week 1 _ ch 1 and 2 _ maruf_ brief lecture notes (1)

1What IsEconomics?

Notes and teaching tips: 6, 8, 19, 20, 26, 30, and 34.To view a full-screen figure during a class, click the red expand button.To return to the previous slide, click the red shrink button.To advance to the next slide, click anywhere on the full screen figure.

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2013 Pearson Australia

Definition of EconomicsAll economic questions arise because we want more than we can get.Our inability to satisfy all our wants is called scarcity.Because we face scarcity, we must make choices.The choices we make depend on the incentives we face.An incentive is a reward that encourages an action or a penalty that discourages an action.

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Definition of EconomicsEconomics is concerned with the efficient use of limited productive resources for the purpose of attaining the maximum satisfaction of our material wantsGetting the most out of what we have got!

Economics is the study of how society manages its scarce resources


Why Study Economics?Economics for GovernmentTo assist in policy development

Economics in BusinessTo provide business with strategic information to make informed business decisions

Economics for Personal UseTo assist individuals, as workers and income receivers, to gain and retain economic security

S2 2014

2012 S2


Micro v Macro Economics

Microeconomics studies how households and firms make decisions and they interact in marketsMacroeconomics studies economy-wide phenomena, including inflation, unemployment and economic growth

S2 2014

2012 S2


Two Big Economic Questions Two big questions summarise the scope of economics:How do choices end up determining what, how, and for whom goods and services get produced?When do choices made in the pursuit of self-interest also promote the social interest?

*Dont skip the questions in a rush to get to the economic way of thinking. Open your students eyes to economics in the world around them. Ask them to bring a newspaper to class and to identify headlines that deal with stories about What, How, and For Whom. Use Economics in the News Today on your Parkin-Bade Web site for a current news item and for an archive of past items (with questions). Pose questions and be sure that the students appreciate that they will have a much better handle on questions like these when theyve completed their economics course.


What, How, and For Whom?Goods and services are the objects that people value and produce to satisfy human wants.What?In Australia, agriculture accounts for 4 per cent of total production, manufactured goods for 26 per cent, and services (retail and wholesale trade, health care, and education are the biggest ones) for 70 per cent. In China, agriculture accounts for 10 per cent of total production, manufactured goods for 46 per cent, and services for 44 per cent. Two Big Economic Questions

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How?Goods and services are produced by using productive resources that economists call factors of production.Factors of production are grouped into four categories: Land Labour Capital Entrepreneurship

Two Big Economic Questions

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The gifts of nature that we use to produce goods and services are land.The work time and work effort that people devote to producing goods and services is labour.The quality of labour depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience.The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services are capital.The human resource that organises land, labour, and capital is entrepreneurship.Two Big Economic Questions

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Human capital varies across countries and by age group.Figure 1.2 shows the shares of workers with tertiary education across four countries.Almost 45 per cent of Australian younger workers have tertiary qualifications compared with 30 per cent for older workers.Two Big Economic Questions

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Self-InterestYou make choices that are in your self-interestchoices that you think are best for you.Social InterestChoices that are best for society as a whole are said to be in the social interest.Social interest has two dimensions:EfficiencyEquity


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Efficiency is achieved when the available resources are used to produce goods and services:At the lowest possible price andIn quantities that give the greatest possible benefit.

Equity is fairness, but economists have a variety of views about what is fair.The Big QuestionCan choices made in self-interest promote the social interest?Two Big Economic Questions

*Talk about Adam Smith and the Wealth of Nations.Note that this book was the first systematic attempt to address this big question and that economists have been trying to answer it ever since.You might like to mention that several Nobel Prizes have been awarded to economists who have worked on the question including Ken Arrow, John Hicks, and Gerard Debreu, as well as John Nash of Beautiful Mind fame.


Four topics that generate discussion and that illustrate tension between self-interest and social interest are Globalisation The information-age economy Global warming Economic instability


*There is not much that we can say to our students at this early point in the course about the way we try to describe the tension between self-interest and the social interest demonstrated by these topics. We can raise the interest level and excitement about the economics course by talking about issues like these four. The Boxes in the textbook flesh out the topics.Talk about some of these and any others that you happen to know a decent amount about. Try very hard to turn your students on! Get them debating these issues and try to steer the discussion toward benefits, costs, and who receives and bears them.


