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Introduction to Economics Egor Sidorov [email protected] Course details ─ Course consists of: ─ Lectures and project. ─ Seminars – focused on practical application of theory. ─ Final written test: min. 60 percent, + project, and active attendance at lectures and seminars ─ Contact: [email protected] 23. 5. 2017 2 Literature ─ MCCONNELL, C., BRUE, S. Economics. New York: McGraw-Hill, 1990-?. ─ SAMUELSON, P., NORDHAUS, W. Economics. New York: McGraw-Hill, 1992-?. ─ www: rek.ujep.cz/~sidorov 23. 5. 2017 3 Course content ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ ─ Introduction Supply and Demand Production & Cost Analysis Theory of the Firm Introduction to Macroeconomics The Output of National Economics Inflation Unemployment Monetary Policy Fiscal Policy International Trade and Economical Integration 23. 5. 2017 4 Why study economics? ─ Our life is a variety of economic relations among others, so economics is a way to understand them. ─ Understand international relations and trade. ─ Understand national policy. ─ Get economic type of thinking – cost-benefit analysis. 23. 5. 2017 5 Think as economist! ─How can number of divorces contribute to economic welfare (i.e. well-being)? 23. 5. 2017 6 1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 23. 5. 2017 7 Scarcity ─ Our needs and wants are unlimited ─ They have different intensity ─ They change over time ─ Goods and services satisfy our wants and needs ─ Our resources for their production are limited. vs. 23. 5. 2017 8 Types of Goods ─ Consumer goods ─ Capital goods 23. 5. 2017 9 Public and Merit goods, provided by the government ─ Public goods” (e.g. defense provision, etc.): ─ these goods are available to everyone, regardless income level, ─ everybody equally benefits from them. ─ “Merit goods” (health care, education, roads building, etc.): ─ not all the people tend to use them; ─ privately gained benefits turn out to be external benefits. 23. 5. 2017 10 Production process (input) (ouput) Production 23. 5. 2017 11 1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 23. 5. 2017 12 Production factors ─ Labor ─ Land ─ Capital ─ Entrepreneurship 23. 5. 2017 13 1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 23. 5. 2017 14 Limited sources vs. Unlimited needs ─ Scarcity is the reason for basic economic questions: ─ 1. What to produce? ─ 2. How to produce? ─ 3. For whom to produce? ─ Two marginal economic systems of solving these problems exist: ─ Command economy model ─ Market economy model 23. 5. 2017 15 Command model: basics ─ Basic economic problems in the command economics: ─ “What?” problem is solved by the planning authorities and the state statistics bureau. ─ “How?” problem deals with the functions of respective ministries. ─ “For whom?” – distribution of income is comparatively equal among all the economic agents. All the property belongs to the state, institution of personal proprietorship does not exist. 23. 5. 2017 16 Command model: pro and contra ─ Positive features: ─ Resources aren’t wasted on competitive duplication. ─ Planned distribution – same standards of living for all the people. ─ Prices are stable, etc. ─ Negative features: ─ Political and social complexity of administrating this system. ─ The recourses tend to be distributed in insufficient way. ─ It is impossible to plan the response for every economical agents’ need. ─ etc. 23. 5. 2017 17 Market model: basics ─ Basic economic problems in the market economics: ─ “What?” and “How?” problems are solved by market: prices, supply and demand mechanisms. ─ “For whom?” – distribution of income is determined by the ownership institute. 23. 5. 2017 18 Basic economic agents ─ Households ─ Firms ─ State ─ Rest of the World 23. 5. 2017 19 Market mechanism Expen ditures Goods Market of goods Taxes Taxes Stát 23. 5. 2017 Prod. factors Households Expend itures Transfers Production factor market Transfers Firms 20 Market model: pro and contra ─ Positive features: ─ Automatic and efficient allocation of recourses without the need of any planning. The demand is the reason for supply. ─ The economy provides what the consumer want. The consumer “votes” and shows his preferences by spending money. ─ All the economic agents have a particular interest in accurate and efficient system functioning. ─ Negative features: ─ Market model tends to be inefficient in solving social problems. Low income means the respectively lower life level. ─ Some significant parts of social reality “fall out” from the interest of market economy, e.g. environment protection. 