Economics Lecture one

1. EconomicsLecture one Basic Principles and thought processes of economics Professor Chris Wimmer October 22 2007

2. Discussion of Class Outline • Course Detail: The course Introduction to Economics intends to present the student with micro and macro economics’ basic principles and assumes the student has no prior knowledge on the subject matter. Some understanding of mathematics and calculus may be needed as a pre-requisite or at least a co-requisite. The course will use a combination of lectures, tutorials, group assignments/presentations, directed readings, and other media to educate the student. The evaluation methods will be as presented below. The text for the course will be Greg Mankiw’s Principles of Economics 3rd or 4th edition. Additional readings and journals will be directed as required. All lectures will be for two hours but may also require class discussion, student presentation, or forms of media such as video.

3. Tentative Evaluation Methods • Tutorial participation – 10% (show up) • Quizzes (3) – 36% • Group Presentation – 20% (5% peer) • Final Exam – 34 %

4. Outline of Class Rules • Be on time • Don’t sleep in class • Raise your hand to talk • There are no dumb questions • Never laugh at people • No cheating • Turn off cell. Make calls on break • If you are absent, let me know ahead

5. Economics • A working definition • Text: A study of how a society manages its resources. • Interactions of consumers and producers. • Study of the market • Scarcity causes value and need for strategic allocation

6. Part One: Ten Principles of Economics • 1. People face trade-offs • 2. Opportunity cost • 3. Rational thinking • 4. Incentives • 5. Benefits of Trade • 6. Markets and Economic Activity • 7. Government influence • 8. A Country’s Production and Living Standards • 9. Inflation • 10. Inflation and Unemployment

7. Trade offs and Opportunity Costs • Must always give something up to get something else. (Don’t forget your time is valuable too!) • E.g. Sleeping vs. Studying, Food vs. Clothes • Efficiency/Equity Trade-off  Read definitions on page 5 • Pro-growth strategy do not always reduce inequality. Increasing equity sometimes doesn’t increase total production • Taxing rich higher = less incentive to work

8. Opportunity cost • Definition: Opportunity cost is whatever is given up (forsaken) to get an item or service or anything else you want to do or enjoy • If you are have to take time off work to go to the dentist, what is the opportunity cost of a $100 visit.

9. Rational people • People try to achieve their objectives with the best of their ability • People will want more of good things and less of bad things • Firms try to achieve highest profit • Consumers try to achieve highest satisfaction

10. Marginal Changes • People make small decisions or incrementally e.g. should I go to class today, should I eat 1 more candy, should I buy another computer • Marginal cost vs. marginal benefit (revenue) • If marginal benefit > marginal cost?

11. Incentives • Something that induces a person to react • It influences your behaviour and your wants • Price is major incentive in consumers mind e.g. Price of Coke goes up….people buy more Pepsi (substitute). Pepsi buys more cans because they can sell more products e.g. Banning smoking inside = incentive to quit

12. Benefits of Trade • Allows specialization which benefits us all • Imagine no trade and you had to do everything and create everything yourself? • Countries can concentrate on what they have an advantage at and trade for things that they find hard to do or have a lack of domestically

13. Markets and Economic Activity • Markets are where trade takes place between a buyer an seller. These days it doesn’t have to be a physical place • Market economies let the ‘invisible hand’ or market forces allocate its resources. • This is said to produce the highest level of efficiency • Producers and consumers interact in a market to establish the price of goods or services and quantity produced. • Any impediments are said by most economists to reduce efficiency and total welfare

14. Market failure and Government • Adam Smith gave a few examples when governments should intervene  Market Failure  Markets fail to allocate resources efficiently  need to perform market correction • There are a number of reasons for market failures • E.g. Externalities, market power, lack of information, transaction costs, trade barriers etc

15. Read Chapter One Do Questions: Pg. 16  17 Q# 2, 5, 6, 7, 10 Pr. # 3, 4, 5, 6, 8, 9, 11, 12, 16

16. Thinking Like an Economist! • Social science? Humanity? Science? • Using models to explain everyday behavior and attempt to predict future • First step: Be smarter than all other scientists, students, and professors ; )

17. Model One: Circular-Flow Diagram • Shows the flow of money through different transactions between households (you and I) and firms (businesses) • Two markets: 1. Goods and Services 2. Factors of production • Very basic model of economy with no government or international trade

18. Model Two: Production Possibility Frontier • Shows the possible output levels for an economy given its resource and production restraints • Often times trade-offs need to be made to increase production of a good because similar inputs are used for another product • Points outside the frontier are not possible. Inside the frontier are inefficient • This model helps explain the concepts of trade-offs, opportunity costs, and efficiency • Notice that the opportunity cost changes as you move up and down the curve. Products are worth less when there are more of them already produced. • Opportunity cost = the slope of the curve

19. Macro vs. Micro Economics • Microeconomics is the study of firms and households interacting (price setting, monopoly producers) • Macroeconomics deals with the whole country’s economy (GDP, Inflation, Budget surplus)

20. Demand Curve!!! Very Important • Shows the quantity demanded by a consumer at a given price. • But will be used a lot to explain concepts and has a lot more to offer than it seems at first • Downward sloping

21. Review Questions • Pg. 36  37 Q# 2, 4, 6 • Pr. # 1, 2, 3, 4, 5, 8 • Review Chapter 2 appendix and understand graphs, variables, slope, graph shifts

22. Slope and Curves • Rise over run • Change in Y over change in X • Demand curve negative slope! • Why? • What does this mean?

23. Questions and Discussion • Hope you enjoyed your first lecture! • Office hours are Monday and Thursday 10:30 to 12:30 or by appointment • My office is on the second floor under Foreign Expert….because that’s me. • Course outline coming soon.