chapter 1 microeconomics ftu
TRANSCRIPT
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Prepared by Kieu Minh Tran T.(MSc)
For Undergraduates
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SYLLABUS Objectives:to improve economic literacy as well
as critical thinking and problem solving skills toexplain and predict economic issues.
Pre-requisites: Math
Student task:
Class attendance (90%)
Actively participate in-class activity
Complete all homework and other tasks
Dont have private conversation or arrive at class late,which can disrupt the learning environment of theclass
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BOOKS AND READING
Mankiw,N.Gregory,(2009) Principles of Economics-Fifth edition, South Western CENGAGE Learning.
Mankiw,N.Gregory,(2009) Study Guide
Lectures slides
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TOPICS IN MICROECONOMICS
1. Basic concepts in economics andmicroeconomics.
2. Demand and supply3. Consumer Behavior
4. Producer Behavior.5. Market structures6. The role of the Government in the
economy.
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Contact: Tran Thi Kieu Minh
0943170439
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Chapter 1
Basic concepts in economics
and microeconomics
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mailto:[email protected]:[email protected] -
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Contents of Chapter 1
1. Basic concepts
2. Economics
3. The optimum economicchoices
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Economy
Resources
Individuals
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1. Basic concepts
1. Economyoikonomos(Greek): Onewho manages a household
Household - many decisions of allocatelimited resources
Society - many decisions
Allocate resources
Allocate output
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1. Basic concepts2. Individuals
Household = consumers Firms = Producers
Government
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1. Basic concepts3. Resources
Land: Nature resources
Labor (L):
Capital: Physical capital (K)
Entrepreneurship
Resources are scarce
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1. Basic concepts4. Scarcity - limited nature of societys resources
Scarcity means that society has limited resources andtherefore cannot produce all the goods and servicespeople wish to have.
5. Goods
Economics goods
Free goods
Economics bads
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Principles
Microeconomics and Macroeconomics
Positive vs Normative Analysis
Models
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2. Economics Physicists try to explain the existence of black holes
in outer space.
Biologists try to explain why dinosaurs becameextinct,
Econom ists try to expla in puzzl ing observat ions
and facts about the economy.
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ThreeQuestions of an economy
1. Whatis to be produced?2. Howare the goods to be produced?
How can resources be used efficiently?
3. For whomare the goods to beproduced?
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Definition of EconomicsEconomics is to study of how society
manages its scarce resourcesEconomists study:
How people make decisions: how much theywork, what they buy, how much they save, and how theyinvest their savings.
How people interact with one another
Analyze forces and trends that affect theeconomy as a whole
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FOUNDATIONS OF MODERN
ECONOMICS
CLASSICAL
ADAM SMITH: The Wealth of Nations (1776)
ALFRED MARSHALL: Principles of Economics (1890).
NEOCLASSICAL
During the 1940s - 1950s
Modern classical school of economics with 5 key ideas.
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2.1Ten principles of economicsHow People Make Decisions
1: People Face Trade-offs
2: The Cost of Something Is What You Give Up to Get It3: Rational People Think at the Margin4: People Respond to Incentives
How People Interact5: Trade Can Make Everyone Better Off6: Markets Are Usually a Good Way to Organize Economic Activity7: Governments Can Sometimes Improve Market Outcomes
How the Economy as a Whole Works8: A Countrys Standard of Living Depends on Its Ability to ProduceGoods and Services9: Prices Rise When the Government Prints Too Much Money10: Society Faces a Short-Run Trade-off between Inflation andUnemployment
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How People Make Decisions
Principle 1: People face trade-offs
Making decisions Trade off one goal against another
Student time
Parents income
Society
National defense vs. consumer goods
Clean environment vs. high level of income
Efficiency vs. equality
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How People Make Decisions
Principle 2: The cost of something is what you give up toget it
People face trade-offs
Make decisions
Compare cost with benefits of alternatives
Opportunity cost
Whatever most be given up to obtain one item
THERE IS NO FREE LUNCH!