23. 5. 2017 21 Economic models of the modern world ─ In the end, what we used to call “the contemporary market oriented economy model” is the … ─ … mix of the most important features of market model, we have discussed… ─ …and governmental interventions in certain spheres of vital importance. ─ The participation of the government is necessary for providing conditions for social oriented market functioning. 23. 5. 2017 22 Where’s your country at on the scale? ─ Economies of the contemporary worlds’ countries have the features of both models. ─ “Tastes differ”: some economies have more command model features, others more market oriented. But both have positive and negative traits. Command 23. 5. 2017 Market 23 1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 23. 5. 2017 24 What is “Economics”? ─ Economics: ─ Analyzes how individuals, firms and states use their scarce resources in order to satisfy their unlimited needs ─ Collects, analyzes and interprets the related data ─ Develops theories and laws trying to explain these phenomena and predict the future trends ─ Economics = science about wealth. ─ How to use scare resources, how to distribute them among society members and how to use them. 23. 5. 2017 25 Positive and normative economics ─ Positive economics – describes reality. ─ „what is“ ─ Normative economics – describes how the reality should look like. ─ „what ought to be“ 23. 5. 2017 26 Two levels of economics ─ Microeconomics ─ is focused on analysis of market structures, consumer behaviour and company behaviour (production, costs, prices of input / output, profit, investments). ─ Macroeconomics theory ─ acquaints us with macroeconomics aggregates, problems of economic growth, money supply, unemployment and inflation. In the end we will also be able to understand monetary and fiscal policy of state, theory of international market and balance of payments. 23. 5. 2017 27 Economics methods ─ Observation ─ Statistical analysis ─ Economic modeling ─ Experiment ─ Cause-effect type of models War in Iraq 23. 5. 2017 Supply of oil goes down Gas prices go up Transportation costs go up Food prices go up 28 1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 23. 5. 2017 29 Opportunity costs ─ Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision. vs. We can go ride a bike 23. 5. 2017 We can go to work for USD 6,50 an hour. 30 ─Should Bill Gates move his lawn? 23. 5. 2017 31 23. 5. 2017 32 1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 23. 5. 2017 33 Economic modeling ─ Model is a simplified reality ─ Mathematic models reflect trends, however they aren’t capable of reflecting the whole range of elements making up a human nature 23. 5. 2017 34 Economic laws ─ Law of Downward-sloping Demand ─ When the price of commodity raises (given other conditions do not change – ceteris paribus) consumers tend to buy less of the commodity. Accordingly, when the price is lowered, other things equal, the quantity demanded increases. P 12 10 8 6 Budget = USD 10 4 2 1 23. 5. 2017 2 3 4 5 6 Q 35 Ceteris paribus principle ─ If the other conditions change we switch from the initial model to the totally new model. ─ This doesn’t mean that the considered economic law doesn’t work – it works given other factors remain equal. P 12 10 8 6 Budget = USD 5 4 2 23. 5. 2017 1 2 3 4 5 6 Q 36 Production Possibility Frontier (PPF) PPF presents ─ law of scarcity. ─ economic efficiency. ─ economic development. ─ choices between public and private goods. ─ choices between current and future consumption, ─ etc. 23. 5. 2017 Variant Cookies (mil. kg) A B C D 0 8 16 20 Ovens (thous. pieces) 5 4 2 0 Cookies 24 D 20 16 12 C F E B 8 4 A 1 2 3 4 5 6 Ovens 37 PPF based analysis ─ choices between luxury and normal goods. Luxury goods Luxury goods 22 22 18 18 16 12 16 12 8 8 A 4 1 2 3 A 4 4 5 6 Normal goods r. 1950: Developing country 23. 5. 2017 B 1 2 3 4 5 6 r. 2009: Developed country 38 PPF based analysis ─ The whole curve will move in case of change of production factors Investment goods Investment goods 22 18 22 18 Country B 16 12 8 16 12 Country A 4 23. 5. 2017 Country B 8 Country A 4 1 2 3 4 Today’s choice 5 6 Consumption 1 2 3 4 5 6 Expected future result 39 Thank you for attention! Sources: SAMUELSON, P. A., NORDHAUS, W. D. Ekonomie 18. vydání. Praha: Svoboda, 2005. KRAFT, J., RITSCHELOVÁ, I. Ekonomie pro environmentální management. Ústí n. L.: UJEP, 2003. MCDOUGAL LITTELL. Economics: Concept and Choices. Canada: McDougal Littell, 2008. Mankiw, G. Principles of Microeconomics. UK: Thomson Learning, 2003.