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EC111 Introduction to Economics Announcements: Course materials for Ec111: You should read/should have attended the introductory.

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Presentation on theme: "EC111 Introduction to Economics Announcements: Course materials for Ec111: You should read/should have attended the introductory."— Presentation transcript:

1 EC111 Introduction to Economics Announcements: Course materials for Ec111: You should read/should have attended the introductory presentation. Read the course outline if you have not done so already. Exercise 1 -- posted on website and due next week in class Advanced Class – 12-1 Mondays, 6.126A. Start next week; not all weeks

2 Lecture1: Introduction to Microeconomic Study, Basic Concepts, and Tools Reading: Ch 1, Ch 28, 633-641 Begg et al or… Ch 1, Ch 24 pp. 672-677 Sloman and Wride, and… Ec 111 lecture 1 notes (on website)

3 Outline Microeconomic Study: The Sources of Well-Being Material Well-Being: Production: Production Potential, Production Choices and the Role of Resources Trade: Gains from Trade and Gains from Specialisation Market Incentives and Allocation Methods

4 Microeconomic Study (1) Suppose we wish to fulfill human wants. These are potentially unlimited… …but the resources to fulfill them are scarce: human wants often exceed our capacity to meet them. Because of scarcity, choices must be made among alternative plans to meet wants.

5 Microeconomic Study (2) What sort of plans might we consider? One would be a production plan. what goods and services to produce how to produce them for whom to produce them

6 Microeconomic Study (3) To make such decisions we need a framework to represent production, scarcity and what we sacrifice when we choose particular production plans. We introduce tools to partially address issues of concern: Production Possibility Frontiers Opportunity Cost Resource Constraints

7 Food output A  Clothing Output 14 Production possibility frontier The production possibility frontier This tells us the maximum amount the economy can produce using all available resources. B

8 Food output C  Clothing output 1 14 An Example of a PPF (4) The opportunity cost of food in terms of clothing is lower for red than for blue, so red has a comparative advantage in producing food. Blue has a comparative advantage in producing clothing. 100 50 100

9 Food output C  Clothing output 1 14 An Example of a PPF (5) Blue now has an absolute advantage in producing clothing and food… But red still has the comparative advantage in producing food! 100 25 50 100

10 Microeconomic Study (5) So we know that production and trade can both potentially contribute to fulfilling wants with our limited resources. But how could trade be organised and implemented? How could we implement production plans? For this we need new tools: Market Economies Command Economies Mixed Economies

11 Markets can be central to economies Markets are the means by which …  households’ decisions about consumption of alternative goods  firms’ decisions about what and how to produce  and workers’ decisions about how much and for whom to work … These can all be reconciled and incentivised by the adjustment of prices in free markets. Allocation is through decentralised decision- making.

12 The command economy Is an alternative to the market economy A government planning office decides:  what will be produced,  how it will be produced,  for whom it will be produced. Detailed instructions are then issued to households, firms and workers. Incentives are rewards and sanctions for not fulfilling plans. Allocation is directly controlled.

13 The invisible hand Adam Smith in the Wealth of Nations (1776) argued that individuals pursuing their self-interest would be led ‘as by an invisible hand’ to do things that are in the interests of society as a whole. The command economy has been used in a variety of contexts (Incas in 16 th century, US in wartime, Soviet Union), although it tends to be a temporary measure. See works of Grossman, 1960s.

14 Market vs. Command Command economies perform well if well-being requires that individuals take more than self-interest into account. For example, a market economy may not result in equal distribution of wealth. A market economy may not limit pollution. Market economies do well at aggregating information and providing incentives. For example, a market economy may respond quickly to changing consumer tastes for a new electronic device.

15 A mixed economy In a mixed economy the government and private sector jointly solve economic problems. The government influences decisions through taxation, subsidies, and provision of free services such as defense and the police. It also regulates the extent to which individuals may pursue their own self-interest. Incentives are modified through modification of the price system. Allocation is both direct and through this modified set of prices.

16 UKUSAChinaCuba Command economy Free market economy HungarySweden Market orientation

17 Microeconomic Study (7) Hence, there are many ways to implement the production and trading plans we design. This course will study a variety of market structures as well as the tools to analyse production and trading plans. We will use models to do this – deliberate simplifications of reality – to focus on core concepts that you will develop in future courses.

18 Positive and normative Positive economics studies objective or scientific (testable) observations about how the economy works. (“GDP has increased”; “Exports have risen because exchange rates have been favourable”) Normative economics offers recommendations based on (non- testable) value judgments. (“We should tax the rich more than the poor”; “Exports should rise”)

19 Microeconomics Microeconomics is concerned with choices and behaviour of individual economic units, whether consumers, firms, households, or industries.

20 Macroeconomics Macroeconomics studies economic aggregates, their behaviour and movements (such as inflation, aggregate output, employment)

21 Well Being Material Well Being Production Resources Markets Limits, potential Potential, choices Gains from trade specialisation Regulation Incentives, allocations

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