Introduction to Economics Why study economics Our life

Introduction to Economics

Why study economics? ─ Our life is a variety of economic relations among others, so economics is a way to understand them. ─ Understand international relations and trade. ─ Understand national policy. ─ Get economic type of thinking – cost-benefit analysis. 12/3/2020 2

Think as economist! ─ How can number of divorces contribute to economic welfare (i. e. well-being)? 12/3/2020 3

1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 12/3/2020 4

Scarcity ─ Our needs and wants are unlimited ─ They have different intensity ─ They change over time ─ Goods and services satisfy our wants and needs ─ Our resources for their production are limited. vs. 12/3/2020 5

1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 12/3/2020 9

Production factors ─ Labor ─ Land ─ Capital ─ Entrepreneurship 12/3/2020 10

1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 12/3/2020 11

Limited sources vs. Unlimited needs ─ Scarcity is the reason for basic economic questions: ─ 1. What to produce? ─ 2. How to produce? ─ 3. For whom to produce? ─ Two marginal economic systems of solving these problems exist: ─ Command economy model ─ Market economy model 12/3/2020 12

Command model: basics ─ Basic economic problems in the command economics: ─ “What? ” problem is solved by the planning authorities and the statistics bureau. ─ “How? ” problem deals with the functions of respective ministries. ─ “For whom? ” – distribution of income is comparatively equal among all the economic agents. All the property belongs to the state, institution of personal proprietorship does not exist. 12/3/2020 13

Command model: pro and contra ─ Positive features: ─ Resources aren’t wasted on competitive duplication. ─ Planned distribution – same standards of living for all the people. ─ Prices are stable, etc. ─ Negative features: ─ Political and social complexity of administrating this system. ─ The recourses tend to be distributed in insufficient way. ─ It is impossible to plan the response for every economical agents’ need. ─ etc. 12/3/2020 14

Market model: basics ─ Basic economic problems in the market economics: ─ “What? ” and “How? ” problems are solved by market: prices, supply and demand mechanisms. ─ “For whom? ” – distribution of income is determined by the ownership institute. 12/3/2020 15

Basic economic agents ─ Households ─ Firms ─ State ─ Rest of the World 12/3/2020 16

Market model: pro and contra ─ Positive features: ─ Automatic and efficient allocation of recourses without the need of any planning. The demand is the reason for supply. ─ The economy provides what the consumer want. The consumer “votes” and shows his preferences by spending money. ─ All the economic agents have a particular interest in accurate and efficient system functioning. ─ Negative features: ─ Market model tends to be inefficient in solving social problems. Low income means the respectively lower life level. ─ Some significant parts of social reality “fall out” from the interest of market economy, e. g. environment protection. 12/3/2020 17

Economic models of the modern world ─ In the end, what we used to call “the contemporary market oriented economy model” is the mix of… ─ … the most important features of market model, we have discussed… ─ …and governmental interventions in certain spheres of vital importance. ─ The participation of the government is necessary for providing conditions for social oriented market functioning. 12/3/2020 18

Where’s your country at on the scale? ─ Economies of the contemporary worlds’ countries have the features of both models. ─ “Tastes differ”: some economies have more command model features, others more market oriented. But both have positive and negative traits. Command 12/3/2020 Market 19

1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 12/3/2020 20

What Economics Is All About ─ Scarcity refers to the limited nature of society’s resources. ─ Economics is the study of how society manages its scarce resources, including ─ how people decide how much to work, save, and spend, and what to buy ─ how firms decide how much to produce, how many workers to hire ─ how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs CHAPTER 1 TEN PRINCIPLES OF ECONOMICS

What is “Economics”? ─ Economics: ─ Analyzes how individuals, firms and states use their scarce resources in order to satisfy their unlimited needs ─ Collects, analyzes and interprets the related data ─ Develops theories and laws trying to explain these phenomena and predict the future trends ─ Economics = science about wealth. ─ How to use scare resources, how to distribute them among society members and how to use them. 12/3/2020 22

