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Introduction to Economics

Introduction to Economics. Lectures&Seminars/ DeianDoykov/ SityU/ Foundation Year/ Semester 1-2008. Introduction to Economics. Basics: The Economy is us. “Economics is the study of mankind in the ordinary business of life” Alfred Marshall , Principles of Economics, 1890 Week 2.

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Introduction to Economics

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  1. Introduction to Economics Lectures&Seminars/ DeianDoykov/ SityU/ Foundation Year/ Semester 1-2008

  2. Introduction to Economics Basics: The Economy is us “Economics is the study of mankind in the ordinary business of life” Alfred Marshall, Principles of Economics, 1890 Week 2 2 October 07

  3. The Economy is us Economics and the economy • What is economics? • Economic issues • The nature of economic choice • The role of the market • Positive and normative economics • Micro and macro - economics • Tools of economic analysis 3 October 07

  4. What is economics? Economics The study of the choices made by people who are faced with scarcity. 4 October 07

  5. What is economics? Six key principles that are central to all economic theory principle of opportunity cost the marginal principle the principle of diminishing returns the spillover principle the reality principle the principle of comparative advantage 5 October 07

  6. Principle of opportunity cost The principle of opportunitycost states that the opportunity cost of something is what you sacrifice to get it. 6 October 07

  7. The marginal principle The marginal principle states that any activity should be increased as long as the marginal benefits of the additional activity exceed the marginal costs. 7 October 07

  8. The principle of diminishing returns The principle of diminishing returns states that, in the short run, if use of one input is increased while all others are held constant, production will eventually increase at a decreasing rate. 8 October 07

  9. The spillover principle The spillover principle states that certain activities create spillover costs or spillover benefits that exceed the costs or benefits to the producers or consumers of that activity. 9 October 07

  10. The reality principle The reality principle states that what matters to economic agents is the real value or purchasing power of money or income, not its face or nominal value. 10 October 07

  11. Principle of comparative advantage The principle of comparative advantage states that total output can be increased if each of two parties specializes in producing that product for which its opportunity cost is lower 11 October 07

  12. What is economics? The methodology of economics: The use of assumptions to simplify (the ceteris paribus assumption) 12 October 07

  13. Economic issues How society allocates scarce resources ? # Oil price shocks (A resource is scarce if the demand at a zero price would exceed supply) # Income distribution (ID) (ID tells us how income is divided between different groups or individuals 13 October 07

  14. The nature of economic choice Factors of production: Resource inputs used to produce goods and services, e.g. land, labour, capital. Opportunity cost: The most desired goods and cervices that are forgone in order to obtain something else. Production possibilities: The alternative combinations of final goods and cervices that could be produced in a given time period with all available resources and technology. 14 October 07

  15. The nature of economic choice Law of increasing opportunity cost: In order to get more of any good in a given time period, society must sacrifice ever increasing amounts of other goods. Law of diminishing returns: Each extra worker adds less to output than the previous extra worker added 15 October 07

  16. Making a fuller use of resources x Production inside the production possibility curve y v Food O Clothing 16 October 07

  17. Growth in potential output Now Food O Clothing 17 October 07

  18. Growth in potential output 5 years’ time Food Now O Clothing 18 October 07

  19. Growth in potential and actual output Food O Clothing 19 October 07

  20. Growth in potential and actual output y x Food O Clothing 20 October 07

  21. The role of the market How choices are made? Market An arrangement that allows buyers and sellers to exchange things. Market mechanism The use of market price and sales to signal desired output 21 October 07

  22. The role of the market Command economies # government failure Free markets # the invisible hand Mixed economies # market failure 22 October 07

  23. Positive and normative economics Normative EconomicsAnalysis that answers the question, What ought to be? Positive EconomicsAnalysis that answers the question, What is or what will be? 23 October 07

  24. Micro and macro - economics Microeconomics The study of the choices made by consumers, firms, and government, and how these decisions affect the market for a particular good or service. Macroeconomics The branch of economics that looks at a nation's economy as a whole. 24 October 07

  25. Tools of economic analysis • Economic data • Index numbers • Nominal and real variables • Economic models • Models and data • Diagrams , lines, and equations • Theories and evidence 25 October 07

  26. The business cycle Potential output 3 4 2 Actual output 1 National output 3 4 2 1 O Time 26 October 07

  27. The business cycle Trend output Potential output National output Actual output O Time 27 October 07

  28. Growth rates in selected industrial countries UK Annual growth rate (%) 28 October 07

  29. Growth rates in selected industrial countries UK Annual growth rate (%) 29 October 07

  30. Growth rates in selected industrial countries UK France Annual growth rate (%) 30 October 07

  31. Growth rates in selected industrial countries UK France Annual growth rate (%) 31 October 07

  32. Growth rates in selected industrial countries Germany UK France Annual growth rate (%) 32 October 07

  33. Growth rates in selected industrial countries Germany UK France Annual growth rate (%) 33 October 07

  34. Growth rates in selected industrial countries Germany UK USA France Annual growth rate (%) 34 October 07

  35. Growth rates in selected industrial countries Germany UK USA France Annual growth rate (%) 35 October 07

  36. Growth rates in selected industrial countries Germany UK Japan USA France Annual growth rate (%) 36 October 07

  37. Growth rates in selected industrial countries Germany UK Japan USA France Annual growth rate (%) 37 October 07

  38. What economics is all about ? Ends vs. Means Macro vs. Micro Theory and Reality 38 October 07

  39. The Economy is us Questions for discussions: 1. The best things in life are free 2. What do economists really do 3. If I had a million dollars … 4. If we can put a man on the moon why can’t we … 5. Personal budgeting and the opportunity cost of choices 6. The gains from international trade 39 October 07

  40. Introduction to Economics Assignment for week # 3: Essay question: What is the opportunity cost of a university education ? 40 October 07

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