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Introductory Economics ECON1000 S2 2016

Introductory Economics ECON1000 S2 2016. Unit Controller: Dr. Sherry Bawa My Office: Bld. 402, Room 619 Phone: +618 9266 9691 Sherry.bawa@curtin.edu.au Lecturers: Dr. Sherry Bawa on microeconomics (lecture topics, L1 to L5)

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Introductory Economics ECON1000 S2 2016

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  1. Introductory EconomicsECON1000 S2 2016 Unit Controller: Dr. Sherry Bawa My Office: Bld. 402, Room 619 Phone: +618 9266 9691 Sherry.bawa@curtin.edu.au Lecturers: • Dr. Sherry Bawa on microeconomics (lecture topics, L1 to L5) • Associate Professor Garry MacDonald on macroeconomics (lecture topics, L6 to L10) ECON1000 S2 2016 Lecture Series on Bentley campus: Series 1: Tuesdays 2pm (405.201) Series 2: Thursdays 8am (210.101)

  2. Learning Resources • Unit Outline • An informative guide of the unit • Lectures • Recorded videos and lecture slides on Blackboard under “learning modules” tab • Workshops/ Tutorials • Snapshot of the lecture • Discussion Questions • Blackboard • Announcements • Lecture materials • Assessments and other important information • Textbook • Hard copy, E -text version and my econ lab.

  3. Introductory Economics • Blackboard (Bb) Website – Check Regularly! • Announcements/messages • Lecture slides, iLectures, chapter summary notes • Sample test and past student essay papers • Assessment info (quizzes, test, essay) • Workshop materials (tutorial qs etc.) • MyEconLabinfo • Student consult times

  4. Sample Cover  TextbookValue Pack Introductory Economics (Custom Edition) + Media Access, ISBN: 9781488608650 • Custom text for 2016 • MyEconLab • See BB for Course ID code • E-Text version of the book: See BB for details

  5. Assessment

  6. Introductory Economics : About the Unit • Microeconomics • Understanding Economic concepts • Demand and Supply Analysis • Elasticity • Economic Efficiency • Behavioural Economics and Asymmetric Information • Macroeconomics • Macroeconomic Aggregates: GDP, Unemployment and Inflation • Aggregate Demand and Aggregate Supply • Monetary Policy • Fiscal Policy • Exchange Rates

  7. Why Economics? • To understand the challenges and opportunities around you, you need to understand the powerful forces at play. And Economics helps in that. Economics helps in better decision making • Decisions you make as a consumer • Decisions you make as a producer • Decisions you make as a govt. body • Decisions you make as a household • Decisions you make as a student and so on Economics covers some of the basic questions such as: • How the prices get determined • How the markets work • What if the markets fail: Govt. intervention • How the economies grow • National Incomes and Business Cycles • Monetary and Fiscal Policies • International trade and so on

  8. L1, Chapter 1 Part AECONOMICS: FOUNDATIONS AND MODELS • Important economic concepts: • scarcity • opportunity cost • marginal analysis

  9. Scarcity: A definition of economics • We all live in a world of scarcity. • Scarcity forms the basis of economics. • Scarcity is universal: e.g. limited resources, workers, machines,natural resources, housing, food.[e.g. manufacturing industry in Australia] • Economics is how to deal with this scarcity in a most effective manner. • Economics is a study of decisions people make to deal with the basic economic problem i.e. the problem of unlimited wants but scarce resources.

  10. Definition of Economics (cont.) • Economics is the study of how scarce resources are allocatedto produce goods and services that will (attempt to) satisfy unlimited wants. • When there is not enough of a resource (scarcity)—housing, food, water, energy, forests, skilled workers, and so on—there must be some system for determining three basic questions: • What goods & services will be produced? • How they will be produced? and • Who will get those goods & services?

