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Lecture 1 Introduction to Economics

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1 Lecture 1 Introduction to Economics
September 29, 2017

2 Syllabus &Course Materials
Come to the lectures Review your notes & the slides. Stay current in the textbook. Salvatore, D.; Diulio, E. (1996) Schaum's Outline of Principles of Economics, 2nd Edition, Schaum's Outline Series. Salvatore, D. (2006) Schaum's Outline of Microeconomics, 4th edition, Schaum's Outline Series.   Dinler, Z. (2010) İktisada Giriş, 16. Baskı, Ekin Yayınları Use the course Web pages & the web sites advised in the syllabus   Use the office hours

3 Aim of the course Economics has been recognized as a special area of study for over a century. The aim of this course is to make students gain an economic way of thinking. Introduction of the basic economics concepts Difference between micro and macro economics

4 Introduction to Microeconomics
We focus on microeconomics at introductory level. Supply and demand, Elasticities of demand and supply, Price system, Consumer and producer (the firm) behavior, Market structures of perfect competition, monopoly, monopolistic competition, and oligopoly.

5 What is Economics ? Economics: The study of the allocation of scarce resources to produce commodities to satisfy infinite human wants. Classic definition. Economics is about constrained optimization. Choice under conditions of scarcity. As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, as a result, you must make certain choices with your money. You'll probably spend part of your money on : rent, electricity and food ( required expenditures to survive) …..and then you may go to the cinema, buy a new pair of shoes…. Economists are interested in the choices you make, and inquire into why, for instance, you might choose to spend your money on a new DVD player instead of replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by 5TLs per pack. The underlying essence of economics is trying to understand how both individuals and nations behave in response to certain material constraints.

6 Other Definitions of Economics
One of the earliest and most famous definitions of economics was that of Thomas Carlyle, who in the early 19th century termed it the "dismal science." The term dismal science was inspired by prediction that population would always grow faster than food, making mankind to unending poverty and hardship. Economics is the study of exchange and production. Adam Smith ( ), the "father of modern economics" and author of the famous book "An Inquiry into the Nature and Causes of the Wealth of Nations", constructed the discipline of economics by trying to understand why some nations prospered while others lagged behind in poverty. Others after him also explored how a nation's allocation of resources affects its wealth.

7 Other Definitions of Economics
Economics science makes the assumption that human beings will aim to fulfill their self-interests. It also assumes that individuals are rational in their efforts to fulfill their unlimited wants and needs. Economics, therefore, is a social science, which examines people behaving according to their self-interests. The definition set out at the turn of the twentieth century by Alfred Marshall, author of "The Principles Of Economics" (1890), reflects the complexity underlying economics: "Thus it is on one side the study of wealth; and on the other, and more important side, a part of the study of man."

8 Most contemporary definition
"Economics is the social science that examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants.“ What is scarcity?

9 Scarcity Scarcity means that people want more than is available. Scarcity limits us both as individuals and as a society. As individuals, limited income (and time and ability) keep us from doing and having all that we might like. As a society, limited resources (such as natural resources, capital, labor force and technology) fix a maximum on the amount of goods and services that can be produced. Scarcity requires choice. People must choose which of their desires they will satisfy and which they will leave unsatisfied. For example, if you choose to buy one a TV as opposed to a laptop, you give up owning a personel computer in exchange of the TV.

10 Scarcity Economics is sometimes called the study of scarcity because economic activity would not exist if scarcity did not force people to make choices. When there is scarcity and choice, there are costs. The cost of any choice is the option or options that a person gives up. In the previous example the cost of buying TV is the benefits of having laptop Most of economics is based on the simple idea that people make choices by comparing the benefits of option A with the benefits of option B (and all other options that are available) and choosing the one with the highest benefit.

11 Definitions of Macro/Micro-economics
Since the 1930s economists have split their domain into two parts: microeconomics and macroeconomics. Microeconomics looks at small pieces of the puzzle, individual markets as opposed to macro - which looks at the big picture. Macroeconomics looks at the total output of a nation and the way the nation allocates its limited resources of land, labor and capital in an attempt to maximize production levels and promote trade and growth for future generations. After observing the society as a whole, Adam Smith noted that there was an "invisible hand" turning the wheels of the economy: a market force that keeps the economy functioning.

12 Microeconomics looks into similar issues, but on the level of the individual people and firms within the economy. Analyzing certain aspects of human behavior, microeconomics shows us how individuals and firms respond to changes in price and why they demand what they do at particular price levels.

