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Lecture 1 Basics of Economics & Elasticity

Lecture 1 Basics of Economics & Elasticity. Dr. Rajeev Dhawan Director. Given to the EMBA 8400 Class January 4, 2008. Course Objective & Teaching Philosophy. Practical Course to Comprehend the Economic Environment so that Managers can make their Decisions

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Lecture 1 Basics of Economics & Elasticity

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  1. Lecture 1 Basics of Economics & Elasticity Dr. Rajeev Dhawan Director Given to the EMBA 8400 Class January 4, 2008

  2. Course Objective & Teaching Philosophy • Practical Course to Comprehend the Economic Environment so that Managers can make their Decisions • Philosophy is that Micro Sectors Add Up to a Macro Environment • Optimal Blend of Economics and Real World Experience/Common Sense • Train You to Critically Evaluate and Interpret Business Press Writings

  3. Course Layout • First Week (1&2) - Basic Microeconomics • Second Week (3&4) – Basics of Macroeconomics and Basic Workings of an Economy with the Help of a “Basic” Macromodel that can Perform Real-Life Fiscal And Monetary Experiments • Third Week (5&6) – Wrap up with Model Training and Group Project Presentations • Field Trip to the Economic Forecasting Conference on Feb. 27th BONUS)

  4. Background Articles • My Economics • Why Journalists Can't Add • Where Presidents Have No Power • Their Money Our Strength • How to Stop Relatives from Bragging About their Big Profits in Real Estate • Economic Hypochondria

  5. Grading Policy • 50% 2 Quizzes in Class • 25% Group Presentations on a Selected Industry • 25% Take Home Final Exam • Macroeconomic Model Exercise 25% Bonus - Economic Forecasting Conference

  6. Group Presentations The objectives of this group project are : • To help you bridge the gap between the economic theory and models discussed in class and the “real world” • To confront the problems of trying to find data which are appropriate for the questions under consideration and to deal with the problems of incomplete information • To showcase your oral and written communication skills • To identify how the problems faced and the decisions made by other firms are similar to your own.

  7. Suggested Industries 1.Wireless Communication 2. Networking & Security Systems 3. Oil Industry 4. Healthcare Industry 5. Hospitality Industry 6. Paper & Pulp Industry 7. Utility & Power Industry 8. Consumer Products 9. Insurance 10. REIT (Real Estate Investment Trust)

  8. Macro Framework • Households: Consume & Work • Firms: Production & Investment • Government: Money Supply, Taxes, Expenditures • Foreign Sector: Exports, Imports & Exchange Rate

  9. Macroeconomic Model For Teaching • Section 1: A Model Simulation Approach to Macroeconomics • Section 2: Classification of Equations • Section 3: Glossary of Variables • Section 4: Listing of Equations in the Integrated Macro Model • Section 5: Flow Diagram of Integrated Macro Model • Section 6: Policy Experiments with Integrated Macro Model • Section 7: Guidelines to Use the Model

  10. GLOSSARY OF VARIABLES

  11. ~Typical Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION UNEMPLOYMENT CONSUMPTION DISPOSABLE INCOME tax rate TAX REVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  12. ~Typical Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION UNEMPLOYMENT CONSUMPTION DISPOSABLE INCOME tax rate TAX REVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  13. ~Typical Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION UNEMPLOYMENT CONSUMPTION DISPOSABLE INCOME tax rate TAX REVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  14. ~Typical Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION UNEMPLOYMENT CONSUMPTION DISPOSABLE INCOME tax rate TAXREVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  15. ~”New Economy” Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION Tech/Profit Opportunities STOCK MARKET UNEMPLOYMENT CONSUMPTION CONSUMPTION DISPOSABLE INCOME tax rate TAX REVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  16. ~”New Economy” Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION Tech/Profit Opportunities STOCK MARKET UNEMPLOYMENT EUPHORIA CONSUMPTION DISPOSABLE INCOME tax rate TAX REVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  17. ~”New Economy” Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION Tech/Profit Opportunities STOCK MARKET EUPHORIA UNEMPLOYMENT EUPHORIA CONSUMPTION DISPOSABLE INCOME tax rate TAX REVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  18. ~”New Economy” Macro-Model~ price level lag 1 world interest rate IMPORTS world GDP inflation lag 1 world price EXPORTS EXCHANGE RATE PRICE LEVEL NET EXPORTS money INTERESTRATE INFLATION government INVESTMENT REAL GDP EXPECTED INFLATION Tech/Profit Opportunities STOCK MARKET EUPHORIA UNEMPLOYMENT CONSUMPTION DISPOSABLE INCOME tax rate TAX REVENUES POTENTIAL GDP capital stock lag 1 investment lag 1 CAPITAL STOCK labor force

