Global Economics for Managers MBA 505

1. Global Economics for ManagersMBA 505  Stephen E. Margolis MBA 505 Economics for Managers

2. Economics It’s not about the money MBA 505 Economics for Managers

3. Economics Defined The study of: • Responses of humans to unlimited wants and limited resources. • Scarcity Elaborations: • Exchange (James Buchanan) • Optimization and coordination MBA 505 Economics for Managers

4. So, what are we? • Greedy materialists? MBA 505 Economics for Managers

5. So, what are we? • Greedy materialists? Or • Noble visionaries? MBA 505 Economics for Managers

6. Our concern is with anything that people value. Yes, it’s all the stuff we buy: food, shelter, clothing, entertainment, education, medical care, automobiles, travel, jewelry, art, gadgets and so on. It is also everything else we value. Security, health, clean air and water, leisure, privacy, …children… MBA 505 Economics for Managers

7. But isn’t scarcity temporary? No We will live in scarcity – in the economists sense of it, so long as we can imagine things we would like to have….more food, better food, better health, safer cars, cleaner air, faster travel, more free time. So again, is it greed? Imagination? MBA 505 Economics for Managers

8. Adam Smith on self interest: He advocates generosity in The Theory of Moral Sentiments, but in The Wealth of Nations famously offers this: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” MBA 505 Economics for Managers

9. What Makes Economics Different? • Scarcity: The inevitability of choice. Cost is the value of what is given up— Opportunity Cost • Rationality: People pursue their own interests as they know it. • Competition • Individualism: As a methodology As an ethical foundation MBA 505 Economics for Managers

10. Today’s Lecture • Definition (done) • Course operation • Approach to economics • Law of demand • Supply and demand • Prices • Costs • Comparative Advantage MBA 505 Economics for Managers

11. Course Operation • Syllabus • Groups • Evaluation • Moodle • Paper MBA 505 Economics for Managers

12. About this course Economics for business Primarily microeconomics, but with some coverage of macroeconomics and the principles of trade Introductory—intermediate level Economics of business decisions Applied as opposed to theoretical It can be a first course in economics. MBA 505 Economics for Managers

13. P (Don’t copy this down) Pm MC Q MR D MBA 505 Economics for Managers

14. P 5675 (This either) Pm MC Q 456550 12389 MR D MBA 505 Economics for Managers

15. Objectives Understand how markets work Understand the economic logic in business decisions. In other contexts this is expressed as organization and optimization, respectively. MBA 505 Economics for Managers

16. Normative and Positive Economics • Positive • Normative • Prescriptive MBA 505 Economics for Managers

17. Normative and Positive Economics • Positive: What is • Normative: What’s good • Prescriptive: What to do (See Normative) MBA 505 Economics for Managers

18. Managers Are Teachers  Stephen E. Margolis

19. Mathematics MBA 505 Economics for Managers Algebra 1? y = mx + b p = a - bq

20. This will become familiar P = a - bQ a Q/t a/b P MBA 505 Economics for Managers

21. This will become familiar P = a - bQ a -b is the slope, a is the vertical intercept Q/t a/b P MBA 505 Economics for Managers

22. More math I will use some calculus. It will always be optional. Some things are easier and more persuasive that way. MBA 505 Economics for Managers

23. Back to Economics Demand, Supply, and Equilibrium A very quick overview.

24. The fundamental structure of economics Incentives matter.We pick the low hanging fruit first. MBA 505 Economics for Managers

25. The fundamental structure of economics Incentives matter. We pick the low hanging fruit first. Law of demand The law of diminishing marginal product Supply behavior MBA 505 Economics for Managers

26. The Law of Demand If the price of some good goes up, all other things equal, the quantity of the good that is consumed will fall. Incentives Matter What would the alternative be? MBA 505 Economics for Managers

27. Suppose Green Peppers Regular Price: $.99 per pound Today Only: $1.49 MBA 505 Economics for Managers

28. Demand as a Diagram Price 0 Q/t A flow MBA 505 Economics for Managers

29. Demand as a Diagram(My coffee consumption) Price * * * 1 2 3 3.00 2.00 1.00 0 Q/t A flow MBA 505 Economics for Managers

30. Demand as a DiagramHillsborough St. Shops Price * * * 1,000 2,500 5000 3.00 2.00 1.00 0 Q/t A flow MBA 505 Economics for Managers

31. It’s not (just) about the money • Extensions to the law of demand • Seatbelts • Meetings • Emily’s Band-Aids • Insulin • Shaving MBA 505 Economics for Managers

32. Supply P S Q/t MBA 505 Economics for Managers

33. S and D P S Po D Qo Q/t MBA 505 Economics for Managers

34. Price Adjustment P Po D Q/t MBA 505 Economics for Managers

35. More price Adjustment P Po D Q/t MBA 505 Economics for Managers

36. S and D S’ P S P’ Po D Qo Q/t MBA 505 Economics for Managers

37. S and D P S S’ Po P1 D Q1 Qo Q/t MBA 505 Economics for Managers

38. S and D P S Po D1 D Q/t Q1 Qo MBA 505 Economics for Managers

39. S and D (one more time) P S Po P1 D D’ Q0 Q1 Q/t MBA 505 Economics for Managers

40. About Prices MBA 505 Economics for Managers

41. About Prices • Chapter 2 material. • What matters is relative price. • How many restaurant meals per month do I give up to make payments on an Cayman S. • How many loaves of bread do I give up to get a bottle of wine? • How many hours of leisure do I give up to get a 60” HDTV MBA 505 Economics for Managers

42. Suppose every price doubles You wage is a price, that doubles too. So do all your stocks. And your bonds too. (Although that one is more of a fantasy) What Happens? MBA 505 Economics for Managers

43. 2008 2013 Movie 6.00 9.00 Ticket 1 lb. Coffee 10.00 12.00 MBA 505 Economics for Managers

44. What Is Pure Inflation? A balanced increase in the prices of all goods, services and non money- denominated assets. MBA 505 Economics for Managers

45. Does that ever happen? MBA 505 Economics for Managers

46. Does that ever happen? Well actually, No. MBA 505 Economics for Managers

47. What about the overall price level? Suppose some prices went up 20% and some prices went up 50%, and you wanted to know what happened to the price level? MBA 505 Economics for Managers

48. Laspeyres Index X 100 The cost of the old bundle at the new prices The cost of the old bundle at the old prices MBA 505 Economics for Managers

49. A price index MBA 505 Economics for Managers

50. Even Steven Vegetarians, just make believe for a minute. Suppose the price of beef goes up dramatically, but no other price changes. Suppose further that the cost of the bundle that you consume goes up exactly 5%. And finally, suppose you get a raise of exactly 5%, just to keep things even. Are things even? MBA 505 Economics for Managers