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1Lecture 1: IntroductionChristine Ho
ECON001 Introductory Economics
Singapore Management University
Outline The Course
What is Economics?
Course information
Assessment
The economic problem
The need for abstraction
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Production Possibilities
Gains from trade
The need for abstraction
PPF
Opportunity cost
Absolute and comparative advantage
The Course
Logistics
C I f
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Course Info
Teaching
Assessment
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2Logistics
Course Instructor: Christine Ho Office Hour: Mondays 1100-1200 SESS 5038
Email: [email protected]
Course Website: https://elearn.smu.edu.sg/?logout=1
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Lecture notes, group projects, online quizzes, peer evaluation
Optional publisher website http://pearsonmylab.com Your access code comes with the purchase of the main textbook
Course id: ho50964
Teaching Assistants
Vivian Lau (eLearn) Office Hour: Tuesdays 1130-1230
Venue: SESS Group Study Room 5-1
Email: [email protected]
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Nam Trinh (MyLab)
Office Hour: Fridays 1200-1300
Venue: SESS Group Study Room 5-1
Email: [email protected]
Course Info
Objectives Introduce Economic theories and applications
Prepare Econ-major students to enroll in higher level Economics subjects
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Equip non Econ-major students with economic concepts
Tools for economic analysis
Elementary calculus and algebra Diagrammatic expositions
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3Textbooks
Main textbook
Michael Parkin, Economics, Global Edition, Pearson Education
Supplementary textbooks
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Paul Samuelson and William Nordhaus, Economics, International Edition, McGraw-Hill
William A. McEachern, ECON MACRO 2, Student Edition, Cengage Learning Asia Pte Ltd
Teaching
Weekly 3 hour sessions
Lecture slides will be available via the course website Note that the slides provide only an outline of the course
Those have to be supplemented by
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Those have to be supplemented by
Your own notes taken in class Readings from textbooks
Coursework
Weekly quizzes via the course website
Two Main Sections
Microeconomics Household and firm behaviour
Macroeconomics
Aggregate economy and business cycles
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Taught in weeks 1-5
Mid-term exams in week 7 will be based on Microeconomics topics
Taught in weeks 9-13
Final exams in week 15 will be based on All topics: Microeconomics and Macroeconomics
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4Assessment
Work-in-Progress (20%) Class Participation (10%)
Peer evaluationSelf evaluation
Weekly Quizzes (10%)
Group Project (15%) Randomly assigned 20 minutes presentation 5 minutes discussion Written report
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Mid-term exams (25%) On Micro topics taught in Lectures 1 to 5 Section A: quizzes Section B: problem solving
Final exams (40%) On All topics taught in Lectures 1 to 10 Section A: quizzes Section B: problem solving
What is Economics?
The Economic Problem
Th N d f Ab i
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The Need for Abstraction
What is Microeconomics?
What is Macroeconomics?
The Economic Problem
People have _____________ I want a house, a car, food, clothing, movies etc.
However, we have a limited amount of ________ at our disposal
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p e.g. land is limited: shall we use a given plot of land to build more flats or more offices?
Because of scarcity of resources, we have to make ________
Tradeoffs: more of one thing means less of another
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5Resources
Resources are the inputs or ________________________used to produce commodities and services that people want
Natural resources: land, oil reserves earns rent
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Labour: human effort, time earns wages Capital: human creations used to produce goods and services e.g. tools, machinery earns interest Entrepreneurial ability: ideas, ability to create and organise a firm earns profit
Economics
Economics is the study of how ________ agents (individuals, firms, government, society) make choices and how those choices ________________
Rational means acting in one's own self-interest e g
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Rational means acting in one s own self-interest e.g. firms want to maximize profits or minimize costs, society wants to maximize welfare
So how do we study Economics?
Abstraction, Theory and Models
The real world is very complicated Need for simplification and abstraction
Different models are adequate for different problems
A non economic example
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A non-economic example You have a foreign friend visiting Singapore for a day
You are currently in your Introductory Econ class and have limited time to show your friend around
You would however like to have some dim sum together before rushing to the library to do homework
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6Analogy with the Economic Problem
Wants:
Scarcity:
Tradeoffs:
spend time with your friend
limited time
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Choice:
Options Benefit Cost1 Skip class Have fun Dont learn Econ2 Ignore friend Learn about Econ Lose a friend3 Friend comes to SMU You save time Friend might get lost
friend comes to visit you at SMU
A Non Economic Model
Aim: Due to your limited time, it is up to your friend to come and join you at SMU
Problem: How to get to SMU?
Model: A map
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Model: A map
Issue: Which type of map?
From the big picture to the specifics
From the specifics to the big picture
Satellite Image of Singapore
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7A General Model: Map of Singapore
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A More Specific Model: Map of SMU
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Micro and Macro
Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.
