1. Introduction to Economics Lectures&Seminars/ DeianDoykov/ SityU/ Foundation Year/ Semester 1-2008

2. “Economics is the study of mankind in the ordinary business of life” Alfred Marshall, Principles of Economics, 1890 Week 2 “Economics is the study of mankind in the ordinary business of life” Alfred Marshall, Principles of Economics, 1890 Week 2 Introduction to Economics 2 October 07 Basics: The Economy is us

3. The Economy is us Economics and the economy n What is economics? n Economic issues n The nature of economic choice n The role of the market n Positive and normative economics n Micro and macro - economics n Tools of economic analysis 3 October 07

4. What is economics? Economics The study of the choices made by people who are faced with scarcity. 4 October 07

5. What is economics? Six key principles that are central to all economic theory n principle of opportunity cost n the marginal principle n the principle of diminishing returns n the spillover principle n the reality principle n the principle of comparative advantage 5 October 07

6. Principle of opportunity cost The principle of opportunity cost states that the opportunity cost of something is what you sacrifice to get it. 6 October 07

7. The marginal principle states that any activity should be increased as long as the marginal benefits of the additional activity exceed the marginal costs. 7 October 07

8. The principle of diminishing returns The principle of diminishing returns states that, in the short run, if use of one input is increased while all others are held constant, production will eventually increase at a decreasing rate. 8 October 07

9. The spillover principle states that certain activities create spillover costs or spillover benefits that exceed the costs or benefits to the producers or consumers of that activity. 9 October 07

10. The reality principle states that what matters to economic agents is the real value or purchasing power of money or income, not its face or nominal value. 10 October 07

11. Principle of comparative advantage The principle of comparative advantage states that total output can be increased if each of two parties specializes in producing that product for which its opportunity cost is lower 11 October 07

12. What is economics? The methodology of economics: The use of assumptions to simplify (the ceteris paribus assumption) 12 October 07

13. Economic issues How society allocates scarce resources ? # Oil price shocks (A resource is scarce if the demand at a zero price would exceed supply) # Income distribution (ID) (ID tells us how income is divided between different groups or individuals 13 October 07

14. The nature of economic choice Factors of production: Resource inputs used to produce goods and services, e.g. land, labour, capital. Opportunity cost: The most desired goods and cervices that are forgone in order to obtain something else. Production possibilities: The alternative combinations of final goods and cervices that could be produced in a given time period with all available resources and technology. 14 October 07

15. The nature of economic choice Law of increasing opportunity cost: In order to get more of any good in a given time period, society must sacrifice ever increasing amounts of other goods. Law of diminishing returns: Each extra worker adds less to output than the previous extra worker added 15 October 07

16. v x y O Making a fuller use of resources Food Clothing Production inside the production possibility curve 16 October 07

17. O Growth in potential output Food Clothing Now 17 October 07

18. O Food Clothing Now Growth in potential output 5 years’ time 18 October 07

19. O Food Clothing Growth in potential and actual output 19 October 07

20. O Food Clothing Growth in potential and actual output x y 20 October 07

21. The role of the market How choices are made? Market An arrangement that allows buyers and sellers to exchange things. Market mechanism The use of market price and sales to signal desired output 21 October 07

22. The role of the market Command economies # government failure Free markets # the invisible hand Mixed economies # market failure 22 October 07

23. Positive and normative economics Normative Economics Analysis that answers the question, What ought to be? Positive Economics Analysis that answers the question, What is or what will be? 23 October 07

24. Micro and macro - economics Microeconomics The study of the choices made by consumers, firms, and government, and how these decisions affect the market for a particular good or service. Macroeconomics The branch of economics that looks at a nation's economy as a whole. 24 October 07

25. Tools of economic analysis n Economic data n Index numbers n Nominal and real variables n Economic models n Models and data n Diagrams, lines, and equations n Theories and evidence 25 October 07

26. O National output Time Potential output 1 2 3 4 1 2 3 4 Actual output The business cycle 26 October 07

27. O National output Time Potential output Actual output Trend output The business cycle 27 October 07

28. Annual growth rate (%) UK Growth rates in selected industrial countries 28 October 07

29. Annual growth rate (%) UK Growth rates in selected industrial countries 29 October 07

30. Annual growth rate (%) UK France Growth rates in selected industrial countries 30 October 07

31. Annual growth rate (%) UK France Growth rates in selected industrial countries 31 October 07

32. Annual growth rate (%) UK France Germany Growth rates in selected industrial countries 32 October 07

33. Annual growth rate (%) UK France Germany Growth rates in selected industrial countries 33 October 07

34. Annual growth rate (%) UK France USA Germany Growth rates in selected industrial countries 34 October 07

35. Annual growth rate (%) UK France USA Germany Growth rates in selected industrial countries 35 October 07

36. Annual growth rate (%) UK France USA Germany Japan Growth rates in selected industrial countries 36 October 07

37. Annual growth rate (%) UK France USA Germany Japan Growth rates in selected industrial countries 37 October 07

38. What economics is all about ? Ends vs. Means Macro vs. Micro Theory and Reality 38 October 07

39. The Economy is us Questions for discussions: 1. The best things in life are free 2. What do economists really do 3. If I had a million dollars … 4. If we can put a man on the moon why can’t we … 5. Personal budgeting and the opportunity cost of choices 6. The gains from international trade Questions for discussions: 1. The best things in life are free 2. What do economists really do 3. If I had a million dollars … 4. If we can put a man on the moon why can’t we … 5. Personal budgeting and the opportunity cost of choices 6. The gains from international trade 39 October 07

40. Assignment for week # 3: Essay question: What is the opportunity cost of a university education ? Assignment for week # 3: Essay question: What is the opportunity cost of a university education ? Introduction to Economics 40 October 07