1. MICROECONOMICS I dr hab. Ewa Freyberg ewa.freyberg@sgh.waw.pl

2. Readings:
D.Begg, S.Fisher, R.Dornbush „Economics”, McGraw Hill International, most recent edition
N.Gregory Mankiw, Mark P.Taylor „Economics”, 2006 Thomson Learning
The Economist, the Wall Street Journal
Resources for economics on the internet: (mega-side for economics)

3. Introduction to Economics
Lecture 1

4. A definition of economics
Many definitions but not many differences
D.Begg.. „Economics”: „Economics is the study of how societies with limited, scarce resources decide what gets produced, how, and for whom”
N.G.Mankiw.. „Economics’: „Economics is the study of scarce resources management”
A. Marshall ( ): „economics is the study of mankind in the ordinary business of life”
Robert Heilbroner ( ) „The Economic Problem (1968): economics is essentially the study of a process of providing for the material well-being of society”, „the study how men earns his daily bread”

5. Key words: scarcity, alternative use, choice
More modern definition: „economics is the social science that examines how people choose to use limited or scarce resources to satisfy the unlimited wants”
„scarcity” means that people want more than is available;
Because resources are scarce, it is necessary to choose among alternatives: land, labor and capital may be used to produce pianos or computers or to prevent cancer.

6. Is it worth doing all things well?
James Buchanan (Nobel Prize in Economics1986-theory of public choice): „An economist is one who disagrees with the statement that what is worth doing is worth doing well. Time is scarce and limited and there are many things one can do with one’s time. If one wants to do all things well, one must devote considerable time to each and thus must sacrifice other things one could do. Sometimes is worth to do some things poorly so that one has more time for other things.”

7. What gets produced, how and for whom
What gets produced? Goods and services. More developed countries produce more services and less material goods
How? Whether to invest in robots or hire more workers”
For whom? For 15 % of world population in developed countries or…

8. Structure of national product (what gets produced 2011)
Share in GDP %
Euro area
USA
Japan
Poland (2010)
agriculture
1.7
1.2
3.5
industry
25.6
20.0
28.1
31.7
services 73
78.8
70.7
64.8

9. World population structure and income distribution (2010)
US, Canada
Central/South America
Europe
Africa
Middle East
Asia
% of world population 5 8 10 11 52
% of world GDP 24 23 2 31

10. Poor and very rich
90% of world income produced in USA, Europe, Japan and Australia
USA having 1/6 of world adult population gets 1/3 of world income
India having 15% world adult population gets 1% of worlds income
The 1% group of people with the highest income : 10.4 % people of Irish nationality % of Swiss nationality, 33% - Americans.

11. Differences in productivity decide on unequal income distribution
Last 50 years average rate of income growth in USA and Europe 2%, in Ethiopia 0.6%
In 2010 GDP per capita in US $, in Ethiopia 1093 $
Differences in income distribution decide also on that what gets produced: relative poor Brazil (high income inequality) produces a large amount of domestic services (maids, private drivers, butlers); rich Denmark (more equal income distribution) produces a small amount of domestic services

12. The production possibility frontierA B C D E
Pizza ( in ) 9 17 24 30
Robots ( in 1000) 23 22 10

13. 4 principles
1) Scarcity/trade offs :the opportunity cost of any good or service is the amount of other goods or services that must be given up to obtain it
2) The law of increasing opportunity costs: the opportunity cost of robots in terms of pizza increases : the more robots is produced .
3) The efficient economy produces on the curve instead inside it
4) Growth means pushing the PPF outward

14. Economic growth
If the supply of resources available to our economy is increased it will be possible to produce more of pizza and robots
It could be shown by an outward shift of PPF
3 major forces have fuelled economic growth: increases in productive assets, increases in the skill and education of the labor force and advances in knowledge
Society can obtain more of goods and services only by consuming less today – a choice between consumption today and consumption in the future

15. Economic growth – the other approach
An increase in the economy resource base
Advancements in technology
An improvement in the rules (laws, institutions, and policies)
By working harder and giving up current leisure

16. Economic systems – who decides what, how and for whom to produce
2 extreme models of the economy
A free -market economy: the markets and the prices play the central role in allocating resources among competing uses.
A command economy – the government makes all decisions about production and consumption
A mixed economy – both the government and the private sector play an important roles in deciding what, how and for whom

17. Positive and normative economics
A positive statement – a statement about what is, contains no indication of approval or disapproval, no value judgment (a positive statement can be wrong ; „the moon is made of green cheese”)
A normative statement expresses a judgment about whether the situation is desirable or undesirable („the world would be a better place if the moon were made of green cheese” (there is no way of disproving this statement )

18. How useful is positive –normative distinction?
It helps people with very different views about what is desirable to communicate with each other. If their disagreement is on positive grounds, the further discussion and testing may bring them closer together
Normative economics makes a judgment what goals are desirable, positive part of it explains how to obtain those goals
J. M. Keynes ( ): „The object of positive science is the establishment of uniformities, of a normative science the determination of ideals”

19. Microeconomics and macroeconomics (trees and the forest)
Microeconomics deals with the economic behaviour of individual economic agents: households and firms
Macroeconomics studies the operation of the economy as a whole
Microeconomic foundations more and more important to understand macroeconomic topics

20. Which part: macro or micro more important
Both linked, we have to study them together
Until 1970s macroeconomics seemed to be more attractive for economists, giving them impression of the control over the economy BUT
stagflation, present financial crisis have changed that opinion