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How People Make Decisions
Principle 3: Rational people think at the margin
Rational people
Systematically & purposefully do the best they can toachieve their objectives
Marginal changes
Small incremental adjustments to a plan of action
Rational decision maker take action only if
Marginal benefits > Marginal costs
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How People Make Decisions
Principle 4: People respond to incentives
Incentive Something that induces a person to act
Higher price
Buyers - consume less
Sellers - produce more
Public policy
Change costs or benefits
Change peoples behavior
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How People Interact
Principle 5: Trade can make everyone better off
Trade
Specialization
Allows each person/country to specialize in the activitieshe/she does best
People/countries can buy a greater variety of goods andservices at lower cost
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How People Interact
Principle 6: Markets are usually a good way to organizeeconomic activity
Market economy - allocates resources
Decentralized decisions of many firms and households
As they interact in markets for goods and services
Guided by prices and self interest
Adam Smiths invisible hand
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How People Interact
Principle 7: Governments can sometimes improve
market outcomesWe need government
Enforce the rules
Maintain institutions - key to market economy
Enforce property rights
Property rights
Ability of an individual to own and exercise control overscarce resources
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How People Interact
Principle 7: Governments can sometimes improvemarket outcomes
Government intervention
Change allocation of resources
To promote efficiency
Avoid market failure
To promote equality
Avoid disparities in economic wellbeing
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How the Economy as a Whole
WorksPrinciple 8: A countrys standard of living depends on its
ability to produce goods and services
Large differences in living standards
Among countries
Over time
Explanation: differences in productivity
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How the Economy as a Whole Works
Productivity
Quantity of goods & services produced from each unit oflabor input
Higher productivity
Higher standard of living
Growth rate of nations productivity
Determines growth rate of its average income
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How the Economy as a Whole Works
Principle 9: Prices rise when the government prints toomuch money
Inflation
An increase in the overall level of prices in the economy
Causes for large / persistent inflation
Growth in quantity of money
Value of money falls
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How the Economy as a Whole
WorksPrinciple 10: Society faces a short-run trade-off between
inflation and unemployment
Short-run effects of monetary injections:
Stimulates - overall level of spending
Higher demand for goods and services
Firms raise prices; hire more workers; produce moregoods and services
Lower unemployment
Short-run tradeoff between inflation andunemployment
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How the Economy as a Whole
WorksPrinciple 10: Society faces a short-run trade-off between
inflation and unemployment Short-run trade-off between unemployment and
inflation
Key role analysis of business cycle
Business cycle
Fluctuations in economic activity
Employment
Production
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2.2 Microeconomics and
Macroeconomics
Microeconomics
The study of how households and firms makedecisions
And how they interact in markets
Macroeconomics
The study of economy-wide phenomena, includinginflation, unemployment, and economic growth
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2.3 Positive vs. Normative
economic analysis Positive statements
Attempt to describe the world as it is
Descriptive
Confirm or refute by examining evidence
Answer for What be
Normative statements
Attempt to prescribe how the world should be
Prescriptive
Answer for What should be
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2.4 The scientific method of economics
Observation, theory, and more observation
ObservationTheory
Conducting experiments
Observation
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Economics model
Economic model: an explanation of how the economyor part of the economy works.
Assumption: Judgements about features that can beignored to make the world easier to understand.
Ceteris paribus assumption: All other things beingequal. The term refers to holding all other variablesconstant when one variable is changed.
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Economic model
Come in many forms:
Numerical tables
Graphs
Algebraic equations
Wordy descriptions
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Visual model of the economy
Shows how dollars flow through markets
among households and firmsDecision makers
Firms & Households
Markets For gods and services
For factors of production
Our first model: The circular-flow diagram
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The circular flow
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Second model: The production possibilities frontier
Production possibilities frontier
A graphCombinations of output that the economy
can possibly produce
Given the available
Factors of production
Production technology
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The production possibilities frontier
Quantity of
ComputersProduced
Quantity of
CarsProduced
0 300 600 700 1,000
3,000
AB
C
D
E
F
1,000
2,2002,000
Production
PossibilitiesFrontier
The production possibilities
frontier shows thecombinations of output - in
this case, cars andcomputers - that the
economy can possibly
produce.
The economy can produce
any combination on or
inside the frontier.
Points outside the frontier
are not feasible given theeconomys resources.
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Efficient levels of production
Points on the PPF
Trade-off: The only way to get more of onegood is to get less of the other good
Inefficient levels of production
Points inside PPF
Second model: The production possibilities frontier
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Second model: The production possibilities frontier
Bowed out production possibilities frontierOpportunity cost of one good= Give up the
other good
Resource specialization
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Technological advance
Outward shift of the productionpossibilities frontier
Economic growth
Produce more of both goods
Second model: The production possibilities frontier
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A shift in the production possibilities frontierQuantity of
Computers
Produced
Quantity of
Cars Produced
0 600 650 1,000
3,000
A2,2002,300
A technological advance in
the computer industryenables the economy to
produce more computers
for any given number of
cars. As a result, the
production possibilitiesfrontier shifts outward. If
the economy moves from
point A to point G, then the
production of both cars and
computers increases.
4,000
G
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3.1 Why people choice? People want to maximize their benefit.
People face the fact that resources are scared
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3.2 Purposes of the choices Households (consumers): maximizing benefit (utility)
Firms (producers): maximizing profit
Government: maximizing social welfare
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MATHEMATICS REVISION
Slope of the curve
x
y
8
1
1 2
20
28
Slope= (28-20) = 8
2-1
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Revision (cont.)
Six types of relationship
Increasingpositiveslope
DecreasingPositiveslope
Increasingnegativeslope
Decreasingnegativeslope
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Math revision (Cont.)
Constant slope
Constant
positive slope
Constant
negative slope
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Facts and impacts
Movement along the curvevs.shift of the curve
Movement along the curve:
When x and y changes.
Shift of the curve:
When another variable
other than x and y change.
A third variable shift the
curve.
x
y
z1
Z2
The lineshifts whenZ changes
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