Economics Webcast #1 “Core Concepts”

1. Economics Webcast #1“Core Concepts” • Mark Truman • HKS - MPP Class of 2013

2. What is Economics? • Economics - the social science that analyzes the production, distribution, and consumption of goods and services. (Wikipedia) • Plain English: The study of how society allocates scarce resources. • Microeconomics - the subset of Economics that examines the behavior of basic elements in the economy, including individual markets and agents (such as consumers and firms, buyers and sellers). (Wikipedia) • Macroeconomics - the subset of Economics that examines issues affecting an entire economy, including unemployment, inflation, and economic growth • Plain English: Microecon is the study of people and firms; Macroecon is the study of nations and economies. The two overlap quite often...

3. Some Economic Terms We Need • Markets - Places where buyers and sellers meet to exchange goods and services. Markets can be both physical (Walmart) and virtual (Ebay) • Firms - Companies, both for-profit and non-profit, participating in markets • Agents - People or firms in the market who are going to buy and sell • Supply - The amount of goods or services for sale in the market at a given price • Demand - The amount of goods or services consumers are willing and able to purchase at a given price. • Equilibrium - The point where supply and demand are equal and markets clear. (More on this later!)

4. Perfect Competition • Specific Characteristics Include: • Infinite Buyers and Sellers • Zero Mobility Costs • Zero Entry/Exit Barriers • Perfect Information • Homogenous Products • Agents are “price takers”

5. Why Use Perfect Competition? It Does Not Exist! • Perfect competition offers us a basic model from which we can draw conclusions about the ways markets should work. When we view real markets, we can understand them by understanding how they differ from perfect competition. • Monopolies, for example, are a specific deviation from perfect competition. We can define how monopolies affect consumers because we understand how a perfectly competitive market works. • Much like Physics, Economics confronts a basic educational problem: How can we teach people about the core concepts of the field when every issue is riddled with confounding variables? Perfect competition removes enough of those complications to make Economics accessible to newcomers.

6. Supply and Demand Curves • Supply and Demand “curves” are the most fundamental model in Economics, representing how the market determines the amounts and prices of exchanges. • Demand curve is downward sloping, reflecting decreasing demand as prices increase • Supply curve is upward sloping, reflecting increased willingness by suppliers to supply when prices increase

7. Supply and Demand in a Competitive Market • The point at which the two curves meet (P* and Q*) is said to be the equilibrium point where the market “clears.” • The market will never be exactly at this point, but market forces push both consumers and producers toward equilibrium • High prices will lead to low demand, forcing producers to lower prices • Low prices will lead to high demand, encouraging suppliers to enter the market

8. Case Study: Minimum Wages • If the government institutes a price floor, it results in a surplus of labor. • Q* = 1,000; P* = 3.80 pounds • With a minimum wage, the demand for labor is 750 at a price of 4.20 pounds. But at that price, we have a surplus of labor; far more than 750 workers want jobs. • According to this model, is a minimum wage good or bad?

9. Questions? Comments? • Contact Mark directly at • mark.truman@gmail.com