1. I NTRODUCTION OF E CONOMICS Lecturer: Jack Wu Economics 101

2. WHAT IS ECONOMY ( 經濟，經濟體 )? The word economy originally comes from a Greek word for “one who manages a household.” Broader definition: household, society, and country.

3. FUNDAMENTAL PROBLEM FACED BY ECONOMY  Fundamental economic problem: scarce resources. -- Scarcity... means that economy has limited resources and therefore cannot produce all the goods and services people wish to have. -- Resources : physical resource, financial resource, human resource, natural resource

4. WHAT IS ECONOMICS ( 經濟學 )? Economics is the study of how society or economy manages its scarce resources. It comprises of Microeconomics and Macroeconomics.

5. MICROECONOMICS 個體經濟學 ( 台 灣 ) ，微觀經濟學 ( 大陸 ) Microeconomics: the study of how households and firms make decisions and how they interact in markets (Econ 101: introductory Microeconomics, Econ 201: intermediate Microeconomics) Examples: mobile phone consumption choice decision, mobile phone production decision, and mobile phone market

6. MACROECONOMICS 總體經濟學 ( 台灣 ) ，宏觀經濟學 ( 大陸 ) Macroeconomics: the study of economy-wide phenomena including inflation, unemployment, and economic growth (Econ 102: Introductory Macroeconomics, Econ 202: Intermediate Macroeconomics) Examples: Quantitative Easing (QE) Policy, Euro Zone Crisis, Abenomics, China Economy Soft Landing, Sluggish Income Growth of Taiwan

7. E VERYBODY S HOULD L EARN E CONOMICS. Economics is a subject that we must confront in our everyday lives. As a matter of fact, we already spend a great deal of our time thinking about economic issues: prices(inflation), incomes (economic growth), consumption decisions, use of our time, job opportunity (unemployment), and so on.

8. T EN P RINCIPLES OF E CONOMICS

9. P RINCIPLE #1: P EOPLE F ACE T RADEOFFS. There is no such thing as a free lunch. To get one thing, we usually have to give up another thing. Making decisions requires trading off one goal against another.

10. S PECIAL E XAMPLE OF T RADEOFF  Efficiency v. Equity  Efficiency means society gets the most that it can from its scarce resources.  Equity means the benefits of those resources are distributed fairly among the members of society. Example: Tax paid by wealthy Taiwanese and then distributed to those less fortunate. Outcome: Increased equity and reduced efficiency

11. P RINCIPLE #2: T HE C OST OF S OMETHING IS W HAT Y OU G IVE U P TO G ET I T. Decisions require comparing costs and benefits of alternatives. Whether to go to college or to work? The opportunity cost of an item is what you give up to obtain that item. Opportunity cost comprises of both explicit cost and implicit cost.

12. P RINCIPLE #3: R ATIONAL P EOPLE T HINK AT THE M ARGIN Many decisions in life involve incremental decisions: should I take another course this semester? Marginal changes are small, incremental adjustments to an existing plan of action. People make decisions by comparing costs and benefits at the margin.

13. P RINCIPLE #4: P EOPLE R ESPONDS TO I NCENTIVES Because people make decisions by weighing costs and benefits, their decisions may change in response to changes in costs and benefits. Example: Seat Belt Laws increase use of seat belts and lower the incentives of individuals to drive safely.

14. P RINCIPLE #5: T RADE CAN M AKE E VERYONE B ETTER O FF 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. Examples: Most families do not build their own homes, make their own clothes, or grow their own food.

15. P RINCIPLE #6: M ARKETS A RE U SUALLY A G OOD W AY TO O RGANIZE E CONOMIC A CTIVITY A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand”—Market Prices.

16. P RINCIPLE #7: G OVERNMENT C AN S OMETIMES I MPROVE M ARKET O UTCOMES Market failure occurs when the market fails to allocate resources efficiently. Market failure may be caused by an externality, which is the impact of one person or firm’s actions on the well-being of a bystander. market power, which is the ability of a single person or firm to unduly influence market prices. When the market fails (breaks down) government can intervene to promote efficiency and equity.

17. P RINCIPLE #8: T HE S TANDARD OF L IVING D EPENDS ON A C OUNTRY ’ S P RODUCTION Standard of living may be measured in different ways: By comparing personal incomes. By comparing the total market value of a nation’s production (GDP, Gross Domestic Product). Almost all variations in living standards are explained by differences in countries’ productivities. Productivity is the amount of goods and services produced from each hour of a worker’s time.

