Introduction to Economics

1. Introduction to Economics

2. How to get a finalmark • Final Test – multiplechoice • Yourpresentsatlecturesiscompulsory • but…

3. Bibliography • „Microeconomics”Prentice Hall Publishing House, June2004 ISBN: 0-13-191207-0 • Czarny B. „Podstawy Ekonomii” • Begg D., „Economics” • Friedman M. „Free to Choose” (Wolny wybór) • Mises L. „Human Action” • http://www.ioz.pwr.wroc.pl/Pracownicy/Chodak/

4. Definition of economics • What is the main purpose of economics? • Economics studies how individuals and societies use limited resources to satisfy unlimited wants.

5. Schools of economicthought • Pre-classicaleconomy - Ancienteconomicthought, Scholasticism, Mercantilism, Physiocrats • Classicalschool - focuses on the tendency of markets to move to equilibrium – Adam Smith • … • Austrianschool (Carl Menger, F.A. Hayek, Ludwig von Mises) • Keynesianschool (John Maynard Keynes)

6. AustrianvsKeynesianschools • Keynes vsHayek: roundtwo • "Fear the Boom and Bust" Hayek vs. Keynes

7. Brokenwindowfallacy • Presentation about broken window fallacy

8. The Free Lunch Myth • Milton Friedman speech aboutTheFree Lunch Myth

9. Four kinds of spending moneyby Milton Friedman

10. Fundamental economic problem • scarcity. (film) • individuals and societies must choose among available alternatives.

11. Opportunity cost • the cost of any activity measured in terms of the value of the best alternative that is not chosen (that is foregone) • has been described as expressing relationship between scarcity and choice • is assessed in not only monetary or material terms, but also in terms of anything which is of value • may be assessed in decision-making process of production. If the workers on a farm can produce either 1 million pounds of wheat or 2 million pounds of barley, then the opportunity cost of producing 1 pound of wheat is the 2 pounds of barley forgone • (Film)

12. economic cost vs accounting cost • Assessing opportunity costs is fundamental to assessing the true cost of any course of action • Economiccost=accountingcost + opportunitycost • Example: • starting capital 100 tys. PLN, • Run yourown business 1 year • Profit 25 tys. PLN

13. Rational self-interest and homo economicus • individuals select the choices that make them happiest, given the information available at the time of a decision. • Homo economicus, or Economic human, is the concept of humans, whoare rational and will always attempt to maximize their utility - whether it be from monetary or non-monetary gains.This theory stands in contrast to the concept of Homo reciprocans, which states that human beings are primarily motivated by the desire to be cooperative, and improve their environment.

14. Economic goods, free goods, and economic bads • economic good (scarce good) - the quantity demanded exceeds the quantity supplied at a zero price. • free good - the quantity supplied exceeds the quantity demanded at a zero price. • economic bad - people are willing to pay to avoid the item

15. Factors of production – goods needed to produce another goods • land • natural resources, the “free gifts of nature”, not processed goods • labour • the contribution of human beings • capital • machines, buildings, tools, plant and equipment • “financial capital”is used to buy non-financial capital • (film1) • (Film2)

16. Resource payments Economic Resource Resource payment land rent labour wages capital interest

17. Information economics or the economics of information • Branch of microeconomic theory that studies how information affects an economy and economic decisions. • Information has special characteristics. • It is easy to create but hard to trust. • It is easy to spread but hard to control. • It influences many decisions. • You can’t estimate it’s value before getting to know • These special characteristics (as compared with other types of goods) complicate many standard economic theories.

18. Positive and normative analysis • positive economics • attempt to describe how the economy functions • relies on testable hypotheses • normative economics • relies on value judgements to evaluate or recommend alternative policies • often used by politicians (film)

19. Economic methodology • scientific method • observe a phenomenon, • make simplifying assumptions and formulate a hypothesis, • generate predictions, and • test the hypothesis.

20. Simplifying assumptions • Cēterīs paribus(Latin phrase), literally translated as "with other things the same." It is commonly rendered in English as "all other things being equal." • abstraction in economics • used to simplify reality (film)

21. Logical fallacies • Hasty generalization • occurs when it is incorrectly assumed that what is true for each and every individual in isolation is true for an entire group. • post hoc, ergo propter hoc fallacy (association as causation) • occurs when one incorrectly assumes that one event is the cause of another because it precedes the other. e.g. the winter was rather mild, in spring the price of oil was very high, so we can assume: when the winter is mild, the price of oil increases

22. Microeconomics vs. macroeconomics • microeconomics - the study of individual economic agents and individual markets • macroeconomics - the study of economic aggregates, studies economy as a whole

23. Algebra and graphical analysis • direct relationship (film)

24. Direct relationship

25. Inverse relationship

26. Independent relationship

27. Linear relationships • A linear relationship possesses a constant slope, defined as:

28. Linear relationships (continued) • If an equation can be written in the form: Y=mX+b, then: m = slope, and b = Y - intercept.

29. The art of economics „The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Henry Hazlitt

30. „The Forgotten Man”by William Graham Sumner • As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X. As for A and B, who get a law to make themselves do for X what they are willing to do for him, we have nothing to say except that they might better have done it without any law, but what I want to do is to look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of. He is the victim of the reformer, social speculator and philanthropist, and I hope to show you before I get through that he deserves your notice both for his character and for the many burdens which are laid upon him.

31. Literature: • www.oswego.edu/~kane/eco101.htm • www.wikipedia.org • www.investopedia.com • Czarny B. Podstawy ekonomii

32. World’sSmallestPolitical Quiz

34. Exercises • http://ecedweb.unomaha.edu/Dem_Sup/econqui2.htm • This picture shows a demand curve for oranges in a given locality. Please, consider the following events and then illustrate on the chart the impact they would have on the demand: A) the consumer incomes increased B) the price of tangerines increased C) the price of knives which are used to peel oranges decreased D) orange juice became very trendy E) The wife of the prime minister became a shareholder of a few fruitswholesalers and, incidentally the government imposed an obligatory programme „the orange for every child” 2. This picture shows a supply curve for bread in a given locality. Please, consider the following events and then illustrate on the chart the impact they would have on the supply : A) VAT rate grew B) The bread production was subsidized C) The bread baking technology was improved D) The price of flour decreased E) The bakers salaries grew

35. Exercieses • Let there be a supply curve of petrol: Q=P and demand curve: Q=-P+20. A new tax is introduced: every single litre of petrol is taxed with a fixed sum of 2 PLN when sold. Illustrate the impact of the new tax on the chart. Calculate the volume of production in litres before the tax was introduced and after the introduction of the tax. Calculate the new price. Calculate budget income due to the new tax. • Let there be a supply curve: Q=P-1, demand curve: Q=-P+5. The government subsidizes the production of beef – every kilogram is subsidized with an extra zloty. Calculate the equilibrium price before and after Introduction of the subsidy. How much will the taxpayer have to lay out to cover the cost of the new subsidy?

36. Questions to the film • What are thenames of thetwo major economics schools? • Who are the statists? • According to the Austrian School, what are the causes of economic problems? • How can you characterize the market process? • What would happen if every single person got a million dollars? • Why are minimum wages not protecting the most vulnerable workers?