Positive and normative economics ─ Positive economics – describes reality. ─ „what is“ ─ Normative economics – describes how the reality should look like. ─ „what ought to be“ 12/3/2020 23

Two levels of economics ─ Microeconomics ─ is focused on analysis of market structures, consumer behaviour and company behaviour (production, costs, prices of input / output, profit, investments). ─ Macroeconomics theory ─ acquaints us with macroeconomics aggregates, problems of economic growth, money supply, unemployment and inflation. In the end we will also be able to understand monetary and fiscal policy of state, theory of international market and so on. 12/3/2020 24

Microeconomics and Macroeconomics ─ Microeconomics is the study of how households and firms make decisions and how they interact in markets. ─ Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth. ─ These two branches of economics are closely intertwined, yet distinct: they address different questions. CHAPTER 2 THINKING LIKE AN ECONOMIST

1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 12/3/2020 26

Opportunity costs ─ Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision. vs. We can go ride a bike 12/3/2020 We can go to work for USD 6, 50 an hour. 27

─Should Bill Gates move his lawn? 12/3/2020 28

1. Scarcity 2. Production factors 3. Market system 4. Economics as a science 5. Opportunity costs 6. Economic models 12/3/2020 29

Economics methods ─ Observation ─ Statistical analysis ─ Economic modeling ─ Experiment ─ Cause-effect type of models War in Iraq 12/3/2020 Supply of oil goes down Gas prices go up Transportation costs go up Food prices go up 30

Economic modeling ─ Model is a simplified reality ─ Mathematic models reflect trends, however they aren’t capable of reflecting the whole range of elements making up a human nature 12/3/2020 31

Assumptions & Models ─ Assumptions simplify the complex world, make it easier to understand. ─ Example: When studying international trade, we might assume the world consists of two countries and two goods. Very unrealistic, but simplifies the problem and yields useful insights about the more complicated real world. ─ Economists use models to study economic issues. A model is a highly simplified representation of a more complicated reality. CHAPTER 2 THINKING LIKE AN ECONOMIST

Some Familiar Models A road map CHAPTER 2 THINKING LIKE AN ECONOMIST

Some Familiar Models A model of human anatomy from high school biology class CHAPTER 2 THINKING LIKE AN ECONOMIST

Some Familiar Models A model airplane CHAPTER 2 THINKING LIKE AN ECONOMIST

Our First Model: The Circular-Flow Diagram ─ The Circular-Flow Diagram: A visual model of the economy, shows how dollars flow through markets among households and firms. ─ Includes two types of “actors”: ─ households ─ firms ─ Includes two markets: ─ the market for goods and services ─ the market for “factors of production” CHAPTER 2 THINKING LIKE AN ECONOMIST

m ay P rg o f d de n a s od o g m De Sa Market of goods Sup le pl s ie d go od s Expen ditures ts n e ds o o Goods Market mechanism Taxes 12/3/2020 Prod. factors Households W ag La es nd , r , L en ab ts or , C a ap tes ita l Transfers Expend itures Transfers d. o pr r o rs s f rs o t t en cto fac m fa n ay cti u d P o Pr Production factor market o Firms

Economic laws ─ Law of Downward-sloping Demand ─ When the price of commodity raises (given other conditions do not change – ceteris paribus) consumers tend to buy less of the commodity. Accordingly, when the price is lowered, other things equal, the quantity demanded increases. P 12 10 8 6 Budget = USD 10 4 2 1 12/3/2020 2 3 4 5 6 Q 38

Ceteris paribus principle ─ If the other conditions change we switch from the initial model to the totally new model. ─ This doesn’t mean that the considered economic law doesn’t work – it works given other factors remain equal. P 12 10 8 6 Budget = USD 5 4 2 12/3/2020 1 2 3 4 5 6 Q 39

Thank you for attention!