the economic perspective

8/3/2019 The Economic Perspective

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The Economic Perspective

Prof. Rushen Chahal

2/12/2012 Prof. Rushen Chahal

ECONOMICS:ECONOMICS:EXPLORE & APPLYEXPLORE & APPLY


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Today

I. Introductions

II. Basic Intro to Economics

III. Micro Vs. Macro

IV. The three basic questions of economics

V. Different market types

VI. Equity vs. Efficiency

VII. A review of graphs



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Why Study Economics?

To Get Rich

To Better Understand the Laws of Supply andDemand

To Better Understand Inequality in the Distribution ofIncome

Economics Exists Everywhere in Our World!



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Economics Is Everywhere!

Taxes

Free Trade

Inflation Unemployment

Job Choices

Consumption and Saving Choices

Prices



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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



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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



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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



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What is Economics?

Looks at growth in developing countries, and

proposes ways to encourage the efficient use

of resources

And much much more . . . .



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H

ave you ever had to decide betweenH

ave you ever had to decide betweenwacthing a movie with your girlfriendwacthing a movie with your girlfriend

or giving her a lovely toy?or giving her a lovely toy?

A) YES B) NO



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Stated Simply:

Economics is the study ofhow

societies use scarce resources to

produce valuable commodities

and distribute them among

different people.



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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



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Today

I. Introductions

II. Basic Intro








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Micro Vs. Macro

In this course were going to be looking at

both microeconomics and macroeconomics

Whats the difference?

Do any of you have any ideas about the

differences between micro and macro?



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Microeconomics

Microeconomics deals with individual parts of theeconomy

Concerned with individual consumers, workers,

and firms Studies the individual industries firms operate

within

Whats an industry?

What industry is China Air in?

What industry is Lenovo in?

What industry is Carrefour in?

What industry is McDonalds in?2/12/2012 Prof. Rushen Chahal


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Microeconomics

Microeconomics focuses upon interactions betweenconsumers 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



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Macro vs. Micro

Microeconomics deals with the behavior of

individual entities:

-Markets

-Firms

-Households



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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



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Macroeconomics

Macroeconomics no longer cares about theindividual 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 steadyinflation, high rates of employment, and high

rates of economic growth We will focus in this subject for the second half of

the semester



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Today

I. Introductions

II. Basic Intro








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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. ForWhom?



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The three basic questions of

economics What:

What goods and services should be produced?

How:

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

ForWhom:

Who will consume the goods and services that areproduced? How will these goods and services bedistributed among the different individuals in the economy



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Today

I. Introductions

II. Basic Intro








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Different types of markets

The questions ofWhat, How, and ForWhomcan be answered largely by looking at whattype of market system is in place

Different types of markets

Command and control

Free markets

Mixed economies



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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 waslargely a command and control system

The government was deciding what to produce, how

to produce it, and who would consume the goods

produced



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Free Market

Under a free market system, the marketanswers the questions of what, how and forwhom

The government stays out of the economyentirely

The market determines what is produced, how

to produce it, and who consumes the goodsproduced



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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 were talking about a

market?



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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



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Markets

Together, buyers and sellers interact to form a market

So we can simply say that a market is made up of allof 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



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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



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Mixed economies

In reality, almost all economies are mixed economies

Mixed economies are a combination of free marketsand command and control economies

In mixed economies, some parts of the economy are

determined by the government and others are

determined by the market



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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



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CommandCommand

andand

ControlControl

LaissezLaissez--FaireFaireFree MarketsFree MarketsMixedMixed

The Spectrum of Economic

Systems



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So how do we decide?

Is it better to have a mixed economy that is closer toa 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 moreconcerned with: equity or efficiency



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Today

I. Introductions

II. Basic Intro








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Equity and Efficiency

Equity: Focusing on fairly and evenly distributinggoods 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 concentratethroughout the semester



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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



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In this case, we might want to have a purely

command and control economy

If the government is determining the threequestions of what, how, and for whom, we can

hopefully ensure that goods and services are

distributed fairly



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This is largely the way that China was operating formuch of the second half of the 20th century

There are some problems with command and control

economies: The government doesnt know our needs, wants, and

desires better than we do

The government often has trouble motivating firms toproduce

Command and control economies very often are facedwith vast inefficiencies



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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 Smiths invisible hand



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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 asignifier of the value of goods and services

Changes in prices thus lead to changes in both

consumer and producer behavior



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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



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It seems then, that neither a purely commandand control economy, nor a purely free marketis the best choice

Instead, were going to take somecombination of the two

This mixed economy will involve both qualities

of a free market, as well as a command andcontrol economy



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Today

I. Introductions

II. Basic Intro








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A Review of Graphs

Price (per thousandcubic feet.)

$2 $3 $4 $5 $6

Quantity Demanded(billions of cubic feet per

year)

120 80 56 38 20


Quantities of Natural Gas Demanded At Various Prices


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A Review of Graphs

120

80

5638

20

$0

$1

$2

$3

$4$5

$6

$7

0 50 100 150

Quantity Demanded (billions of cubic feet per year)

Price(perthousandcubicfeet)

Quantities of

Natural Gas

Demanded


8056


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A Review of Graphs:

Slopes

X

Y


A Negative Slope

0


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A Review of Graphs:

Slopes

X

Y


A Positive Slope

0


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A Review of Graphs:

Slopes

X

Y


A Zero Slope

0


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A Review of Graphs:

Slopes

X

Y


An Infinitive Slope

0


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A Review of Graphs:

Measuring Slopes

7.9

8

8.1

8.2

8.3

8.4

8.58.6

0 1 2 3 4 5 6

X

Y


0

An increase of 1 on the X axis results in an

increase of0.1 on the Y axis.


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A Review of Graphs:

Measuring Slopes

7.9

8

8.1

8.2

8.3

8.4

8.58.6

0 1 2 3 4 5 6

X

Y


0

Thus, the slope of this graph is 1/10

meaning that for every increase

in x, y will increase by 1/10 that amount


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A Review of Graphs:

Slopes in Curved Graphs

X

Y


A Negative Slope

0


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A Review of Graphs:


X

Y


A Positive Slope

0


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A Review of Graphs:


X

Y


A Positive Slope

0

A Negative Slope


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A Review of Graphs:


X

Y


A Positive Slope

0

A Negative Slope


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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



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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



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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



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To Sum Up

We then saw the three basic questions were

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?)



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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



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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 equityor efficiency

In the end, a mixed economy will ensure that

there is a favorable balance of equity and

efficiency



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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



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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.



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Test Yourself

2. The three basic questions an economy mustanswer are

a. why produce; how much to produce; who toproduce it.

b. what to produce; how to produce it; who toconsume it.

c. what to produce; why produce; how toproduce.

d. when to produce; how to produce; what toproduce.



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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.



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Test Yourself

4. In a capitalist economy, economic

activities are coordinated by

a. tradition.

b. prices.

c. government.

d. business firms.



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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.



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HomeWork

To be handed in personally next lesson:

Test your self (pages 17-18) questions 1-20

(except questions 5 and 18)



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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

the economic perspective

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