18. P RINCIPLE #9:P RICES R ISE W HEN THE G OVERNMENT P RINTS T OO M UCH M ONEY Inflation is an increase in the overall level of prices in the economy. One cause of inflation is the growth in the quantity of money. When the government creates large quantities of money, the value of the money falls.

19. P RINCIPLE #10: S OCIETY F ACES A S HORT -R UN T RADEOFF B ETWEEN I NFLATION AND U NEMPLOYMENT The Phillips Curve illustrates the tradeoff between inflation and unemployment: Inflation is lower  Unemployment is higher It’s a short-run tradeoff!

20. T HINKING L IKE AN E CONOMIST

21. E CONOMIC M ODELS Economists use models to simplify reality in order to improve our understanding of the world Economists make assumptions in order to make the world easier to understand. Economists use different assumptions to answer different questions.

22. B ASIC E CONOMIC M ODELS Two of the most basic economic models include: The Circular Flow Diagram The Production Possibilities Frontier

23. C IRCULAR -F LOW D IAGRAM The circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms. Decision makers Firms & Households Markets For goods and services For factors of production

24. T HE C IRCULAR F LOW D IAGRAM Spending Goods and services bought Revenue Goods and services sold Labor, land, and capital Income = Flow of inputs and outputs = Flow of dollars Factors of production Wages, rent, and profit FIRMS Produce and sell goods and services Hire and use factors of production Buy and consume goods and services Own and sell factors of production HOUSEHOLDS Households sell Firms buy MARKETS FOR FACTORS OF PRODUCTION Firms sell Households buy MARKETS FOR GOODS AND SERVICES

25. P RODUCTION P OSSIBILITIES F RONTIER The production possibilities frontier is a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

26. Production possibilities frontier A B C Quantity of Cars Produced 2,200 600 1,000 300 0 700 2,000 3,000 1,000 Quantity of Computers Produced D

27. EFFICIENT OR INEFFICIENT? Efficient levels of production Economy’s getting all it can from the scarce resources available Points on the production possibilities frontier Trade-off: The only way to get more of one good is to get less of the other good Positive opportunity cost Inefficient levels of production Points inside production possibilities frontier. Zero opportunity cost.

28. S HAPE OF P RODUCTION P OSSIBILITIES F RONTIER Concave curve (bowed outward): The opportunity cost of producing one good increases as the production of this good rises. REASON: Some resources are better suited to the production of this good than another good (and vice versa). Straight line: The opportunity cost of producing one good is constant as the production of this good rises.

29. A S HIFT IN P RODUCTION P OSSIBILITIES F RONTIER Resource Availability Changes (natural resources, human resources, physical resources) Technology Changes

30. A SHIFT IN THE PRODUCTION POSSIBILITIES FRONTIER D UE TO A TECHNOLOGICAL ADVANCE IN COMPUTER INDUSTRY 30 Quantity of Computers Produced Quantity of Cars Produced 0 600 650 1,000 3,000 A 2,200 2,300 4,000 G

31. TECHNOLOGICAL ADVANCE A technological advance in the computer industry enables the economy to produce more computers for any given number of cars. As a result, the production possibilities frontier shifts outward. If the economy moves from point A to point G, then the production of both cars and computers increases.

32. I MPORTANT C ONCEPTS Concepts illustrated by the Production Possibilities Frontier Efficiency Tradeoffs Opportunity Cost Economic Growth

33. P OSITIVE AND N ORMATIVE A NALYSIS Positive statements are statements that attempt to describe the world as it is. Called descriptive analysis Normative statements are statements about how the world should be. Called prescriptive analysis

34. G AINS FROM T RADE

35. A UTARKY ( 自給自足 ) OR T RADE ? How do we satisfy our wants and needs in a global economy? We can be economically self-sufficient (Autarky). We can specialize and trade with others, leading to economic interdependence.

36. C ASE 1: T HE S IMPLEST E CONOMY only two goods: potatoes and meat only two people: a potato farmer and a cattle rancher Each only works 8 hours/day What should each produce? Why should they trade?