GlobalisationGlobalisation means the expansion of international trade, borrowing and lending, and investment.Globalisation is in the self-interest of consumers who buy low-cost imported goods and services and in the self-interest of the multinational firms that produce in low-cost regions and sell in high-price regions. But is globalisation in the self-interest of low-wage workers in other countries and Australian firms that cant compete with low-cost imports?Is globalisation in the social interest?Two Big Economic Questions

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The Information-Age EconomyThe technological change of the past forty years has been called the Information Revolution.The information revolution has clearly served your self-interest: It has provided your cell phone, laptop, loads of handy applications, and the Internet. It has also served the self-interest of Bill Gates of Microsoft and Gordon Moore of Intel, both of whom have seen their wealth soar.But did the information revolution serve the social interest? Two Big Economic Questions

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Climate ChangeEvery day, when you make self-interested choices to use electricity and gasoline, you contribute to carbon emissions.You leave your carbon footprint.You can lessen your carbon footprint by walking, riding a bike, taking a cold shower, or planting a tree.But can each one of us be relied upon to make decisions that affect the Earths carbon-dioxide concentration in the social interest? Two Big Economic Questions

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Economic InstabilityBetween 1993 and 2007, the Australian and global economies expanded strongly. Incomes in Australia increased by 30 per cent and incomes in China tripled.But in August 2007, a period of financial stress began that soon gripped the entire global financial system.The choices of U.S. banks to borrow and lend and the choices of people and business to lend to and borrow from U.S. banks are made in self-interest. Does this lending and borrowing serve the social interest? Two Big Economic Questions

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The Economic Way of ThinkingMaking a Rational Choice A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice.Only the wants of the person making a choice are relevant to determine its rationality.The idea of rational choice provides an answer to the first question: What goods and services will be produced and in what quantities?

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The Economic Way of ThinkingCost: What you Must Give UpThe opportunity cost of something is the highest-valued alternative that must be given up to get it.What is your opportunity cost of going to an AC/DC concert?Opportunity cost has two components: 1. The things you cant afford to buy if you purchase the AC/DC ticket. 2. The things you cant do with your time if you go to the concert.

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Opportunity cost :Example:If I have two dollars in my wallet I may be able to purchase either a drink or a snack. If I choose a snack, the trade-off I am making is the drink I can no longer afford. This is what economists refer to as an opportunity cost. The opportunity cost of choosing the snack is sacrificing the drink.


The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be produced and those that cannot.To illustrate the PPF, we focus on two goods at a time and hold the quantities of all other goods and services constant.That is, we look at a model economy in which everything remains the same (ceteris paribus) except the two goods were considering.Production Possibilities and Opportunity Cost

*The production possibility frontier (PPF) is the first economic model the students see. Your first challenge is to ensure that the students understand the mechanics of the model. You can provide some help in the classroom but your main goal must be to get the student working to develop good work habits. Encourage them to work the end-of-chapter problems, study guide questions, and to work the Practice Problems in MyEconLab so that they are comfortable with the mechanics of this chapter.


Production Possibilities FrontierFigure 2.1 shows the PPF for two goods: cola and pizzas.Production Possibilities and Opportunity Cost

*Your second challenge is to help the students begin to use the PPF model and to start thinking like economists. Thinking about everyday events in terms of graphs and tables of numbers is hard for most students. You can help them to appreciate economic models in general and the PPF model in particular by using the model to describe the tradeoff between studying and a social life faced every day by each student.Why do some of the brightest students not get 100 per cent? After sleeping, attending classes, and performing the mundane tasks of life, a student has 8 hours a day available for study and recreation. If the student spends all 8 hours studying, he/she will get 100 per cent. But each hour of recreation lowers the mark.The Economics of Uni Life 101. First, assume a constant opportunity cost of recreation equal to a 10 percentage point drop in the mark for each hour spent not studying. The highest mark possible is 100 per cent, the lowest is 40 percent, and the negatively sloped PPF curve is a straight line. Ask the students to draw the graph based on your description. Help them to interpret the PPF graph: the intercept points reveal the maximum mark and the maximum recreation hours possible, and the negative slope quantifies the trade-off the student faces. Points on the curve represent production efficiency and points inside the curve represent a misallocation of the students time where opportunities for increases in recreation and/or percentage points are wasted.Then show that the opportunity cost of each additional hour of recreation (lost percentage points) is constant. Ask the students why.


