1. Introduction to Economics

2. 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.

3. Think as economist!
How can number of divorces contribute to economic welfare (i.e. well-being)?

4. Scarcity Production factors Market system Economics as a science
Opportunity costs
Economic models

5. 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.

6. Scarcity Production factors Market system Economics as a science
Opportunity costs
Economic models

7. Production factors
Labor
Land
Capital
Entrepreneurship

8. Scarcity Production factors Market system Economics as a science
Opportunity costs
Economic models

9. 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

10. 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.

11. 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.

12. 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.

13. Basic economic agents Households Firms State Rest of the World

14. 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.

15. 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.

16. 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.
Market
Command

17. Scarcity Production factors Market system Economics as a science
Opportunity costs
Economic models

18. What Economics Is All About
Scarcity refers to the limited nature of society’s resources.
Economics is the study of how society manages its scarce resources, including
how people decide how much to work, save, and spend, and what to buy
how firms decide how much to produce, how many workers to hire
how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs
You might want to elaborate a bit on some of the points made here. Some examples are below:
“How do people decide how much to work?” Time is scarce resource – many of our students know this very well. There’s just not enough time to do everything we’d like to do. How do we decide how much of our time to spend working? There’s a tradeoff: the more time we spend working, the higher our income, and therefore the more stuff we can buy. But, the more time we spend working, the less time we have for leisure – hanging out with friends, going hiking, watching movies, etc. (You might want to ask your students how THEY decide how much time to spend working. Some will say it depends on how many classes they are taking, or the time requirements of the available jobs. But probably at least a few will say the wage – the higher the wage, the more worthwhile to work.)
“How do firms decide what kind of labor to hire?” Firms can hire unskilled or skilled workers. The skilled workers are more productive, but cost more than the unskilled workers.
“How do firms decide how much to produce?” Ask your students, and see if any of them say “it depends on the price of the product they sell.” (Probably some will say “it depends on whether there’s a lot of demand for the product”. To which you might respond “and if there’s a lot of demand for the product, what does that mean for the price that firms can get for the product?”)
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS

19. What is “Economics”? Economics: Economics = science about wealth.
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.

20. Positive and normative economics
Positive economics – describes reality.
„what is“
Normative economics – describes how the reality should look like.
„what ought to be“

21. 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 so on.

22. Microeconomics and Macroeconomics
Microeconomics is the study of how households and firms make decisions and how they interact in markets.
Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
These two branches of economics are closely intertwined, yet distinct: they address different questions.
CHAPTER 2 THINKING LIKE AN ECONOMIST

23. Scarcity Production factors Market system Economics as a science
Opportunity costs
Economic models

24. 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
We can go to work for USD 6,50 an hour.

25. Should Bill Gates move his lawn?

26. Scarcity Production factors Market system Economics as a science
Opportunity costs
Economic models

27. Transportation costs go up
Economics methods
Observation
Statistical analysis
Economic modeling
Experiment
Cause-effect type of models
War in Iraq
Supply of oil goes down
Gas prices go up
Transportation costs go up
Food prices go up

28. 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

29. Assumptions & Models
Assumptions simplify the complex world, make it easier to understand.
Example: When studying international trade, we might assume the world consists of two countries and two goods.
Very unrealistic, but simplifies the problem and yields useful insights about the more complicated real world.
Economists use models to study economic issues. A model is a highly simplified representation of a more complicated reality.
CHAPTER 2 THINKING LIKE AN ECONOMIST

30. Some Familiar Models
A road map
CHAPTER 2 THINKING LIKE AN ECONOMIST

31. Some Familiar Models
A model of human anatomy from high school biology class
CHAPTER 2 THINKING LIKE AN ECONOMIST

32. Some Familiar Models A model airplane
CHAPTER 2 THINKING LIKE AN ECONOMIST

33. Our First Model: The Circular-Flow Diagram
The Circular-Flow Diagram: A visual model of the economy, shows how dollars flow through markets among households and firms.
Includes two types of “actors”:
households
firms
Includes two markets:
the market for goods and services
the market for “factors of production”
CHAPTER 2 THINKING LIKE AN ECONOMIST

34. Market mechanism Market of goods Sales Payments for goods
Supplied goods
Demanded goods
Goods
Expenditures
Taxes
Taxes
Transfers
Transfers
Households
Firms
Expenditures
Prod. factors
Payments for prod. factors
Wages, rents, rates
Production factors
Land, Labor, Capital
Production factor market

35. 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. 2 1 10 3 5 4 8 6 12 Q P
Budget = USD 10

36. 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. 2 1 10 3 5 4 8 6 12 Q P
Budget = USD 5

37. Thank you for attention!