LECTURE 1: INTRODUCTION Can you live on 50 PhP a day? *Data as of 2000 As of 2019, 67.5 daily Why these alarming education statistics? Have our young Pinoys lost interest in learning? Because their parents cannot afford the cost? And the high cost does not give them the commensurate return on their investments? Because the teachers no longer motivate nor inspire? Source: Virola, 2006. NSCB Or is our society transforming from one that cherishes education to one that encourages boys and girls to enroll in voice and dancing schools, and never mind if they miss formal classes? Price of poverty or a case of distorted priorities? If it is because of the present high cost of education, why was education more affordable in the good old days? Is there failure of governance somewhere? How much does gov’t allocate on public education? Positive Economics Statement Normative Economics Statement We should spend at least 4% of our GDP on public educational institutions. Source: Virola, 2006. NSCB How much resources do we allocate for disaster control and management? Origin of the word ‘Economics’ Ø Oikonomia (oy-kon-om-eé-ah), – Greek word that means “household management” What is Economics? Methodology of economics • Framework • Assumptions (e.g., ceteris paribus) • Models (math, graphs, equations) It is a social science that deals with the allocation of scarce resources to satisfy unlimited human wants. • Human • Natural • Physical Economics is a science “a body of systematized knowledge concerning what is.” § seeks to explain the ‘why’ of things in the world of economic behavior – production, consumption, and distribution § Economic models - main tools used by economists to explain economic phenomena. § Scarcity implies making choices. OR OR Two Main Branches Ø Microeconomics - studies behavior of individual economic units households, firms, markets Ø Macroeconomics - Focus is on the whole/aggregate economy - E.g., GNP, GDP, inflation, unemployment Positive vs. Normative Economics Ø Positive Economics - description and explanation of economic phenomena l Answers the question: “What is?” • • • • The price of gasoline is Php 42.25/liter. The population growth rate is 2.3%. The minimum wage in NCR is Php 382/day 11 million Filipinos live on $1 a day Positive vs. Normative Economics Normative Economics … is the application of positive economics for the purpose of generating policy prescriptions Answers the question: “What should be?” • • • • The price of gasoline should be Php 35.00/liter. The population growth rate must only be at 2 %. The minimum wage in NCR should be Php 400/day Filipinos ought to live on at least $5 a day. LECTURE 2: The Economic Problem What you have learned in the last meeting Ø Economics l l l is a social science. Inquiry into the ‘why’ of things Applies framework (way of thinking) Uses models to explain complex reality • assumptions e.g., ceteris paribus • asserts that economic agents are optimizers • normative vs positive economics Ø Ø 2 main branches: micro and macro Scarcity is central to the study of economics How would you choose to use or allocate… • 6 hours to study for Math, English and Econ exams? • Php 100 of your daily allowance? • 5 hectares of agricultural land? • Php 50 million of CDF if you were the Governor of your province? • Php 1 trillion budget for the Filipino people? Scarcity of resources: Economic Problem Problem of Choice; Problem of Allocation The Four Basic Economic Problems What to produce? Ø How much to produce? Ø How to produce? Ø For whom to produce? Ø Systems of Allocation • Economies run by tradition • most ancient and prevalent way to solve econ problem before 20th century • Economies run by command • ‘centrally-planned’ economies • government decides on goods to produce • Economies run by the market system • completely unregulated market economy Þ market is the institution that determines the answers. * actual economies fall somewhere in between CETERIS PARIBUS Ø A Latin term that means “Holding all other things equal or constant” Examples Ø I will enrol in Ateneo if the tuition fee is free, cet. par. Ø I will buy starbucks coffee if the price will go down, cet. par. Ø Filipinos prefers Jollibee to Mcdo, cet. par. Lecture 3 Ten Principles of Economics TEN PRINCIPLES OF ECONOMICS • A household and an economy face many decisions: – Who will work? – What goods and how many of them should be produced? – What resources should be used in production? – At what price should the goods be sold? Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. TEN PRINCIPLES OF ECONOMICS Society and Scarce Resources: – The management of society’s resources is important because resources are scarce. – Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. TEN PRINCIPLES OF ECONOMICS § Economics is the study of how society manages its scarce resources. § Economists study how people make decisions: § How much they work § What they buy § How much they save § How they invest their savings Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. TEN PRINCIPLES OF ECONOMICS § Economists also study how people interact such as buyers and sellers. § Price determination. § Economists also analyze forces and trends that affect the economy as a whole. § Growth in average income § The rate of price increase. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. HOW PEOPLE MAKE DECISIONS § There is no mystery to what an “economy” is. § It’s a group people interacting with one another as they go about their lives. § We start the study of economics with four principles of individual decision making: § People face tradeoffs § The cost of something is what you give up to get it. § Rational people think at the margin. § People respond to incentives. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 1: People Face Tradeoffs “There is no such thing as a free lunch” § To get something we like, we usually have to give up something we don’t like. § A student and her time: § Studying vs. napping or cycling. § Society’s tradeoffs: § Guns vs. Butter § Clean environment and higher income Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 1: People Face Tradeoffs § Society’s tradeoffs (cont’d): § Efficiency vs. Equity § Efficiency: Society getting the most it can from its scarce resources. § Equity: Distributing economic prosperity fairly among the members of society. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 2: The Cost of Something is what You Give Up to Get it § Making decisions requires comparing the costs and benefits of alternative courses of actions. § To go to university or not to go? § Opportunity cost: Whatever must be given up to obtain some item § We define it as “The value of the best forgone alternative use of the resource.” Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 2: The Cost of Something is what You Give Up to Get it Examples of Opportunity Cost 1. What do you give up to have good grades? 2. What do give up to have a fit body? 3. For you to have a good social life, what are the things you need to give up? Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 3: Rational People Think at the Margin § Marginal changes: Small incremental adjustments to marginal changes. § Individuals and firms can make better decisions by thinking at the margin. § By comparing the marginal benefits (MB) with the associated marginal costs (MC) of a decision. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 4: People Respond to Incentive • Marginal changes in costs or benefits motivate people to respond. • The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs! • There are good and bad incentives. Its up to you how to make your workers productive. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. HOW PEOPLE INTERACT • The first four principles discussed how individuals make decisions. • The next three principles concern how people interact with one another. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 5: Trade can Make Everyone Better Off • People gain from their ability to trade with one another. • Competition results in gains from trading. • Trade allows people to specialize in what they do best. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 6: Markets are Usually a Good Way to Organize Economic Activity § Market economy: An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. § Firms decide whom to hire and what to make. Meanwhile, households decide which firms to work for and what to buy with their incomes. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 6: Markets are Usually a Good Way to Organize Economic Activity § Market economy: An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. § Firms decide whom to hire and what to make. § Households decide which firms to work for and what to buy with their incomes. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 6: Markets are Usually a Good Way to Organize Economic Activity § Invisible Hand: Adam Smith popularized this idea to say that the government need NOT to intervene or have minimal intervention only, in the market. § He introduced the concept of Laissez faire or Free market. Free Market can determine the most efficient price of a good or a commodity even without government intervention. § This gave rise to market powers. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 7: Governments can Sometimes Improve Market Outcomes § When the invisible hand does not work. § Market failure: A solution in which a market left on its own fails to allocate resources efficiently. § Externality: The impact of one person’s actions on the well-being of a bystander. § Market power: The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. (e.g., monopoly) Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 7: Governments can Sometimes Improve Market Outcomes § Why do we have the provision for state universities? § Why do we have LRTs and MRTs? § Why do we have Day Care Centes? § Why do we have Universal Health Care? Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. HOW THE ECONOMY AS A WHOLE WORKS § The last three principles concern the workings of the economy as a whole. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 8: A Country’s Standard of Living Depends on its Ability to Produce Goods and Services § Standard of Living may be measured in different ways (e.g. personal income or total market value of a nation’s production.) – Differences in standard of living between countries or even provinces is attributable to the productivity of the country or province. § Productivity: The amount of goods and services produced from each hour of a worker’s time. Productivity => Standard of Living Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 9: Prices Rise when the Government Prints Too Much Money § When the government creates large quantities of money, the value of the money falls. § Inflation: General increase it the level of prices § Hyperinflation: A period of icreasing inflation § One cause of inflation is the growth in the quantity of money. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 9: Prices Rise when the Government Prints Too Much Money § In Germany… § In January 1921, a daily newspaper cost 0.30 marks. § In November 1922, the same paper cost 70 000 000 marks. § Other case of hyperinflation § Zimbawe (2007) § Venezuela (2016) Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 10: Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. § A tradeoff is where one thing increases and another must decrease § In the short run, when prices are high, producers are more enticed to produce more, therefor, employing more workers. § This means, even though there is increase in price (inflation), more workers are employed (therefore reducing unemployment). Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Principle 10: Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. § Phillips curve: A curve that shows the short-run tradeoff between inflation and unemployment. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Summary • When individuals make decisions, they face tradeoffs among alternative goals. • The cost of any action is measured in terms of foregone opportunities. • Rational people make decisions by comparing marginal costs and marginal benefits. • People change their behavior in response to the incentives they face. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Summary • Trade can be mutually beneficial. • Markets are usually a good way of coordinating trade among people. • Government can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable. • Productivity is the ultimate source of living standards. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Summary • Money growth is the ultimate source of inflation. • Society faces a short-run tradeoff between inflation and unemployment. Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. LECTURE 4: Production Possibilities Frontier Technological Choices and the Production Possibilities Frontier (PPF) Þ a tool useful for illustrating choices available to society and its constraints Ø PPF º all the possible combinations of the maximum amounts of two goods and services that can be produced with a given amount of resources and technology Ø PPF Assumptions about the PPF Ø Only two goods are produced: food (F) and cars (C) Ø The society has limited resources (in fixed supply) Ø Resources can be transferred across sectors Ø The technology exhibits diminishing marginal returns in the use of all inputs Ø All productive inputs are fully utilized Example of PPF: all resources used Trade-off A B C D E F OC or rate of trade-off DC FOOD CLOTHING CAR DF DC DF (F) (C) Specializing in car prodn 0 1000 100 950 100 -50 -0.5 200 850 100 -100 -1 300 650 100 -200 -2.0 400 400Speciali- 100 -250 -2.5 500 0 zing 100 -400 -4 in food prodn Notes on the PPF (1) Interpretation of points, say pt. D: (1) l If we use all resources, we can produce at most 300 units of Food and 650 units of cars Trade-off (2) l If we want to ­ Food prodn, must ¯Car Opportunity Cost of Food (3) l l amount of Cars that must be given up to produce an extra unit of Food Between points A and B, OC of F is 0.5 Notes on the PPF (2) Opportunity cost (4) l the value of the best foregone alternative use of the resource Rate of trade-off is increasing (5) l in absolute value Þ increasing opportunity cost of F Implication (6) l As we produce more of F, it gets harder to substitute F for C Graphical Illustration of PPF C 1,200 1,000 A 800 Pts on the PPF are efficientfully employed resources using best technology B D Unemployment of resources 600 I 400 Unattainable or infeasible given current resources and technology C E N 200 0 F 0 100 200 300 400 500 F Does PPF answer Basic Econ Questions? Ø What to produce? l Ø How much to produce? l Ø Shown by points along PPF How to produce? l Ø Shown by 2 goods on axes of PPF Use technology that will enable economy to produce goods represented by points along PPF For whom to produce? l Not shown by PPF Shifts in PPF C ­ in resources and/or techno improvements leads to an outward shift in the PPF ­ in resources and/or techno improvements in car production only ­ in resources and/or techno improvements in food production only ­in resources and/or techno improvements of both F and C prodn 0 F