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In moving from E to F:The quantity of pizzas increases by 1 million.The quantity of cola decreases by 5 million cans.The opportunity cost of the fifth 1 million pizzas is 5 million cans of cola.One of these pizzas costs 5 cans of cola.Production Possibilities and Opportunity Cost

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Figure 2.2 illustrates the marginal cost of a pizza.As we move along the PPF, the opportunity cost of a pizza increases.The opportunity cost of producing one more pizza is the marginal cost of a pizza.Using Resources Efficiently

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It is a general principle that:The more we have of any good, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it.We call this general principle the principle of decreasing marginal benefit. The marginal benefit curve shows the relationship between the marginal benefit of a good and the quantity of that good consumed.Using Resources Efficiently

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In Figure 2.3, at point A, with 0.5 million pizzas available, people are willing to pay 5 cans of cola for a pizza..Using Resources Efficiently

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The expansion of production possibilities an increase in the standard of living is called economic growth.Two key factors influence economic growth: Technological change Capital accumulation

Technological change is the development of new goods and of better ways of producing goods and services.Capital accumulation is the growth of capital resources, which includes human capital.Economic Growth

*You can have some fun and generate some discussion by getting the students to think about what life might be like after another 200 years of economic growth. Provide some numbers: For example, In 2006, income per person in the United States was about $100 a day. In 1806, it was about 70 a day, and if the past growth rate prevails for another 200 years, in 2206 it will be $14,000 a day. Emphasise the magic of compound growth. If they think that $14,000 a day is a big income, get them to do a ballpark estimate of the daily income of Bill Gates (about $20 million!) Encourage a discussion of why scarcity is still present even at these large incomes.Be sure to cover the Standard of Living Tradeoff idea that the students met in Chapter 1 and that they can now think about with the more powerful tool of the PPF.If you wish, connect the discussion of efficiency with that of growth. Ask the students to explain what determines the efficient growth rate (not in text).


The Cost of Economic GrowthTo use resources in research and development and to produce new capital, we must decrease our production of consumption goods and services.So economic growth is not free.The opportunity cost of economic growth is less current consumption.Economic Growth

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Figure 2.5 illustrates the tradeoff we face.We can produce pizzas or pizza ovens along PPF0.By using some resources to produce pizza ovens today, the PPF shifts outward in the future.Economic Growth

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Comparative Advantage and Absolute AdvantageA person has a comparative advantage in an activity if that person can perform the activity at a lower opportunity cost than anyone else.A person has an absolute advantage if that person is more productive than others.Absolute advantage involves comparing productivities while comparative advantage involves comparing opportunity costs.Lets look at Liz and Joe who operate smoothie bars.Gains from Trade

*The gain from trade is a real eye-opener for students. Their first reaction is one of skepticism. Convincing students of the power of trade to raise living standards and the costs of trade restriction is one of the most productive things we will ever do.Here are some ideas to drive home the idea of comparative advantage:Why didnt Billy Sunday do his own typing? Billy Sunday, an evangelist in the 1930s, was reputed to be the worlds fastest typist. Nonetheless, he employed a secretary who was a slower typist than he. Why? Because in one hour of preaching, Billy could raise several times the revenue that he could raise by typing for an hour. So Billy plays to his comparative advantage.Why doesnt Martha Stewart bake her own bread? Martha Stewart is probably a better cook than most people, but she is an even better writer and TV performer on the subject of food. So Martha plays to her comparative advantage and writes about baking bread but buys her bread.Why doesnt Vinnie Jones play soccer? Vinnie Jones is one of the worlds best soccer players (although now getting a bit old). But he stopped playing soccer and started making movies some years ago. Why? Because, as he once said, You go to the bank more often when youre in movies. Vinnies comparative advantage turned out to be in acting.The costs of trade restrictions need to be driven home. The 2002 steel tariff increase and the EU response is a good story to use.


Notes and teaching tips: 6, 8, 19, 20, 26, 30, and 34.To view a full-screen figure during a class, click the red expand button.To return to the previous slide, click the red shrink button.To advance to the next slide, click anywhere on the full screen figure.