  19. Field Trip to the Forecasting Center’s QuarterlyForecast Conference on Feb. 27th!

  20. The Economic Forecasting Center at Georgia State University collects and analyzes macroeconomic data and develops procedures to forecast the national, regional and local economies. http://robinson.gsu.edu/efc/index.html

  21. What Products Do We Offer? • The Center offers: • Forecast Reports • Georgia and Atlanta (Quarterly) • Nation (Quarterly) • Southeast Indicators (Bi-Annual) • Quarterly Conferences • Sponsorships • Custom Consulting Services

  22. Quarterly Conferences • Consortium of GSU Experts and Business Executives • My Forecast Talk! • 4 Industry Speakers • Forecast Reports • Networking Breakfast, Refreshments and Lunch

  23. How to Attend Our Conferences? • It Costs Money! • $150 per Person • Institutional Discounts Available. • BUT MY STUDENTS ARE IN FOR FREE! • Check Our Website for Latest Program: www.robinson.gsu.edu/efc

  24. Introduction The 10 Principles of Economics

  25. What is Economics? • Economics is the study of how we use our scarce productive resources for consumption, now or in future. • Paul Samuelson • Resources are scarce: • Society has limited resources and therefore cannot produce all the goods and services people wish to have • Example: clean air & water • Scarcity is not poverty

  26. Basic Questions • What to produce in what quantity? • How to produce them? • When and where to produce? • For whom? • Who makes economic decisions and by what process?

  27. Basic Concepts • Opportunity Cost: Things are Scarce • Next Best Alternative • Ex: Party on Friday night vs. study for exams • Cost of Time • Ex: 1 hour wait time at the dentist

  28. Basic Concepts • Marginal Concept: At the Margin • Utility: Level of Satisfaction (here, drunkenness)

  29. Basic Concepts • Sunk/Fixed Costs: Expenditures Made that Cannot be Recovered • Example: • You bought a computer laptop for $1500 • A newer, upgraded model costs $1200 • The dealer will accept a trade in + $400 • What do you do?

  30. Winnick’s Voyage to the Bottom of the Sea WSJ; by Andy Kessler • First Mover, FCC regulated + fixed costs • Regulated utility • Price protection • You can’t lose • Traffic / use was of low economic value or cashless • Global Crossing couldn't cut prices without running the risk of either failing to cover its debt or being unable to raise more capital • Accounting Tricks…….

  31. 10 Principles of Economics • People face tradeoffs : • “No such thing as free lunch” • Give up one thing to get another –Opportunity Cost (OC) • Everything has an OC – whatever must be given up to get that item • People make decisions at the margins – increments matter • People respond to incentives – e.g. cigarette laws, communism • Free Trade is good (for everybody)

  32. 10 Principles of Economics • Markets organize economic activity - Adam Smith “Invisible Hand” • Governments can sometimes improve market outcome • A country’s standard of living depends upon its production power (productivity) • Prices rise when government prints too much money • Phillips curve – short run tradeoff between inflation and unemployment

  33. Branches of Economics • Micro: The Study of One Entity (firm, business, people) • Macro: The Study of a Collection of Things (national, aggregate)

