ECONOMICS: EXPLORE & APPLY

The Economic Perspective

Prof. Rushen Chahal

2/12/2012

Prof. Rushen Chahal

Today
I. II. III. IV. V. VI. VII. Introductions Basic Intro to Economics Micro Vs. Macro The three basic questions of economics Different market types Equity vs. Efficiency A review of graphs

2/12/2012

Prof. Rushen Chahal

Why Study Economics?

To Get Rich To Better Understand the Laws of Supply and Demand To Better Understand Inequality in the Distribution of Income Economics Exists Everywhere in Our World!

2/12/2012

Prof. Rushen Chahal

Economics Is Everywhere!
Taxes Free Trade Inflation Unemployment Job Choices Consumption and Saving Choices Prices
Prof. Rushen Chahal

2/12/2012

What is Economics?
Studies how the prices of labor, capital, and land are set in the economy, and how these prices are used to allocate resources Explores the behavior of the financial markets and analyzes how they allocate capital to the rest of the economy

2/12/2012

Prof. Rushen Chahal

What is Economics?
Examines the distribution of income, and suggests ways that the poor can be helped without harming the performance of the economy. Looks at the impact of government spending, taxes, and budget deficits on growth

2/12/2012

Prof. Rushen Chahal

What is Economics?
Studies the swings in unemployment and production that make up the business cycle, and develops government policies for improving economic growth. Examines the patterns of trade among nations and analyzes the impact of trade barriers

2/12/2012

Prof. Rushen Chahal

What is Economics?
Looks at growth in developing countries, and proposes ways to encourage the efficient use of resources And much much more . . . .

2/12/2012

Prof. Rushen Chahal

Have you ever had to decide between wacthing a movie with your girlfriend or giving her a lovely toy?

A) YES
2/12/2012 Prof. Rushen Chahal

B) NO

Stated Simply: Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

2/12/2012

Prof. Rushen Chahal

Economics on one leg

Economics is all about dealing with: scarce

resources and unlimited wants.

This forces us to make choices In economics we try to learn how to make the best choices

2/12/2012

Prof. Rushen Chahal

Today
I. II. III. IV. V. VI. VII. Introductions Basic Intro Micro Vs. Macro The three basic questions of economics Different market types Equity vs. Efficiency A review of graphs

2/12/2012

Prof. Rushen Chahal

Micro Vs. Macro

In this course we re going to be looking at both microeconomics and macroeconomics What s the difference? Do any of you have any ideas about the differences between micro and macro?

2/12/2012

Prof. Rushen Chahal

Microeconomics
Microeconomics deals with individual parts of the economy Concerned with individual consumers, workers, and firms Studies the individual industries firms operate within What s an industry? What industry is China Air in? What industry is Lenovo in? What industry is Carrefour in? What industry is McDonald s in? 2/12/2012 Prof. Rushen Chahal

Microeconomics
Microeconomics focuses upon interactions between consumers and producers in individual markets Focuses on the market prices which help determine who gets what Microeconomics is focusing upon the individual components of the entire economy We will be looking at this subject for the first half of the semester

2/12/2012

Prof. Rushen Chahal

Macro vs. Micro

Microeconomics deals with the behavior of individual entities: -Markets -Firms -Households

2/12/2012

Prof. Rushen Chahal

Macroeconomics
Macroeconomics is dealing much more with The big picture Looks at the economy as a whole, rather than focusing upon the individual parts (what we call the economy in aggregate) Focuses on concepts like GDP Focuses on employment, inflation, economic growth, the federal budget, and interest rates

2/12/2012

Prof. Rushen Chahal

Macroeconomics
Macroeconomics no longer cares about the individual industries that exist within an economy Instead we are focusing on the economy as a whole You will see later in the semester that some of the key macroeconomic goals are low and steady inflation, high rates of employment, and high rates of economic growth We will focus in this subject for the second half of the semester
2/12/2012 Prof. Rushen Chahal

Today
I. II. III. IV. V. VI. VII. Introductions Basic Intro Micro Vs. Macro The three basic questions of economics Different market types Equity vs. Efficiency A review of graphs

2/12/2012

Prof. Rushen Chahal

The three basic questions of economics

When dealing with economics, we are generally looking at three basic questions regarding the economy:
1. What 2. How 3. For Whom?

2/12/2012

Prof. Rushen Chahal

The three basic questions of economics

What:
What goods and services should be produced?

How:
How should we produce these goods? How do we decide which method is best in producing our goods and services?

For Whom:
Who will consume the goods and services that are produced? How will these goods and services be distributed among the different individuals in the economy

2/12/2012

Prof. Rushen Chahal

Today
I. II. III. IV. V. VI. VII. Introductions Basic Intro Micro Vs. Macro The three basic questions of economics Different market types Equity vs. Efficiency A review of graphs

2/12/2012

Prof. Rushen Chahal

Different types of markets

The questions of What, How, and For Whom can be answered largely by looking at what type of market system is in place Different types of markets
Command and control Free markets Mixed economies

2/12/2012

Prof. Rushen Chahal

Command and control

Under the command and control system, the government or some other regulatory body answers the questions of what, how, and for whom In the past, China had a system in place that was largely a command and control system The government was deciding what to produce, how to produce it, and who would consume the goods produced

2/12/2012

Prof. Rushen Chahal

Free Market
Under a free market system, the market answers the questions of what, how and for whom The government stays out of the economy entirely The market determines what is produced, how to produce it, and who consumes the goods produced

2/12/2012

Prof. Rushen Chahal

Markets
In microeconomics, we are often looking at individual markets
e.g. The market for rice in China, the market for bicycles in Beijing, the market for beer in ICB

What do we mean when we re talking about a market?

