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Introduction to the Course

Introduction to the Course. Instructor : Clint Levitt Email : cjl.eco@cbs.dk Phone : Office: Communication : Unfortunately , I do not speak french , so all emails must be written in english. Session 1. What do Economists Study?. Objective 1. Introduce the study of economics

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Introduction to the Course

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  1. Introduction to the Course • Instructor: Clint Levitt • Email: cjl.eco@cbs.dk • Phone: • Office: • Communication: Unfortunately, I do not speak french, so all emails must bewritten in english.

  2. Session 1 What do Economists Study?

  3. Objective 1 • Introduce the study of economics • How to think like an economist • Key Concepts • Scarcity and Tradeoffs • Opportunity Costs • Models • Introduce the first model: Production Possibility Frontier

  4. Objective 2 • Supply and Demand Models • Key Concepts • Markets • Prices • Law of Supply • Law of Demand • Excess Supply and Excess Demand • Equilibrium

  5. What is the Study of Microeconomics? • Howchoicesare made under the condition of scarcity. • Example 1: Income • Example 2: Time • OTHER EXAMPLES?

  6. How to StudyTheseChoices? Costbenefitanalysis • Compare the benefitsagainst the costs. Question: Should I do x? • Answer: If and onlyif B(x)>C(x). • Example: Skiing

  7. Practice Problem #1 • Mike has a flexible summer job. He workseveryday but is allowed to take time offanytimehewants. • His friendsuggeststheytakeoffwork to go to the beach. It willcostthem $20 each to get to the beach. • Mike’spreferencesaresuchthat a day at the beach is worth $45. • Mike alsolikes his job and wouldbewilling to pay $10 per day just to work. • If mikeearns $10 ifheworks, shouldhe go to the beach? • Howabout is heearns $15? • Howaboutifheearns $20?

  8. Practice Problem #2 • Dana has purchased a $40 dollar ticket to a rock concert. • But, on the day of the concertshe has beeninvited to a party for a friend. • Shecannotattendboth. If she had knownabout the party, beforebuying the ticket, shewould have chosen the party. • If she is rational, willshe go to the party? • Hint: Thinkabout the costs and benefits at the time of making the decision!

  9. Models • What is a Model? An economic model is a simplified framework designed to illustrate complex processes • We use models to focus on specific processes that we are interested in understanding. • Models are necessarily a simplification of reality.

  10. Production Possibility Curve • The production possibility curve • what the curve shows The various combinations of outputs that can be produced with fixed inputs of production, holding technology fixed. • microeconomics and the production possibility curve: • choices and opportunity cost • increasing opportunity cost

  11. Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m A production possibility curve Units of food (millions) Units of clothing (millions)

  12. A production possibility curve a Units of food Units of clothing (millions) (millions) a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

  13. A production possibility curve b Units of food Units of clothing (millions) (millions) 8m 0.0 b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

  14. A production possibility curve c Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m c 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

  15. A production possibility curve Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)

  16. A production possibility curve Units of food (millions) Units of clothing (millions)

  17. w A production possibility curve x Units of food (millions) Units of clothing (millions)

  18. The Production Possibility Curve • The production possibility curve • What is the interpretation of the shape of the curve? • The slope of the curve is the marginal rate of transformation. • It describes the changes in the opportunity costs of production • MRT – amount of one good that must be given up to produce one additional good.

  19. 1 1 Increasing opportunity costs x y Units of food (millions) Units of clothing (millions)

  20. 1 1 2 1 Increasing opportunity costs x y Units of food (millions) z Units of clothing (millions)

  21. Production Possibility Curve • The production possibility curve • what the curve shows • microeconomics and the production possibility curve: • choices and opportunity cost • increasing opportunity cost

  22. Production Possibility Curve • The production possibility curve • macroeconomics and the production possibility curve: • production within the curve

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

  24. Production Possibility Curves • The production possibility curve macroeconomics and the production possibility curve: • production within the curve • shifts in the curve

  25. Growth in potential output Now Food O Clothing

  26. Growth in potential output 5 years’ time Food Now O Clothing

  27. Growth in potential and actual output Food O Clothing

  28. Growth in potential and actual output y x Food O Clothing

  29. Practice Problem #3 A country is capable of producing the following combinations of goods and services per period of time, assuming that it makes full use of its resources of land, labour and capital. Sketch the ProductionPossibilityCurve.