  34. How are Theories Developed? • Decision-Makers • Firms, governments • Markets • Place where exchange takes place

  35. Who REALLY Owns that WineryTIME Magazine; by Terry McCarthy Consolidation is the Norm • 60% of U.S. wine is produced by the top five companies • Consolidation among distributors is squeezing out the medium-sized producers, who make from 100,000 to 1 million cases a year • Market is not growing • Only 10% of adults drink 86% of the wine • Fixed Costs • Some wineries do not have enough volume to get a priority from distributors

  36. Who REALLY Owns that WineryTIME Magazine; by Terry McCarthy • Reshuffling to scarce resources • He can make lots of money just by shifting more of his production - and more of his customers – from 1.5L jugs of generic red that sell for less than $5 retail to smaller bottles of $7 Merlot • The Future • The higher end is where the profits and the growth are to be found • The Italians have figured it out – how to create tastes that suit the American palate

  37. Chapter 4 Demand & Supply

  38. Some Basic Definitions • Market: a group of buyers and sellers of a particular good or service • E.g. Warren Buffet has been buying up junk bonds • E.g. Bars, parties – informal market Stock market – organized market

  39. Example of Supply & Demand • Hong Kong chicken flu scare? Price of chicken  • Mad cow disease in US? Price of beef  • Oprah bad mouths beef? Price of beef  • Amarillo farmers sue her. • SARS? (Macro issue…)

  40. Pints of Beer P QD $10.00 0 7.00 1 5.00 3 4.00 6 2.00 11 0.00 19 Demand Quantity demanded (Q): the amount of a good that buyers are willing and able to purchase at a given price (P).

  41. Market Demand versus Individual Demand • Market demand refers to the sum of all individual demands for a particular good or service. • Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

  42. The Market Demand Curve The market demand curve is the horizontal sum of the individual demand curves! When the price is $5.00, Catherine will demand 3 beers. The market demand at $5.00 will be 7 beers. When the price is $5.00, Nicholas will demand 4 beers. + = Nicholas’s Demand Catherine’s Demand Market Demand Price of Beers Price of Beers Price of Beers 5.00 5.00 5.00 4.00 4.00 4.00 13 7 4 7 3 6 Quantity of Beers Quantity of Beers Quantity of Beers When the price is $4.00, Catherine will demand 6 beers. The market demand at $4.00, will be 13 beers. When the price is $4.00, Nicholas will demand 7 beers.

  43. Graph Results • Demand curve/schedule is downward sloping and shows the relationship between price of a good and the quantity demanded • Why downward sloping? • Law of demand: Ceteris Paribus (all other things being equal) the quantity demanded falls when price rises

  44. Other Determinants of Demand • Income (I) : • I  , D   Normal Goods: car, Ferrari • I  , D   Inferior goods: bus rides, potatoes • Price of related goods • Substitutes (inversely correlated) • Compliments (directly correlated)

  45. Other Determinants of Demand • Tastes – taken as above • You get old and prefer Lincoln Town cars to sports cars • Expectations – about future • Income potential with EMBA degree  • Loss of jobs, layoffs prospects • Market Demand • More players  Increase in demand • Buy IPO’s in 90’s

  46. Shifts in Demand Curve • Variables that shift the demand curve:

  47. Increase in demand Decrease in demand Demand curve, D 2 Demand curve, D 1 Demand curve, D 3 Shifts in the Demand Curve Price of Beer Quantity of 0 Beer

  48. Supply Quantity supplied (Q): the amount of a good that sellers are willing and able to sell at a given price (P). Pints of Beer P QS $10.00 12 7.00 7 5.00 4 4.00 3 2.00 1 0.00 0

  49. Supply • Supply graph for another bar Pints of Beer P QS $10.00 8 7.00 5 5.00 4 4.00 3 2.00 1 0.00 0

  50. Determinants of Supply • Your own Price • Input Prices • Cost of bottle of beer: labor, capital, rent • Technology • Smoking laws  separation of smoking & drinking • Expectations • Future outlook

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