**

2012 S2

2012 S2

*Dont skip the questions in a rush to get to the economic way of thinking. Open your students eyes to economics in the world around them. Ask them to bring a newspaper to class and to identify headlines that deal with stories about What, How, and For Whom. Use Economics in the News Today on your Parkin-Bade Web site for a current news item and for an archive of past items (with questions). Pose questions and be sure that the students appreciate that they will have a much better handle on questions like these when theyve completed their economics course.*

*

*

*

*

*

*Talk about Adam Smith and the Wealth of Nations.Note that this book was the first systematic attempt to address this big question and that economists have been trying to answer it ever since.You might like to mention that several Nobel Prizes have been awarded to economists who have worked on the question including Ken Arrow, John Hicks, and Gerard Debreu, as well as John Nash of Beautiful Mind fame.*There is not much that we can say to our students at this early point in the course about the way we try to describe the tension between self-interest and the social interest demonstrated by these topics. We can raise the interest level and excitement about the economics course by talking about issues like these four. The Boxes in the textbook flesh out the topics.Talk about some of these and any others that you happen to know a decent amount about. Try very hard to turn your students on! Get them debating these issues and try to steer the discussion toward benefits, costs, and who receives and bears them. *

*

*

*

*

*

*The production possibility frontier (PPF) is the first economic model the students see. Your first challenge is to ensure that the students understand the mechanics of the model. You can provide some help in the classroom but your main goal must be to get the student working to develop good work habits. Encourage them to work the end-of-chapter problems, study guide questions, and to work the Practice Problems in MyEconLab so that they are comfortable with the mechanics of this chapter.*Your second challenge is to help the students begin to use the PPF model and to start thinking like economists. Thinking about everyday events in terms of graphs and tables of numbers is hard for most students. You can help them to appreciate economic models in general and the PPF model in particular by using the model to describe the tradeoff between studying and a social life faced every day by each student.Why do some of the brightest students not get 100 per cent? After sleeping, attending classes, and performing the mundane tasks of life, a student has 8 hours a day available for study and recreation. If the student spends all 8 hours studying, he/she will get 100 per cent. But each hour of recreation lowers the mark.The Economics of Uni Life 101. First, assume a constant opportunity cost of recreation equal to a 10 percentage point drop in the mark for each hour spent not studying. The highest mark possible is 100 per cent, the lowest is 40 percent, and the negatively sloped PPF curve is a straight line. Ask the students to draw the graph based on your description. Help them to interpret the PPF graph: the intercept points reveal the maximum mark and the maximum recreation hours possible, and the negative slope quantifies the trade-off the student faces. Points on the curve represent production efficiency and points inside the curve represent a misallocation of the students time where opportunities for increases in recreation and/or percentage points are wasted.Then show that the opportunity cost of each additional hour of recreation (lost percentage points) is constant. Ask the students why.*

*

*

*

*

*

*

*

*You can have some fun and generate some discussion by getting the students to think about what life might be like after another 200 years of economic growth. Provide some numbers: For example, In 2006, income per person in the United States was about $100 a day. In 1806, it was about 70 a day, and if the past growth rate prevails for another 200 years, in 2206 it will be $14,000 a day. Emphasise the magic of compound growth. If they think that $14,000 a day is a big income, get them to do a ballpark estimate of the daily income of Bill Gates (about $20 million!) Encourage a discussion of why scarcity is still present even at these large incomes.Be sure to cover the Standard of Living Tradeoff idea that the students met in Chapter 1 and that they can now think about with the more powerful tool of the PPF.If you wish, connect the discussion of efficiency with that of growth. Ask the students to explain what determines the efficient growth rate (not in text).*

*

*

*The gain from trade is a real eye-opener for students. Their first reaction is one of skepticism. Convincing students of the power of trade to raise living standards and the costs of trade restriction is one of the most productive things we will ever do.Here are some ideas to drive home the idea of comparative advantage:Why didnt Billy Sunday do his own typing? Billy Sunday, an evangelist in the 1930s, was reputed to be the worlds fastest typist. Nonetheless, he employed a secretary who was a slower typist than he. Why? Because in one hour of preaching, Billy could raise several times the revenue that he could raise by typing for an hour. So Billy plays to his comparative advantage.Why doesnt Martha Stewart bake her own bread? Martha Stewart is probably a better cook than most people, but she is an even better writer and TV performer on the subject of food. So Martha plays to her comparative advantage and writes about baking bread but buys her bread.Why doesnt Vinnie Jones play soccer? Vinnie Jones is one of the worlds best soccer players (although now getting a bit old). But he stopped playing soccer and started making movies some years ago. Why? Because, as he once said, You go to the bank more often when youre in movies. Vinnies comparative advantage turned out to be in acting.The costs of trade restrictions need to be driven home. The 2002 steel tariff increase and the EU response is a good story to use.

week 1 _ ch 1 and 2 _ maruf_ brief lecture notes (1)

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