price
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Intuition Behind Relative Prices

Recall
Mary specializes in rice due to her comparative advantage (lower opportunity
cost) in rice
Tom specializes in meat due to his comparative advantage (lower opportunity
cost) in meat

If relative price of rice is lower than 0.5,

0 5 then Mary would have no
incentive to sell rice to Tom since the price of rice is lower than her
opportunity cost of producing rice Otherwise Mary would be making
a loss
Conversely, if relative price of rice is higher than 8, then Tom would
have no incentive to buy rice from Mary since the price of rice is higher
than his opportunity cost of producing rice Otherwise Tom would
save money by producing the rice himself
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17

Class Exercise 2
Suppose that China can produce 160 cars per month or 400 tons of
rice per month. India can produce 160 cars per month or 200 tons of
rice per month.
1. Draw the production possibility frontiers for both countries
2. What is the opportunity cost of a car in each country? What is the
opportunity cost of a ton of rice in each country?
3. Which country has a comparative advantage in producing cars? Rice?
4. Suppose that under self- sufficiency, each country devotes half of their
resources to the production of cars and the other half to the production
of rice. How many cars and tons of rice do each country produce?
5. Give an example where trade could be beneficial to both countries.
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Take Home

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Main Lessons
People have unlimited wants but scarcity of resources implies that they
need to make choices
Economics study how agents make choices
Microeconomics focuses on the specifics or agent's individual decisions
Macroeconomics focuses on the big picture or aggregate variables
An economic model describes some aspect of the economy
Ceteris Paribus is latin for if all other things remain the same
Positive statements are testable
Normative statements are about what ought to be

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18

Main Lessons Contd

Production possibility frontier shows the maximum combination of
goods that can be produced
Opportunity cost is the highest valued alternative foregone
Absolute advantage involves comparing productivity
Comparative advantage involves comparing opportunity cost
Specialization can lead to gains from trade
For there to be gains from trade, relative prices must lie between the
opportunity costs of the different agents

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Next
Homework: Please refresh your maths skills!

Solving a system of equation e.g.

y = 10 + x

(1)

y
x = 50 2y

((2))

How much is x and y?

Graphs e.g. plot equations (1) and (2) with y on the vertical axis
and x on the horizontal axis.

Next Lecture: Demand and Supply

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