37. C ASE 1 ( CONTINUED ) Minutes needed to make 1 ounce of ___________________________________ Meat Potatoes ___________________________________ Farmer 60min/oz 15min/oz Rancher 20min/oz 10min/oz

38. C ASE 1 ( CONTINUED ) Amounts produced in 8 hours ___________________________________ Meat Potatoes ___________________________________ Farmer 8 oz 32 oz Rancher 24 oz 48 oz

39. T HE F ARMER ’ S P RODUCTION P OSSIBILITIES F RONTIER Potatoes (ounces) 8 32 0 Meat (ounces) (a) The Farmer’s Production Possibilities Frontier

40. T HE R ANCHER ’ S P RODUCTION P OSSIBILITIES F RONTIER Potatoes (ounces) 0 Meat (ounces) (b) The Rancher’s Production Possibilities Frontier 48 24

41. OPPORTUNITY COST Definition Whatever must be given up to obtain some item Measures the trade-off between the two goods that each producer faces

42. C ASE 1(C ONTINUED ): O PPORTUNITY C OSTS 1oz of meat1oz of potatoes Farmer4 oz of potatoes¼ oz of meat Rancher2 oz of potatoes½ oz of meat

43. A BSOLUTE A DVANTAGE The comparison among producers of a good according to their productivity — absolute advantage Describes the productivity of one person, firm, or nation compared to that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

44. C OMPARATIVE A DVANTAGE Compares producers of a good according to their opportunity cost. Whatever must be given up to obtain some item The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

45. S PECIALIZATION AND T RADE Comparative advantage and differences in opportunity costs are the basis for specialized production and trade.

46. B ENEFITS OF T RADE Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade. Benefits of Trade Trade can benefit everyone in a society because it allows people to specialize in activities in which they have a comparative advantage.

47. S ELF -S UFFICIENCY (A UTARKY ) By ignoring each other: Each consumes what they each produce. The production possibilities frontier is also the consumption possibilities frontier. Without trade, economic gains are diminished.

48. S ELF -S UFFICIENCY (A UTARKY ) IN C ASE 1 Assume: Farmer spends 4 hours on meat and 4 hours on potatoes. Rancher spends 4 hours on meat and 4 hours on potatoes.

49. C ASE 1 (C ONTINUED ): W ITHOUT T RADE Production: Farmer produces 4 oz of meat and 16 oz of potatoes. Rancher produces 12 oz of meat and 24 oz of potatoes. Consumption: Farmer consumes 4 oz of meat and 16 oz of potatoes. Rancher consumes 12 oz of meat and 24 oz of potatoes.

50. T HE F ARMER ’ S P RODUCTION AND C ONSUMPTION W ITHOUT T RADE Copyright©2003 Southwestern/Thomson Learning Potatoes (ounces) 4 16 8 32 A 0 Meat (ounces) (a) The Farmer’s Production and Consumption Farmer's production and consumption without trade

51. T HE R ANCHER ’ S P RODUCTION AND C ONSUMPTION W ITHOUT T RADE Copyright © 2004 South-Western Potatoes (ounces) 12 24 B 0 Meat (ounces) (b) The Rancher’s Production and Consumption 48 24 Rancher's production and consumption without trade

52. O NE P ROPOSAL FOR S PECIALIZATION Farmer devotes all his time to growing potatoes. Rancher spends 6 hours a day raising cattle and 2 hours growing potatoes.

53. P RODUCTION U NDER THIS P ROPOSAL Farmer’s production with Specialization: 0 oz of meat and 32 oz of potatoes Rancher’s production with Specialization: 18 oz of meat and 12 oz of potatoes.

54. P ROPOSAL FOR T RADE The price of trade Must lie between the two opportunity costs Trade deal: Farmer gives rancher 15 oz of potatoes, and rancher gives farmer 5 oz of meat in return. Note: Trade Price of Meat: 2~4 oz of potatoes Note: Trade Price of Potatoes: 1/4 oz ~1/2 oz of meat

55. C ONSUMPTION WITH T RADE Farmer’s consumption with trade: 5 oz of meat and 17 oz of potatoes Rancher’s consumption with trade: 13 oz of meat and 27 oz of potatoes.

56. H OW T RADE E XPANDS THE F ARMER ’ S S ET OF C ONSUMPTION O PPORTUNITIES Potatoes (ounces) 4 16 5 17 8 32 A A* 0 Meat (ounces) (a) The Farmer’s Production and Consumption Farmer's production and consumption without trade Farmer's consumption with trade Farmer's production with trade

57. H OW T RADE E XPANDS THE R ANCHER ’ S S ET OF C ONSUMPTION O PPORTUNITIES Potatoes (ounces) 12 24 13 27 B 0 Meat (ounces) (b) The Rancher’s Production and Consumption 48 24 12 18 B* Rancher's consumption with trade Rancher's production with trade Rancher's production and consumption without trade

58. I NTERNATIONAL T RADE Each country has many citizens with different interests. International trade can make some individuals worse off, even as it makes the country as a whole better off. Imports — goods produced abroad and sold domestically Exports — goods produced domestically and sold abroad