2/12/2012

Prof. Rushen Chahal

Markets
Every market is going to consist of two key parts:
1. Buyers 2. Sellers

Buyers:
Consumers, who purchase goods and services Firms, who buy labor, capital, and raw materials

Sellers:
Firms, which sell their goods and services Workers, who sell their labor to firms

2/12/2012

Prof. Rushen Chahal

Markets
Together, buyers and sellers interact to form a market So we can simply say that a market is made up of all of the buyers and sellers that are interested in buying and selling a particular product In the computer industry, who are the sellers? Who are the buyers? All of these together, when they interact, form the market for computers

2/12/2012

Prof. Rushen Chahal

Free Markets
Under a free market system, the interaction of buyers and sellers determine what, how, and for whom The government plays no role in decision making regarding the economy

2/12/2012

Prof. Rushen Chahal

Mixed economies
In reality, almost all economies are mixed economies Mixed economies are a combination of free markets and command and control economies In mixed economies, some parts of the economy are determined by the government and others are determined by the market

2/12/2012

Prof. Rushen Chahal

Mixed economies
Different countries have different combinations, either leaning more towards a free market system or a command and control economy We have seen China moving more and more towards a free market system over the past 25 years

2/12/2012

Prof. Rushen Chahal

The Spectrum of Economic Systems

Command and Control

Mixed

LaissezLaissez-Faire Free Markets

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Prof. Rushen Chahal

So how do we decide?
Is it better to have a mixed economy that is closer to a free market than a command and control economy? Or would we rather give more control to the government in making economic decisions? Which one is going to be better for the economy? This is going to depend upon what we are more concerned with: equity or efficiency

2/12/2012

Prof. Rushen Chahal

Today
I. II. III. IV. V. VI. VII. Introductions Basic Intro Micro Vs. Macro The three basic questions of economics Different market types Equity vs. Efficiency A review of graphs

2/12/2012

Prof. Rushen Chahal

Equity and Efficiency

Equity: Focusing on fairly and evenly distributing goods and services throughout the economy Efficiency: Focusing on producing the most value within an economy Very often one of these must be traded off for another This concept of sacrificing something in return for another is one we will continue to concentrate throughout the semester

2/12/2012

Prof. Rushen Chahal

So how do we decide?
Perhaps we are more concerned with making sure that the goods and services are fairly and evenly distributed throughout the economy If so, we might not want to let the market decide the question of for whom , as it might not be fair

2/12/2012

Prof. Rushen Chahal

So how do we decide?
In this case, we might want to have a purely command and control economy If the government is determining the three questions of what, how, and for whom, we can hopefully ensure that goods and services are distributed fairly

2/12/2012

Prof. Rushen Chahal

So how do we decide?
This is largely the way that China was operating for much of the second half of the 20th century There are some problems with command and control economies:
The government doesn t know our needs, wants, and desires better than we do The government often has trouble motivating firms to produce Command and control economies very often are faced with vast inefficiencies

2/12/2012

Prof. Rushen Chahal

So how do we decide?
If we are concerned primarily with efficiency in an economy, then we might want to have a purely free market economy This will ensure that the maximum value possible is produced in an economy Adam Smith s invisible hand

2/12/2012

Prof. Rushen Chahal

So how do we decide?
Companies that produce goods most desired by consumers will thrive, companies that produce goods that are less valued will fail Prices are thus determined by the market, and are a signifier of the value of goods and services Changes in prices thus lead to changes in both consumer and producer behavior

2/12/2012

Prof. Rushen Chahal

So how do we decide?
There are some problems with free markets:
Markets may still fail to achieve efficiency Markets may lead to increasing levels of inequality within the economy

2/12/2012

Prof. Rushen Chahal

So how do we decide?
It seems then, that neither a purely command and control economy, nor a purely free market is the best choice Instead, we re going to take some combination of the two This mixed economy will involve both qualities of a free market, as well as a command and control economy

2/12/2012

Prof. Rushen Chahal

Today
I. II. III. IV. V. VI. VII. Introductions Basic Intro Micro Vs. Macro The three basic questions of economics Different market types Equity vs. Efficiency A review of graphs

2/12/2012

Prof. Rushen Chahal

A Review of Graphs
Quantities of Natural Gas Demanded At Various Prices

Price (per thousand $2 $3 $4 $5 $6 cubic feet.) Quantity Demanded 120 80 56 38 20 (billions of cubic feet per year)

