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  • 5/24/2018 Chapter 1 Microeconomics FTU

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    FTU- MICROECONOMICS Chapt

    Prepared by Kieu Minh Tran T.(MSc)

    For Undergraduates

    1

    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

    2

    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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    FTU- MICROECONOMICS Chapt

    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.

    4

    Contact: Tran Thi Kieu Minh

    [email protected]

    0943170439

    5

    Chapter 1

    Basic concepts in economics

    and microeconomics

    6

    mailto:[email protected]:[email protected]
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    Contents of Chapter 1

    1. Basic concepts

    2. Economics

    3. The optimum economicchoices

    7

    Economy

    Resources

    Individuals

    8

    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

    10

    1. Basic concepts3. Resources

    Land: Nature resources

    Labor (L):

    Capital: Physical capital (K)

    Entrepreneurship

    Resources are scarce

    11

    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

    13

    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.

    14

    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?

    15

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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

    16

    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.

    17

    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

    18

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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

    19

    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!

    20

    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

    22

    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

    23

    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

    24

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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

    25

    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

    26

    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

    28

    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

    29

    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

    30

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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

    31

    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

    32

    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

    34

    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.

    35

    Economic model

    Come in many forms:

    Numerical tables

    Graphs

    Algebraic equations

    Wordy descriptions

    36

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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

    37

    The circular flow

    38

    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

    39

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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.

    40

    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

    41

    Second model: The production possibilities frontier

    Bowed out production possibilities frontierOpportunity cost of one good= Give up the

    other good

    Resource specialization

    42

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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

    43

    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

    44

    45

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    3.1 Why people choice? People want to maximize their benefit.

    People face the fact that resources are scared

    46

    3.2 Purposes of the choices Households (consumers): maximizing benefit (utility)

    Firms (producers): maximizing profit

    Government: maximizing social welfare

    47

    MATHEMATICS REVISION

    Slope of the curve

    x

    y

    8

    1

    1 2

    20

    28

    Slope= (28-20) = 8

    2-1

    48

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    Revision (cont.)

    Six types of relationship

    Increasingpositiveslope

    DecreasingPositiveslope

    Increasingnegativeslope

    Decreasingnegativeslope

    49

    Math revision (Cont.)

    Constant slope

    Constant

    positive slope

    Constant

    negative slope

    50

    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

    51