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Plan for Today

Universität Leipzig Wirtschaftswissenschaftliche Fakultät SQ 21 Introduction to Economics Alexander Fink, PhD. Plan for Today. Syllabus How to succeed in this class Vote on last lecture Starting to think like an economist. Economics.

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Plan for Today

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  1. Universität LeipzigWirtschaftswissenschaftliche FakultätSQ 21 Introduction to EconomicsAlexander Fink, PhD

  2. Plan for Today • Syllabus • How to succeed in this class • Vote on last lecture • Starting to think like an economist

  3. Economics • Economics is the study of how scarce resources are being managed in society • Human wants are unlimited and resources are scarce (even in the most affluent society) • therefore, we have to make choices • Economics as science of choice and exchange • Investigation of individual choices and their interplay

  4. Microeconomics and Macroeconomics • Micro • The study of individual decisions and of the interaction of individuals (firms, households, and the government are often treated as individual actors) • Macro • The study of economy-wide phenomena such as unemployment, inflation, growth, and business cycles.

  5. People Face Trade-Offs • There is no free lunch!! • Trade-Offs are everywhere: VS.

  6. Opportunity Cost • The cost of any activity is the value of the highest valued alternative activity forgone • Cost are always opportunity cost

  7. Decisions are Made at the Margin • People decide whether to buy an extra unit of a good or service • People decide whether to spend an extra unit of time on a certain activity • The Diamond-Water-Paradox

  8. People Respond to Incentives • People compare subjective costs and benefits of activities when making decisions 1916 2010

  9. Trade is Mutually Beneficial • All parties to a voluntary exchange expect to improve their situation

  10. The Price Mechanism Works I • Via the price mechanism resources are allocated in a decentralized fashion based on individual decisions • Resources go to the individuals with the highest willingness to pay (consumers) • Prices guide production (producers) • Prices aggregate decentralized “knowledge of time and place” (Hayek 1945) and serve as information signals

  11. The Price Mechanism Works II • The invisible hand • Guided by self-interest people serve the public by providing goods and services that other most desire • Prices signal profit opportunities • Competition exists in every social system as a result of conflict of interests in a world of scarcity • There are alternative mechanisms to allocate scarce resources: • First come first serve, dictatorship, violence, lottery, races, voting, height, hair color, …

  12. Governments Can Sometimes Improve Outcomes • Market failures: Externalities, public goods, market power (monopolies, duopolies,…) • But: Don’t forget government failures • Incentives not aligned • Knowledge problems

  13. Productivity Determines the Standard of Living • What affects productivity? • The stock of capital • Machines, buildings, infrastructure, … • Human capital • Technology • Institutions (Secure Property Rights, the Rule of Law) (North 1991)

  14. World per capita income in 1990 PPP $, regions

  15. 2008 per capita income in PPP US $

  16. Prices Rise When Governments Print Too Much Money • “Inflation is a monetary phenomenon” • High inflation => Price mechanism less effective

  17. B Phillips curve 6 A 2 4 7 Short-Run Trade-Off Between Inflation and Unemployment I Inflation Rate (percent per year) Unemployment 0 Rate (percent)

  18. 1981 1975 1980 1974 1979 1978 1977 1976 1973 1972 Short-Run Trade-Off Between Inflation and Unemployment II U.S. Inflation Rate 10 (percent per year) 8 Source: Mankiw, G. N. 2004. Principles of Economics. 6 4 2 U.S. Unemployment 0 1 2 3 4 5 6 7 8 9 10 Rate (percent)

  19. Positive vs. Normative Analysis Positive statements Normative statements Nobody should sell his kidney for money. Nobody should work for less than 15 Euros per hour. Cannabis should be legalized. . Students should not have pay for their studies. . University professors should not get tenured • If kidney sells were legal, less people would die from kidney failure. • Increases in the minimum wage lead to increases in unemployment. • If cannabis was legalized, the price of cannabis would fall. • If students paid the full price for their studies, average student quality would increase • Tenured university professors produce less output In this class, we are only interested in positive analyses!!

  20. The Science of Economics • Theory and History • Formulate theories about how the world works • Use quantitative or qualitative empirics to test theories • Reduction of complexity • Assumptions • Models

  21. Literature • Hayek, Friedrich A. 1945. "The Use of Knowledge in Society." American Economic Review 35(4): 519-530. • http://www.indiapolicy.sabhlokcity.com/debate/Notes/hayek_low.pdf • North, Douglas C. 1991. “Institutions.” The Journal of Economic Perspectives 5(1): 97-112. • http://classwebs.spea.indiana.edu/kenricha/classes/v640/v640%20readings/north%201991.pdf

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