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Macroeconomics is the study of the performance of the national and global economies.
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8Microeconomics
How do individuals make decisions?
Shall I buy a house or a car?
How may hours should I work in a day?
H d fi k d i i ?
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How do firms make decisions?
How many workers to employ?
How much to produce?
How does the government make decisions?
Interaction between Markets
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Economic Model
An Economic model is a description of some aspect of the economy
It includes only those features that are needed for the purpose at hand
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E.g. in our non-economic example, a map of SMU was a more appropriate model as opposed to the satellite picture of Singapore
Ceteris Paribus: if all other things remain the ____ To focus on some aspect of the economy, we have to be
able to ignore the other details
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9The Scientific MethodIdentify the question
Specify assumptions
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Formulate a hypothesis
Test the hypothesis
Positive and Normative Statements
A positive statement is a ________ statement Predictions from economic models are testable against
facts
E.g. A rise in income taxes will lead to a lower supply
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of labour
A normative statement is a statement about ______ ________ or ________
Not testable since they express an opinion
E.g. We should increase income taxes
Some Economic Terminology Goods: commodities that people value and produce to satisfy wants
Services: tasks performed for people e.g. haircuts, babysitting
Agent: an entity who makes choices in the economy e.g. people, firms
Consumer: an agent who wants or demands goods or services
i di id l h b di i f di
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An individual who buys dim sum is a consumer of dim sum
A firm which employs workers is a consumer of labour services
Supplier: an agent who provides goods or services
An individual who supplies labour hours
A firm which supplies commodities
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Class Exercise 1
Assignment1. Think of an issue in your everyday life
2. Provide the analogy to economics in terms of wants scarcity of resources trade offs
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of wants, scarcity of resources, trade-offs and choice
3. Try to come up with an adequate model to study your issue
You can discuss with your neighbour
Production Possibilities and Opportunity Cost
P d i P ibili i
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Production Possibilities
Production Possibility Frontier
Opportunity Cost
Production Possibilities
Scarcity: the quantities of goods and services that we can produce are limited by available resources and technology
Th t f d ti ibiliti h th
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The set of production possibilities shows us the combination of goods and services that can be produced given available resources and technology
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Production Possibility Frontier
The production possibilities frontier (PPF) is the ________ between those combination of goods and services that can be produced and those that cannot
Production efficiency: the PPF illustrates the
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combinations of goods and services that can be produced at the ________ possible costs
Trade-off: producing more of one good means producing less of another
Diagrammatic Illustration of PPF
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Numerical Example 1
Two goods: rice and meat
One factor of production: 40 hours of labor available
Productivity and labor requirement:
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Kg per hour Hours per kgRice 0.1 10Meat 0.05 20
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Numerical Example 1 Contd
Production possibilities with 40 hours of labour:
40 hours on rice0 hours on meat
20 hours on rice20 hours on meat
0 hours on rice40 hours on meat
Rice 4 2 0
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If I devote 40 hours on rice, I can produce 4kg of rice and 0kg of meat
If I devote 20 hours on each, I can produce 2kg of rice and 1kg of meat
If I devote 40 hours on meat, I can produce 0kg of rice and 2kg of meat
Meat 0 1 2
Numerical Example 1 ContdMeat
2
Production Possibility FrontierRiceMeat 5.02
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1Production possibility set
Opportunity Cost
The slope of the PPF is negative because more of one good means less of another
The opportunity cost of a good or an action is the ________ valued ________ forgone
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The slopes of the PPF are the negative of the opportunity costs
actioncurrent in gain ealternativ luedhighest vain loss OC
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PPF and Opportunity Cost
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Numerical Example 1 Contd
The opportunity cost of 1 kg of meat is 2 kg of rice
ricein gain meatin loss OCrice meatin gain
ricein loss OCmeat
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The opportunity cost of 1 kg of rice is 0.5 kg of meat
Opportunity CostRice 0.5 kg of meatMeat 2 kg of rice
Gains from Trade
Absolute Advantage
C i Ad
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Comparative Advantage
Specialisation
Gains from trade
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Specialization
Individual agents seldom produce for themselves everything they use
Instead, they ________ in the production of certain goods and then ________
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Export goods that they produce
Import goods produced by others
Specialization and trade enable individuals to ________ consumption relative to the case where they try to be self-sufficient
Absolute and Comparative Advantage
A person has an absolute advantage in an activity if that person can ______________ than anyone else given the same amount of resources
A person has a comparative advantage in an
