Download - Micro Lecture 1.1_Introduction

Copyright © 2013 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442558069/Hubbard and O'Brien/Essentials of Economics/2e 1

WELCOME TO

BUS 700 ECONOMICS

LECTURER: Atta Adu-Osae

Copyright © 2013 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442558069/Hubbard and O'Brien/Essentials of Economics/2e

Assessment Structure

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Assessment Type

When Assessed

Weighting

Mid-trimester examination[Final Exam: Microeconomics]

Week 6 30%

Critical Review – Individual Research Paper on Economics (2,500 words)

Week 10 25%

Final examination[Macroeconomics]

Final Exam Period 45%

Lecture 1: Chapter 1.1

Economics: Foundations and Models


Learning Objectives

1. Define Economics and distinguish between microeconomics and macroeconomics.

2. Explain these three important economic ideas: people are rational; people respond to incentives; optimal decisions are made at the margin.

3. Understand the issues of scarcity and trade-offs, and how the market makes decisions on these issues.

4. Understand the role of models in economic analysis.

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Microeconomics and macroeconomics

Microeconomics: The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices - Lecture 1 – Lecture 6

Macroeconomics: The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth - Lecture 7 – Lecture 12

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What is Economics? Economics and Scarcity

• Economics is the study of how scarce, or limited, resources are used to satisfy unlimited wants and needs for members of society

• Scarcity is the result of not enough goods and services to satisfy all wants and needs.

• In economics we study how people make choices and interact in markets.


Three Key Economic Ideas

Three important ideas in economics are:

1. People are rational.

2. People respond to economic incentives.

3. Optimal decisions are made at the margin.

– Marginal analysis: Analysis that involves comparing marginal benefits and marginal costs.

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Trade-offs force society to make choices

This is especially true with respect to three fundamental questions:

1. What goods and services will be produced?

2. How will the goods and services be produced?

3. Who will receive the goods and services produced?

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Scarcity And Trade-offs


1. What goods and services will be produced?

Choice depends on incentives.

Choosing between alternative options means making a trade-off. Economists use the concept of opportunity cost.

– Opportunity cost is the cost of a purchase or a decision measured in terms of the highest valued alternative that must be given up.

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Factors of Production

• Factors of production are used to create goods and services.o Laboro Lando Capitalo Entrepreneurship


2. How will the goods and services be produced?

In many cases, firms face a trade-off between using more workers and using more machines (i.e. Factors of production).

3. Who will receive the goods and services produced?

Factor Income

Land Rent

Labour Wage

Capital Interest

Entrepreneurship Profit11



• Efficiency is producing the largest attainable output of a desired quality with a given set of resources.

• Producing at the lowest possible cost.

• Productive efficiency: When a good or service is produced using the least amount of resources.

Allocative efficiency: When production reflects consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

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Efficiency and equity


Voluntary exchange: Occurs in markets when both the buyer and seller of a product are made better-off by the transaction.

Equity: The fair distribution of economic benefits between individuals and between societies.

An efficient outcome may or may not be considered by society to be equitable.

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Efficiency and equity, cont.


Economic Analysis: Models and Positive & Normative Statements

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Economics is used to answer questions such as the following:

How are the prices of goods and services determined?

How does pollution affect the economy, and how should government policy deal with these effects?

Why do firms engage in international trade, and how do government policies affect international trade?

Why does government control the prices of some goods and services, and what are the effects of those controls?

Economics: Foundations and models

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Positive and normative analysis

Positive analysis: Analysis that is concerned with what is, and involves value-free statements.

o Objective and Descriptive

o Based on facts

o Can be tested or verified

Example:

o The cost of producing cars is lower in Thailand than in Australia.

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Economic Models


Positive and normative analysis

Normative analysis: Analysis that is concerned with what ought to be, and involves value judgements.

o Prescriptive and subjective

o Not based on facts

o Cannot be tested or verified Example:

o The government should spend the budget surplus on housing for homeless citizens than on fighting imaginary wars like the war against terrorism.

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Economic Models

Download - Micro Lecture 1.1_Introduction

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