  11. Scarcity and Trade-offs Trade-off:The idea that because of scarcity, producing more of one good or service means producing less of another good or service so a trade off. Everybody makes the trade offs; Consumers : because limited incomes that consumers can spend on goods and services Workers : because limited number of hours in a week that workers can allocate to labor or leisure Firms : because limited budgets and technical know-how that firms can use to produce things

  12. The ‘trade-off’: Govt. • Even govt. faces scarcity and makes a trade off. • spend vs. save • defence spending vs. healthcare • clean environment vs. economic growth 12

  13. Scarcity and Trade-offs An important tradeoff in Economics is between Efficiency and Equity • Efficiency: • Are goods & services being produced at their lowest cost? • Is society getting the goods & services it wants? • Is the economy quick to adapt & innovate? • Equity: • are people getting a fair share of the economy’s goods & services?

  14. Definition of economics (cont.) • Microeconomics • is the study of choices made by individuals and businesses, the way these choices interact in markets, and the influence of governments. • Macroeconomics • Is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

  15. The [traditional] economic way of thinking – how people make decisions?

  16. An economic way of thinking… • People are rational • People respond to economic incentives • Optimal decisions are made at the margin What do these mean?

  17. The Economic Way of Thinking (cont.) • Opportunity cost • The highest-valued alternative that we give up to get something • It is the cost of the next best alternative foregone • Opportunity cost includes the value of time • [Economists use this concept of cost while making decisions.

  18. Opportunity Cost – education • The opportunity cost of attending university includes: - education fees / loans - texts - parking permit - foregone salary

  19. Opportunity Cost – having a child • What is the opportunity cost of having a child? medical expenses baby goods leisure time foregone income • What has happened to the fertility rate in Australia? • Fertility rate – the average number of babies born per female

  20. Australia’s Fertility Rate, 1930-2014 Notice the dramatic fall in Australia’s fertility rate from a high of 3.5 babies per female in 1961 to below 2 today (1.8 in 2014) Why are females ‘producing’ less children now than in the 1960s? Are infants/children an inferior good?

  21. Opportunity Cost – baby making • In the 1960s most families in Australia were a single income unit – low opportunity cost • Today, most families are two income: the foregone income may be $60,000 + • Less children are being produced because … the opportunity cost of a child has increased substantially

  22. Opportunity Cost – going to moviesCircle your answer Suppose you find a 20 dollar note. If you choose to use the $20 to go to the movies, your opportunity cost of going to the movies is • nothing, because you found the money. • $20. • $20 plus the value of the time spent at the movies. • $20 plus the value of the time spent at the movies plus the cost of a coke & popcorn you consumed.

  23. Opportunity Cost – reading a book During the next three (3) hours Nammy Foo can choose one of the following three (3) activities: • attending a music festival • reading an economics book • playing Toca Boca games with his niece on the iPad What is the opportunity cost of reading the economics book?

  24. Opportunity Cost – reading a book Circle your answer • depends on how much Nammy enjoys the book. • depends on how much the book cost when it was purchased. • is the value of listening to music at the festival and the value of playing fun games on iPad. • is the value of playing fun games on iPad if Nammy prefers that to going to the music festival.

  25. An Economic Way of Thinking – Choosing at the margin • People make rational choices at themargin by comparing benefits with costs • The benefit that arises from an increase in an activity is its marginal benefit (MB). • The cost of an increase in an activity is its marginal cost (MC).

  26. Choosing at the margin • Marginal benefit and marginal cost act as incentives— inducements to take a particular action. • For any activity, if MB > MC, people have an incentive to do more of that activity. • If MC > MB, people have an incentive to do less of that activity.

  27. Marginal Changes • You have so far spent $1000 building a hot dog stand expecting sales to be $2000. Sales are now only estimated to be $800, and you need to spend another $300 to complete the stand. • Should you complete the stand?

  28. Example – allocating police resources No. of Total Total Police Benefits Costs 0 0 0 100 80,000 40,000 200 140,000 80,000 300 185,000 120,000 400 210,000 160,000

  29. Allocating Police Resources • Notice that as we employ more police resources, total benefits increase but at a decreasing rate! • Why?

  30. Using Resources Efficiently • Preferences and marginal benefit • It is a general principle that the more we have of any good or service, the smaller its marginal benefit. • We call this general principle the principle of decreasing marginal benefit.

