Upload
karen-magtubo
View
990
Download
0
Embed Size (px)
DESCRIPTION
Citation preview
INTRODUCTIONINTRODUCTIONTEN PRINCIPLES OF ECONOMICSTEN PRINCIPLES OF ECONOMICSNORMATIVE VS POSITIVENORMATIVE VS POSITIVECIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAMPRODUCTION POSSIBILITIES FRONTIER`PRODUCTION POSSIBILITIES FRONTIER`
April 13, 2011Ec102 D
OverviewOverview
Economics Defined Ten Principles of Economics Process in Economics Theories and Models Circular Flow Diagram Production Possibilities Frontier (PPF)
Group Quiz #1Group Quiz #1
1. Economists use _______ to simplify the complex world and make it easier to understand.
2. Economists assume that all human beings are ________.
3. The “automatic adjustments” was called _________ by Adam Smith.
4. It means “all else equal”.5. Accdg to Keynes, “In the long run, we are all
____.”6. BONUS: Room number
ECONOMICSECONOMICS
A social science of allocation of scarce resources among alternative uses to attain desired ends. How people make choices Add it all up -- how society makes choices
1. PEOPLE FACE TRADE-1. PEOPLE FACE TRADE-OFFSOFFS No free lunch To get one thing, you have to
give up another Example:
Choice of attending class or sleeping
2. COST OF SOMETHING IS 2. COST OF SOMETHING IS WHAT YOU GIVE UP TO GET ITWHAT YOU GIVE UP TO GET IT
Opportunity cost – the next best alternative foregone If you did not choose do “this”, then
the opportunity cost is what you would have done instead
Example: Opportunity cost of going to class –
SLEEP Study or be a rock star?
3. RATIONAL PEOPLE THINK AT 3. RATIONAL PEOPLE THINK AT THE MARGINTHE MARGIN Rationality Principle Decisions are not always between
extremes More often, in smaller increments
Marginal Changes – Incremental changes Around the edges Additional
4. PEOPLE RESPOND TO 4. PEOPLE RESPOND TO INCENTIVESINCENTIVES
What induces you to act Maybe be a punishment or
reward What do I get for it?
5. TRADE CAN MAKE 5. TRADE CAN MAKE EVERYONE BETTER OFFEVERYONE BETTER OFF
6. MARKETS ARE A GOOD WAY 6. MARKETS ARE A GOOD WAY TO ORGANIZE THE ECONOMYTO ORGANIZE THE ECONOMY
Market – a group of buyers and sellers
Economy – group of people dealing with one another as they go about their lives
Market Economy vs Centrally Planned Economy
Invisible Hand
7. Governments can 7. Governments can sometimes improve market sometimes improve market outcomesoutcomes Maintain rules and institutions Step in when there are market
failures Choice between efficiency or
equality
8. A country’s standard of living 8. A country’s standard of living depends on its ability to produce depends on its ability to produce goods and servicesgoods and services Differences in productivity
differences in average income
9. Prices rise when 9. Prices rise when governments print too much governments print too much moneymoney Long Run Inflation Example
Produce 1000 units, M = P10, 000Price = P10,000/1000 = P10
Produce 1000 units, M = P15, 000Price = P15,000/P1000 = P15
Demand Pull Inflation
10. Society faces a short-run 10. Society faces a short-run trade-off between inflation and trade-off between inflation and unemploymentunemploymentShort run Increase M increased income increased demand higher prices (INFLATION) hire more workers lessen unemployment
Phillips Curve
METHODOLOGY OF METHODOLOGY OF ECONOMICSECONOMICS
Positive Economics - attempts to understand behavior and operation of economic systems without making judgmentsDescribes what exists and how it worksFacts, cause and effectsDescriptive -- WHAT ISExample: Minimum wage laws cause unemployment.
METHODOLOGY OF METHODOLOGY OF ECONOMICSECONOMICS
Normative Economics - Looks at outcomes of economic behavior and asks whether they are good or badMay prescribe courses of actionPolicy economicsPrescriptive -- WHAT OUGHT TO BEExample: The government should raise the minimum wage.
METHODOLOGY OF METHODOLOGY OF ECONOMICSECONOMICSEconomists cannot simply do experiments
Role of Assumptions Example: Trade between two countries producing only two goods
POSITIVE ECONOMICSPOSITIVE ECONOMICS
Descriptive economics - compilation of data that describe phenomena and facts
NSO Publications
POSITIVE ECONOMICSPOSITIVE ECONOMICS
Economic Theory - statement or set of related statements about cause and effect, action and reaction
Model - formal statement of a theory, usually a mathematical statement of a presumed relationship between two variables
Variables - measure that can change from time to time
POSITIVE ECONOMICSPOSITIVE ECONOMICS
Example:Theory: Law of DemandModel: Graph (equation)Variables: Price and Quantity
Models are abstractions.
CETERIS PARIBUSCETERIS PARIBUS
“All else equal” Assume that all other factors do
not change Isolate effects Focus on the relationship
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
Visual model of how money flows through markets among households and firms
How economy is organized and how participants interact
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
Firms – produce goods and services using inputs (labor, land, capital, entrepreneurial activity) Factors of production
Households – own factors of production and consume goods and services (g/s)
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
Two kinds of markets Market for g/s:
Firms – sellers HH – buyers
Market for factors of prod’n Firms – buyers HH – sellers
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
Two loops: Inside – movement of inputs and
output HH sell use of factors of prod’n to firms in mkt for factors of prod’n. Firms use this to produce g/s in the mkt for g/s.
Outer – movement of money HH spend money to buy g/s from firms in
mkt for g/s. Firms use revenue to pay for factors of prod’n
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
CIRCULAR FLOW DIAGRAMCIRCULAR FLOW DIAGRAM
Wallet (HH) Buy food at the caf (firm) Firm use resource to buy inputs
(example: wages) Wages wallets (HH)