Introduction to Economics
Egor Sidorov
egor.sidorov@ujep.cz
Course details
─ Course consists of:
─ Lectures and project.
─ Seminars – focused on practical application of theory.
─ Final written test: min. 60 percent, + project, and
active attendance at lectures and seminars
─ Contact: egor.sidorov@ujep.cz
15. 3. 2016
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Literature
─ MCCONNELL, C., BRUE, S. Economics. New York:
McGraw-Hill, 1990-?.
─ SAMUELSON, P., NORDHAUS, W. Economics.
New York: McGraw-Hill, 1992-?.
─ www: rek.ujep.cz/~sidorov
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Course content
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Introduction
Supply and Demand
Production & Cost Analysis
Theory of the Firm
Introduction to Macroeconomics
The Output of National Economics
Inflation
Unemployment
Monetary Policy
Fiscal Policy
International Trade and Economical Integration
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Why study economics?
─ Our life is a variety of economic relations among
others, so economics is a way to understand them.
─ Understand international relations and trade.
─ Understand national policy.
─ Get economic type of thinking – cost-benefit
analysis.
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Think as economist!
─How can number of
divorces contribute to
economic welfare
(i.e. well-being)?
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1. Scarcity
2. Production factors
3. Market system
4. Economics as a science
5. Opportunity costs
6. Economic models
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Scarcity
─ Our needs and wants are unlimited
─ They have different intensity
─ They change over time
─ Goods and services satisfy our wants and needs
─ Our resources for their production
are limited.
vs.
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Types of Goods
─ Consumer goods
─ Capital goods
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Public and Merit goods,
provided by the government
─ Public goods” (e.g. defense provision, etc.):
─ these goods are available to everyone, regardless income
level,
─ everybody equally benefits from them.
─ “Merit goods” (health care, education, roads
building, etc.):
─ not all the people tend to use them;
─ privately gained benefits turn out to be external benefits.
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Production process
(input)
(ouput)
Production
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1. Scarcity
2. Production factors
3. Market system
4. Economics as a science
5. Opportunity costs
6. Economic models
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Production factors
─ Labor
─ Land
─ Capital
─ Entrepreneurship
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1. Scarcity
2. Production factors
3. Market system
4. Economics as a science
5. Opportunity costs
6. Economic models
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Limited sources vs.
Unlimited needs
─ Scarcity is the reason for basic economic questions:
─ 1. What to produce?
─ 2. How to produce?
─ 3. For whom to produce?
─ Two marginal economic systems of solving these
problems exist:
─ Command economy model
─ Market economy model
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Command model: basics
─ Basic economic problems in the command
economics:
─ “What?” problem is solved by the planning authorities and
the state statistics bureau.
─ “How?” problem deals with the functions of respective
ministries.
─ “For whom?” – distribution of income is comparatively
equal among all the economic agents. All the property
belongs to the state, institution of personal proprietorship
does not exist.
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Command model: pro and
contra
─ Positive features:
─ Resources aren’t wasted on competitive duplication.
─ Planned distribution – same standards of living for all the people.
─ Prices are stable, etc.
─ Negative features:
─ Political and social complexity of administrating this system.
─ The recourses tend to be distributed in insufficient way.
─ It is impossible to plan the response for every economical agents’
need.
─ etc.
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Market model: basics
─ Basic economic problems in the market economics:
─ “What?” and “How?” problems are solved by market:
prices, supply and demand mechanisms.
─ “For whom?” – distribution of income is determined by the
ownership institute.
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Basic economic agents
─ Households
─ Firms
─ State
─ Rest of the World
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Market
mechanism
Expen
ditures
Goods
Market of goods
Taxes
Taxes
Stát
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Prod.
factors
Households
Expend
itures
Transfers
Production factor
market
Transfers
Firms
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Market model: pro and contra
─ Positive features:
─ Automatic and efficient allocation of recourses without the need of
any planning. The demand is the reason for supply.
─ The economy provides what the consumer want. The consumer
“votes” and shows his preferences by spending money.
─ All the economic agents have a particular interest in accurate and
efficient system functioning.
─ Negative features:
─ Market model tends to be inefficient in solving social problems. Low
income means the respectively lower life level.
─ Some significant parts of social reality “fall out” from the interest of
market economy, e.g. environment protection.
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Economic models of the modern
world
─ In the end, what we used to call “the contemporary
market oriented economy model” is the …
─ … mix of the most important features of market model, we
have discussed…
─ …and governmental interventions in certain spheres of
vital importance.