2/12/2012

Prof. Rushen Chahal

A Review of Graphs
Price (per thousand cubic feet) $7 $6 $5 $4 $3 $2 $1 $0 0

20 38 56 80 120 Quantities of Natural Gas Demanded

56
50

80

100

150

Quantity Demanded (billions of cubic feet per year)

2/12/2012 Prof. Rushen Chahal

A Review of Graphs: Slopes

A Negative Slope
Y

0
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Prof. Rushen Chahal

A Review of Graphs: Slopes

A Positive Slope

0
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Prof. Rushen Chahal

A Review of Graphs: Slopes

A Zero Slope

0
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Prof. Rushen Chahal

A Review of Graphs: Slopes

An Infinitive Slope
Y

0
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Prof. Rushen Chahal

A Review of Graphs: Measuring Slopes

An increase of 1 on the X axis results in an increase of 0.1 on the Y axis.
8.6 8.5 8.4 8.3 Y 8.2 8.1 8

0
2/12/2012

7.9 0 1 2 3 4 5 6

Prof. Rushen Chahal X

A Review of Graphs: Measuring Slopes

Thus, the slope of this graph is 1/10 meaning that for every increase in x, y will increase by 1/10 that amount
8.6 8.5 8.4 8.3 Y 8.2 8.1 8

0
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7.9 0 1 2 3 4 5 6

Prof. Rushen Chahal X

A Review of Graphs: Slopes in Curved Graphs

A Negative Slope
Y

0
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Prof. Rushen Chahal

A Review of Graphs: Slopes in Curved Graphs

A Positive Slope
Y

0
2/12/2012

Prof. Rushen Chahal

A Review of Graphs: Slopes in Curved Graphs

A Positive Slope

A Negative Slope 0
2/12/2012

Prof. Rushen Chahal

A Review of Graphs: Slopes in Curved Graphs

A Positive Slope
Y

A Negative Slope 0
2/12/2012

Prof. Rushen Chahal

To Sum Up
At the end of every class I like to take a couple of minutes to recap everything that we talked about during the lecture I will title these slides: To Sum Up These will be useful in helping you see which parts of the lecture I think are most important

2/12/2012

Prof. Rushen Chahal

To Sum Up
Today we got our first taste of economics, and began to get a feel for what kind of things economics is studying Most simply, economics is studying how we make use of the scarce resources we have available to produce things, and how those things are distributed

2/12/2012

Prof. Rushen Chahal

To Sum Up
We differentiated between microeconomics and macroeconomics, both of which we will study this semester Microeconomics is interested in the small scale: markets, individuals, firms, etc Macroeconomics is concerned with the big picture: GDP, employment, inflation, etc

2/12/2012

Prof. Rushen Chahal

To Sum Up
We then saw the three basic questions we re asking in econ are:
1. What?
(What should we produce?)

2. How?
(How should these goods be produced?)

3. For whom?
(Who will consume the goods produced?)

2/12/2012

Prof. Rushen Chahal

To Sum Up
Then we looked at three different types of markets:
1. Command and control economies 2. Free markets 3. Mixed economies

We saw that almost every single economy in the world is a mixed economy, leaning either more towards a command and control economy or free market

2/12/2012

Prof. Rushen Chahal

To Sum Up
We then saw that when trying to decide how much the government should intervene in the market is going to determine whether we are concerned more with equity or efficiency In the end, a mixed economy will ensure that there is a favorable balance of equity and efficiency

2/12/2012

Prof. Rushen Chahal

To Sum Up
We finally looked at a basic review of graphs If you have trouble with these graphs, please do talk to me, so I can help you get caught up, as graphs are going to be very important in economics

2/12/2012

Prof. Rushen Chahal

Test Yourself
1. Economics is primarily the study of
a. stocks and bonds. b. allocating limited resources to meet unlimited wants. c. methods to eliminate scarcity. d. why consumers want what they do.

2/12/2012

Prof. Rushen Chahal

Test Yourself
2. The three basic questions an economy must answer are a. why produce; how much to produce; who to produce it. b. what to produce; how to produce it; who to consume it. c. what to produce; why produce; how to produce. d. when to produce; how to produce; what to produce.
2/12/2012 Prof. Rushen Chahal

Test Yourself
3. Command and control economies are identified by a. reliance upon free markets. b. adherence to the principles of capitalism. c. economic freedom. d. government decision making.
2/12/2012 Prof. Rushen Chahal

Test Yourself
4. In a capitalist economy, economic activities are coordinated by a. tradition. b. prices. c. government. d. business firms.

2/12/2012

Prof. Rushen Chahal

Test Yourself
5. The idea that the economy should produce its outputs with the least costly combination of inputs is known as a. allocative efficiency. b. technological efficiency. c. economic efficiency. d. equity.
2/12/2012 Prof. Rushen Chahal

Home Work
To be handed in personally next lesson: Test your self (pages 17-18) questions 1-20 (except questions 5 and 18)

2/12/2012

Prof. Rushen Chahal

Homework
For next lecture I will be talking about Chapter 2 in Ayers and Collinge Please try and finish both of these chapters before next lecture

2/12/2012

Prof. Rushen Chahal