  30. Practice Problem #3 Continued • Is it possible for this country to produce the following combinations of goods and services? a) 80 units of goods and 50 units of services b) 70 units of goods and 90 units of services c) 40 units of goods and 100 units of services

  31. Practice Problem #3 Continued • What is the opportunity cost (in terms of services) of producing 20 extra units of goods when this country is initially producing: • A) 60 units of goods • B) 20 units of goods

  32. DiscussionQuestion • Whathappens to the productionpossibilitycurve, ifthere is a general increase the efficiency of production?

  33. Microeconomics • Microeconomics describes trade-offs that must be made due to scarcity. • We focus on • Consumer Theory • Theory of the firm

  34. Microeconomics • Microeconomics is also concerned with the role of prices. • How prices are determined? • What is the central role of markets?

  35. Economic Systems

  36. Classifying economic systems Totally planned economy Totally free-market economy

  37. Classifying economic systems Mid 1980s Hong Kong N. Korea UK China Poland Cuba France USA Totally planned economy Totally free-market economy

  38. Classifying economic systems Mid 1980s Hong Kong N. Korea UK China Poland Cuba France USA Totally planned economy Totally free-market economy China Cuba N. Korea Poland France USA UK China (Hong Kong) Mid 2000s

  39. ECONOMIC SYSTEMS • The command economy • features of a command economy • planning: • consumption and investment • matching of inputs and outputs • distribution of output

  40. ECONOMIC SYSTEMS • Advantages of a command economy • high investment, high growth • stable growth • social goals pursued • low unemployment • Problems of a command economy • problems of gathering information • expensive to administer • inappropriate incentives • shortages and surpluses

  41. ECONOMIC SYSTEMS • The free-market economy • demand and supply decisions • the price mechanism: • shortages and surpluses • equilibrium price • response to changes in demand and supply

  42. Sg ­ Dg shortage (Dg > Sg) Pg ­ ­ Dg ¯ The price mechanism: the effect of a rise in demand Goods Market until Dg = Sg

  43. Sf ­ Sg Df shortage (Df > Sf) Pf ­ ­ ­ Df ¯ The price mechanism: the effect of a rise in demand Goods Market Sg ­ Dg shortage (Dg > Sg) Pg until Dg = Sg ­ ­ Dg ¯ Factor Market until Df = Sf

  44. ECONOMIC SYSTEMS • The free-market economy • demand and supply decisions • the price mechanism: • shortages and surpluses • equilibrium price • response to changes in demand and supply • the interdependence of markets

  45. The price mechanism: the effect of a rise in demand Goods Market Sg ­ Dg shortage (Dg > Sg) Pg until Dg = Sg ­ ­ Dg ¯ Factor Market Sf ­ Sg Df shortage (Df > Sf) Pf ­ ­ ­ until Df = Sf Df ¯

  46. ECONOMIC SYSTEMS • Advantages of a free-market economy • transmits information between buyers and sellers • no need for costly bureaucracy • incentives to be efficient • competitive markets responsive to consumers

  47. ECONOMIC SYSTEMS • Problems of a free-market economy • competition may be limited: problem of market power • inequality • the environment and other social goals may be ignored • The mixed economy

  48. Introducing Economics The Nature of Economic Reasoning

  49. THE NATURE OF ECONOMIC REASONING • Economics as a science • models in economics • building models • using models • assessing models • Economics as a social science • difficulties in conducting controlled experiments in many parts of the subject • problems of predicting human behaviour

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