Introduction to Economics

1. Introduction to Economics Egor Sidorov egor.sidorov@ujep.cz

2. Course details • Course consists of: • Lectures and project. • Seminars – focused on practical application of theory. • Finalwritten test: min. 60 percent, + project, and active attendance at lectures and seminars • Contact: egor.sidorov@ujep.cz

3. Literature • MCCONNELL, C., BRUE, S. Economics. New York: McGraw-Hill, 1990-?. • SAMUELSON, P., NORDHAUS, W.Economics. New York: McGraw-Hill, 1992-?. • www: rek.ujep.cz/~sidorov

4. Course content • Introduction • Supply and Demand • Production & Cost Analysis • Theory of the Firm • Introduction to Macroeconomics • The Output of National Economics • Inflation • Unemployment • Monetary Policy • Fiscal Policy • International Trade and Economical Integration

5. 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.

6. Think as economist! • How can number of divorces contribute to economic welfare (i.e. well-being)?

7. Scarcity Production factors Market system Economics as a science Opportunity costs Economic models

8. 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.

9. Types of Goods • Consumer goods • Capital goods

10. Public and Merit goods, provided by the government • Public goods” (e.g. defense provision, etc.): • these goods are available to everyone, regardless income level, • everybody equally benefits from them. • “Merit goods” (health care, education, roads building, etc.): • not all the people tend to use them; • privately gained benefits turn out to be external benefits.

11. Production process (input) (ouput) Production

12. Scarcity Production factors Market system Economics as a science Opportunity costs Economic models

13. Production factors • Labor • Land • Capital • Entrepreneurship

14. Scarcity Production factors Market system Economics as a science Opportunity costs Economic models

15. 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

16. Command model: basics • Basic economic problems in the command economics: • “What?” problem is solved by the planning authorities and the state 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.

17. 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.

18. 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.

19. Basic economic agents • Households • Firms • State • Rest of the World

20. Market mechanism Market of goods Sales Payments for goods Supplied goods Demanded goods Expenditures Goods Taxes Taxes Stát Transfers Transfers Households Firms Prod. factors Expenditures Payments for prod. factors Wages, rents, rates Production factors Land, Labor, Capital Production factormarket

21. 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.

22. 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.

23. 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. Market Command

24. Scarcity Production factors Market system Economics as a science Opportunity costs Economic models

25. 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.

26. Positive and normative economics • Positive economics – describes reality. • „what is“ • Normative economics – describes how the reality should look like. • „what ought to be“

27. 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 balance of payments.

28. Economics methods • Observation • Statistical analysis • Economic modeling • Experiment • Cause-effect type of models

29. Scarcity Production factors Market system Economics as a science Opportunity costs Economic models

30. 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 We can go to work for USD 6,50 an hour.

31. Should Bill Gates move his lawn?

33. Scarcity Production factors Market system Economics as a science Opportunity costs Economic models

34. 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

35. 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 4 Budget = USD 10 2 2 3 Q 1 4 5 6

36. 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 4 Budget = USD 5 2 2 3 Q 1 4 5 6

37. Production Possibility Frontier - (PPF) PPF presents • law of scarcity. • economic efficiency. • economic development. • choices between public and private goods. • choices between current and future consumption, • etc. Cookies 24 20 D 16 C F 12 8 E B 4 A 2 3 Ovens 1 4 5 6

38. PPF based analysis • choices between luxury and normal goods. Luxury goods Luxury goods 22 22 B 18 18 16 16 12 12 8 8 A A 4 4 2 2 3 3 Normal goods 1 1 4 4 5 5 6 6 r. 1950: Developing country r. 2009: Developed country

39. PPF based analysis • The whole curve will move in case of change of production factors Investment goods Investment goods 22 22 18 18 Country B Country B 16 16 12 12 8 8 Country A Country A 4 4 Consumption 2 2 3 3 1 1 4 4 5 5 6 6 Expected future result Today’s choice

40. Thank you for attention! Sources: SAMUELSON, P. A., NORDHAUS, W. D. Ekonomie 18. vydání.Praha: Svoboda, 2005. KRAFT, J., RITSCHELOVÁ, I. Ekonomie pro environmentální management. Ústí n. L.: UJEP, 2003. MCDOUGAL LITTELL. Economics: Concept and Choices. Canada: McDougal Littell, 2008. Mankiw, G. Principles of Microeconomics. UK: Thomson Learning, 2003.