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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
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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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
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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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
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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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
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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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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So how do we decide?
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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So how do we decide?
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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So how do we decide?
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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So how do we decide?
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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So how do we decide?
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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So how do we decide?
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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So how do we decide?
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
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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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
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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
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8056
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A Review of Graphs:
Slopes
X
Y
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A Negative Slope
0
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A Review of Graphs:
Slopes
X
Y
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A Positive Slope
0
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A Review of Graphs:
Slopes
X
Y
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A Zero Slope
0
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A Review of Graphs:
Slopes
X
Y
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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
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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
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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
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A Negative Slope
0
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A Review of Graphs:
Slopes in Curved Graphs
X
Y
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A Positive Slope
0
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A Review of Graphs:
Slopes in Curved Graphs
X
Y
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A Positive Slope
0
A Negative Slope
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A Review of Graphs:
Slopes in Curved Graphs
X
Y
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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