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activity if that person can perform the activity at a _____________________ than anyone else
Note that it is possible for a person to have an absolute advantage in an activity but not a comparative advantage in that activity
Numerical Example 2 Two individuals: Mary and Tom
Two goods: rice and meat
Each individual has one factor of production: 40 hours of labor available
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Productivity and labor requirements:
Mary: kg per hour Tom: kg per hourRice 0.1 0.125Meat 0.05 1
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Numerical Example 2 Contd
Tom has an absolute advantage in both production of rice and meat
Production possibilities with 40 hours of labor:
Mary Tom
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Mary Tom40 hours on rice
20 hours on each
40 hours on meat
40 hours on rice
20 hours on each
40 hours on meat
Rice 4 2 0 5 2.5 0Meat 0 1 2 0 20 40
Meat
40
Toms Production possibility frontier
Marys Production possibility frontier
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2
4 5
Numerical Example 2 Contd
Opportunity costs:
Mary TomRice 0.5 kg of meat 8 kg of meatMeat 2 kg of rice 0.125 kg of rice
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Mary has a comparative advantage in rice
Tom has a comparative advantage in meat
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Numerical Example 2 Contd
Notice that even though Tom has an absolute advantage in both rice and meat, he has a comparative advantage only in meat
Each individual needs to specialize in the production
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of the product where he/she has a comparative advantage
Mary needs to specialize in rice production
Tom needs to specialize in meat production
Numerical Example 2 Contd
Suppose that under self-sufficiency, Mary devotes 20 hours to production of each
Tom devotes 8 hours to production of rice and 32 hours to production of meat
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Consumption in kg under self-sufficiency:Mary Tom
Rice 2 1Meat 1 32
Numerical Example 2 Contd
A potential outcome with trade:
Mary TomProduce Trade Consume Produce Trade Consume
Rice 4 -1.5 2.5 0 +1.5 1.5M 0 6 6 40 6 34
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Relative price: 1 kg of rice = 4 kg of meat
Gains from trade: with trade, both parties can consume more of both goods than under self-sufficiency
Meat 0 +6 6 40 -6 34
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Meat
40
Toms Production possibility frontier
Marys Production possibility frontier
Marys Consumption possibilities at
24
Toms Consumption possibilities at 4
meat
rice
PP
4meat
rice
PP
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2
4 5
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Relative Prices In our numerical example
If 1 kg of meat cost $1, then 1 kg of rice would cost $4
meat of kg 41.56 rice of kg 1
4Price
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For trade to be beneficial to both parties, relative prices must lie between the opportunity costs
4P
meat
rice
2PP125.08
PP.50
rice
meat
meat
rice
Intuition Behind Relative Prices Recall
Mary specializes in rice due to her comparative advantage (lower opportunity cost) in rice
Tom specializes in meat due to his comparative advantage (lower opportunity cost) in meat
If relative price of rice is lower than 0 5 then Mary would have no
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If relative price of rice is lower than 0.5, then Mary would have no incentive to sell rice to Tom since the price of rice is lower than her opportunity cost of producing rice Otherwise Mary would be making a loss
Conversely, if relative price of rice is higher than 8, then Tom would have no incentive to buy rice from Mary since the price of rice is higher than his opportunity cost of producing rice Otherwise Tom would save money by producing the rice himself
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Class Exercise 2 Suppose that China can produce 160 cars per month or 400 tons of
rice per month. India can produce 160 cars per month or 200 tons of rice per month.
1. Draw the production possibility frontiers for both countries
2. What is the opportunity cost of a car in each country? What is the opportunity cost of a ton of rice in each country?
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opportunity cost of a ton of rice in each country?
3. Which country has a comparative advantage in producing cars? Rice?
4. Suppose that under self- sufficiency, each country devotes half of their resources to the production of cars and the other half to the production of rice. How many cars and tons of rice do each country produce?
5. Give an example where trade could be beneficial to both countries.
Take Home
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Main Lessons People have unlimited wants but scarcity of resources implies that they need to make choices
Economics study how agents make choices
Microeconomics focuses on the specifics or agent's individual decisions
Macroeconomics focuses on the big picture or aggregate variables
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Macroeconomics focuses on the big picture or aggregate variables
An economic model describes some aspect of the economy
Ceteris Paribus is latin for if all other things remain the same
Positive statements are testable
Normative statements are about what ought to be
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Main Lessons Contd Production possibility frontier shows the maximum combination of goods that can be produced
Opportunity cost is the highest valued alternative foregone
Absolute advantage involves comparing productivity
Comparative advantage involves comparing opportunity cost
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Comparative advantage involves comparing opportunity cost
Specialization can lead to gains from trade
For there to be gains from trade, relative prices must lie between the opportunity costs of the different agents
Next
Homework: Please refresh your maths skills! Solving a system of equation e.g.
y = 10 + x (1)
x = 50 2y (2)
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y ( )
How much is x and y?
Graphs e.g. plot equations (1) and (2) with y on the vertical axis and x on the horizontal axis.
Next Lecture: Demand and Supply