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2017 Bootcamp. John Glenn College of Public Affairs Zhongnan Jiang. Outline. What is Economics? Scarcity Opportunity cost Macro vs. Micro Individual decision making Marginal analysis Budget Line Markets Supply and Demand, and Equilibrium
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2017 Bootcamp John Glenn College of Public Affairs Zhongnan Jiang
Outline • What is Economics? Scarcity Opportunity cost Macro vs. Micro • Individual decision making Marginal analysis Budget Line • Markets Supply and Demand, and Equilibrium Consumer & Producer Surplus Competitive market and market failure
What is Economics • A study of how to allocate scarce resources Note: scarcity means opportunity cost > zero
Opportunity cost The value of the highest valued foregone alternative. Question: Someone gave you a diamond for free. What is the price? What is the opportunity cost? Price does not equal to opportunity cost!
Micro vs. Macro • Macroeconomics • The economy as a whole • Monetary / fiscal policy. e.g. what effect does interest rates have on whole economy? • Inflation, and unemployment • Economic Growth • International trade and globalization • Government borrowing
Microeconomics • Activities of individuals & markets, meaning: How a market allocates resources Individual decision-making
Focus on Microeconomics • Rationality assumption 1. Preferences 2. Utility maximizers. 3. Perfect information
Individual decision-making • Marginal analysis Marginal cost VS. Marginal benefit For producers, they compare marginal cost with marginal revenue. For consumers, they compare marginal expenditure with marginal utility. • Producers/consumers will choose an option that marginal benefit exceeds marginal cost. • The law of diminishing marginal benefit
Budget Line • What is a budget line? X-axis, Y-axis, and Slope • A change in income, then… • A change in prices, then…
Market • Demand curve • Schedule showing how much consumers are willing to pay for a good or service • Law of Demand • Supply curve • Schedule showing the cost of producing a good or service at each quantity • Equilibrium • Movement along the demand/supply curve (which is caused by changes in price) and movement of the demand/supply curve
Consumer surplus The difference between what consumers are willing and what they actually do spend on the good or service. • Producer surplus The difference between the amount a producer receives and the minimum amount the producer is willing to accept for the good.
Markets • A space where buyers and sellers interact to set prices • Competitive Markets • Many Buyers & Sellers • Low Barriers to Entry or Exit • Perfect Information • Homogeneous Goods • Market Failures
Market failures and public policy • When markets fail, government intervention can restore efficiency • Government intervention in a well-functioning market is inefficient • In late 2013, the Venezuelan government nationalized a toilet paper factory in an attempt to combat a severe shortage. Why was there a toilet paper shortage in the first place? There was a price ceiling on TP, which created a deadweight loss • Examples from the US: Rent control