─ The participation of the government is necessary for
providing conditions for social oriented market
functioning.
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Where’s your country at on the
scale?
─ Economies of the contemporary worlds’ countries
have the features of both models.
─ “Tastes differ”: some economies have more
command model features, others more market
oriented. But both have positive and negative traits.
Command
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Market
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1. Scarcity
2. Production factors
3. Market system
4. Economics as a science
5. Opportunity costs
6. Economic models
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What is “Economics”?
─ Economics:
─ Analyzes how individuals, firms and states use their
scarce resources in order to satisfy their unlimited needs
─ Collects, analyzes and interprets the related data
─ Develops theories and laws trying to explain these
phenomena and predict the future trends
─ Economics = science about wealth.
─ How to use scare resources, how to distribute them
among society members and how to use them.
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Positive and normative
economics
─ Positive economics – describes reality.
─ „what is“
─ Normative economics – describes how the reality
should look like.
─ „what ought to be“
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Two levels of economics
─ Microeconomics
─ is focused on analysis of market structures,
consumer behaviour and company behaviour
(production, costs, prices of input / output, profit,
investments).
─ Macroeconomics theory
─ acquaints us with macroeconomics aggregates,
problems of economic growth, money supply,
unemployment and inflation. In the end we will also
be able to understand monetary and fiscal policy of
state, theory of international market and balance of
payments.
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Economics methods
─ Observation
─ Statistical analysis
─ Economic modeling
─ Experiment
─ Cause-effect type of models
War in Iraq
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Supply of oil
goes down
Gas prices go
up
Transportation
costs go up
Food prices
go up
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1. Scarcity
2. Production factors
3. Market system
4. Economics as a science
5. Opportunity costs
6. Economic models
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Opportunity costs
─ Opportunity cost or economic opportunity loss is the
value of the next best alternative foregone as the
result of making a decision.
vs.
We can go ride a bike
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We can go to work for USD 6,50
an hour.
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─Should Bill Gates move
his lawn?
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1. Scarcity
2. Production factors
3. Market system
4. Economics as a science
5. Opportunity costs
6. Economic models
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Economic modeling
─ Model is a simplified reality
─ Mathematic models reflect trends, however they
aren’t capable of reflecting the whole range of
elements making up a human nature
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Economic laws
─ Law of Downward-sloping Demand
─ When the price of commodity raises (given other
conditions do not change – ceteris paribus) consumers
tend to buy less of the commodity. Accordingly, when
the price is lowered, other things equal, the quantity
demanded increases.
P
12
10
8
6
Budget = USD 10
4
2
1
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3
4
5
6
Q
35
Ceteris paribus principle
─ If the other conditions change we switch from the
initial model to the totally new model.
─ This doesn’t mean that the considered economic
law doesn’t work – it works given other factors
remain equal.
P
12
10
8
6
Budget = USD 5
4
2
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1
2
3
4
5
6
Q
36
Production Possibility Frontier (PPF)
PPF presents
─ law of scarcity.
─ economic efficiency.
─ economic development.
─ choices between public
and private goods.
─ choices between current
and future consumption,
─ etc.
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Variant
Cookies
(mil. kg)
A
B
C
D
0
8
16
20
Ovens
(thous.
pieces)
5
4
2
0
Cookies
24
D
20
16
12
C
F
E
B
8
4
A
1
2
3
4
5
6
Ovens
37
PPF based analysis
─ choices between luxury and normal goods.
Luxury goods
Luxury goods
22
22
18
18
16
12
16
12
8
8
A
4
1
2
3
A
4
4
5
6 Normal goods
r. 1950: Developing country
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B
1
2
3
4
5
6
r. 2009: Developed country
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PPF based analysis
─ The whole curve will move in case of change of
production factors
Investment goods
Investment goods
22
18
22
18
Country B
16
12
8
16
12
Country A
4
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Country B
8
Country A
4
1 2 3 4
Today’s choice
5
6
Consumption
1 2 3 4 5 6
Expected future result
39
Thank you for attention!
Sources:
SAMUELSON, P. A., NORDHAUS, W. D. Ekonomie 18. vydání. Praha:
Svoboda, 2005.
KRAFT, J., RITSCHELOVÁ, I. Ekonomie pro environmentální management.
Ústí n. L.: UJEP, 2003.
MCDOUGAL LITTELL. Economics: Concept and Choices. Canada:
McDougal Littell, 2008.
Mankiw, G. Principles of Microeconomics. UK: Thomson Learning, 2003.