13 Source: http://www.arts.cornell.edu/econ/wissink/econ1110jpw/
Examples of Microeconomic and Macroeconomic Concerns BRANCH OF ECONOMICS PRODUCTION PRICES INCOME EMPLOYMENT Micro Output in individual industries How much steel? How much office space? How many cars – big or small, how fuel efficient? Price of individual goods and services Price of medical care. Price of gasoline. Food prices. Apartment rents. Distribution of income and wealth Wages in the auto industry. Minimum wage. Executive Salaries. Poverty. Wage differentials. Employment by individual businesses and industries Steel industry jobs. Number of employees in a firm. Number of accountants. Macro National production/output Total output: GDP Output by sectors. Investment. Growth of output. Aggregate price level Consumer prices. Producer prices. Rate of inflation. Interest Rates. National income Total wages and salaries. Total corporate profits. National savings. Employment and unemployment in the economy Total # of jobs. Unemployment rate Productivity growth Source:

14 The Production Possibilities Frontier
Let’s introduce the Production Possibilities Frontier better known as the PPF. The PPF is a basic workhorse in economics.

15 The PPF: What Is It? A description of the possible or feasible combinations of commodities an economy can produce, using all of the available resources efficiently. Shows the trade-off between one good in terms of another.

16 Suppose that each day Robinson Crusoe has enough time to catch 4 fish or to gather 8 coconuts.
Notice that he cannot have both 4 fish and 8 coconuts. If he uses his time to catch fish, he does not have that time to find coconuts. If he wants both coconuts and fish he can spend some time to both. If, for example, he spends half the day fishing and the other half-day gathering coconuts, he can have 2 fish and 4 coconuts. A list of all the possible combinations of fish and coconuts open to Crusoe makes up his production possibilities. Fish Coconuts 4 3 2 1 6 8

17 The production-possibilities frontier separates outcomes that are possible for an individual (or a group) to produce from those that cannot be produced. Because Crusoe cannot exchange, his production-possibilities frontier is also his consumption-possibilities frontier. Fish Coconuts 4 3 2 1 6 8

18 The slope of the frontier in the graph above measures the costs facing Crusoe. In order to get an extra fish, he must sacrifice two coconuts, and to get another coconut, he must sacrifice one-half of a fish (see slope of PPF). Notice that there is no money involved; cost does not depend on money, but rather exists whenever there is scarcity and choice. In economics, the cost of anything refers to whatever is given up in order to get that thing. Fish Coconuts 4 3 2 1 6 8

19 The cost of going to college, for example, includes not only the money a person spends on tuition (which could be spent on something else), but also includes the time spent studying and going to classes. The value of this time can be estimated by computing the amount of income a person could earn if he did not go to college.

20 Opportunity Cost The opportunity cost of an activity is the value of the resources used in that activity when they are measured by what they would have produced when used in their next best alternative. Opportunity cost is the value of what is foregone in order to have something else.

21 Example: Lets assume that an individual has a choice between two telephone services.
If he or she were to buy the most expensive service, that individual may have to reduce the number of times he or she goes to the movies each month. Giving up these opportunities to go to the movies may be a cost that is too high for this person, leading him or her to choose the less expensive service. Opportunity cost is different for each individual and nation. Thus, what is valued more than something else will vary among people and countries when decisions are made about how to allocate resources.

22 Production Possibility Frontier
PPF is a curve depicting all maximum output possibilities for two or more goods given a set of inputs (resources, labor, etc.). The PPF assumes that all inputs are used efficiently. As indicated on the chart above, points A, B and C represent the points at which production of Good A and Good B is most efficient. Point X demonstrates the point at which resources are not being used efficiently in the production of both goods; point Y demonstrates an output that is not attainable with the given inputs.

23 However, if there was a change in technology while the level of land, labor and capital remained
the same, *the time required to pick cotton and grapes would be reduced. Output would increase, and the PPF would be pushed outwards. A new curve, on which Y would appear, would represent the new efficient allocation of resources. When the PPF shifts outwards, we know there is growth in an economy. Alternatively, when the PPF shifts inwards it indicates that the economy is shrinking as a result of a decline in its most efficient allocation of resources and optimal production capability.

24 An economy can be producing on the PPF curve only in theory.
In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo one choice for another, the slope of the PPF will always be negative ( downward sloping) if production of product A increases then production of product B will have to decrease accordingly.


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