  31. Total & Marginal Benefits Total Marginal Benefits Benefits 0 - 80,000 80,000 140,000 60,000 185,000 45,000 210,000 25,000

  32. Example – allocating police resources • What is the ‘best’ number of police to employ? • What is the most efficient use of society’s scarce resources? • Calculate Marginal Benefits and Marginal Costs

  33. Example – allocating police resources No. of Marginal Marginal Police Benefits Costs 0 - - 100 80,000 40,000 200 60,000 40,000 300 45,000 40,000 400 25,000 40,000

  34. Example – allocating police resources • The “optimal” no. of police = • When MB = MC The difference between total benefits and total costs i.e. net benefits are at a maximum

  35. No. of Total Total Police Benefits Costs 0 0 0 100 80,000 40,000 200 140,000 80,000 300 185,000 120,000 400 210,000 160,000 Example – allocating police resources

  36. Example – allocating police resources No. of Net Police Benefits (TB-TC) 0 - 100 40,000 200 60,000 300 65,000 400 50,000

  37. The Efficient Use of Resources $ Net benefits 80,000 60,000 MC 40,000 20,000 MB Police 0 100 200 300 400

  38. An Economic Way of Thinking – Responding to incentives • A change in marginal cost or marginal benefit will change the incentives people face • Economists predict how people change their choices when incentives change • What happened to the fertility rate when the government introduced the baby bonus? Answer :

  39. Economic Models • Economics use models to help explain economic observations • An economics model is a simplification of economic reality that is used to make predictions • Models are used to develop theories aboutcause and effect. • We need to decide on the assumptions to be used in developing the model.

  40. Economic Models & Ceteris Paribus • Economic models are based on assumptions: • Ceteris Paribusassumption • “all other things equal” • considers the effect of a change in one factor assuming that all other relevant factors remain the same • allows us to concentrate attention on one single factor at a time

  41. Ceteris Paribus • How do variables A, B and C affect Y? A Y B C

  42. Beer Example of ‘Ceteris Paribus’ • The relationship between the price of beer and beer sales: data reveals that a 20% rise in P(beer) results in a 10% fall in sales [ceteris paribus] • What other factors are held constant? • Suppose the govt increases the tax on beer raising price by 20% … but also introduces a wine tax raising wine prices by 50% and beer sales actually increase by 20%!

  43. Part A Review A rational person does not act unless a. the action makes money for the person. b. the action produces marginal benefits that exceed marginal costs. c. the action produces marginal costs that exceed marginal benefits. d. the action is ethical.

  44. Part A Review In order for a good to be an economic good • it must be scarce. • it must be traded in a market. • it must be produced efficiently. • it must be privately rather than publicly produced.

  45. Part A Review Your neighbour Peachy ran out of coffee, so you gave her an unopened bag. You bought the coffee just before the price increased. You paid $6.00 but the coffee would now cost $9.00 to replace. To compensate for your opportunity cost, Peachy should pay you: a. $9.00, which is your replacement cost. b. $7.50, which splits the difference between the old and new price. c. $6.00, which is what you paid for the coffee. d. nothing; the coffee is a sunk cost.

  46. L1, Chapter 1 Part BChoices and Trade-offs in the Market • Important concepts: • economic efficiency • production possibility frontiers • economic growth

  47. Production Possibilities Frontier (PPF) • The production possibilities frontier (PPF) is agraph showing the various combinations of output that the economy can possibly produce given the available factors of production and technology. • Ideas illustrated by PPF: • Trade-offs • Opportunity Cost • Efficiency • Economic Growth

  48. The Production Possibilities Frontier • The production possibilities frontieris a curve showing the various (maximum) possible combinations of two products that can be produced with the available resources. • The PPF helps demonstrating how producers make decisions in the world of scarcity when they have limited resources to produce.

  49. Ideas Illustrated by the PPF • Trade-offs • Opportunity Cost • Efficiency • Economic Growth

  50. The Production Possibility Frontier • Assumptions • resources are used to produce two goods • Total resources (natural, human, social, capital) are fixed (for a given time period) • Technology is fixed

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