Rocks and Shoals

1. Rocks and Shoals • Tips on getting through this course. • Skim read the assignments before class • This an foundation knowledge course – that means we will be building on this base in future courses • Reading the material the night before the exam will invariably lead to a poor grade. • Keep up with the homework questions. They are key to doing well on the exams. Dr. David P Echevarria

2. Rocks and Shoals • Attendance; key to learning • ECN 221 lectures involve some complex material. Missing class discussions will affect exam performance. • Class Participation • ASK QUESTIONS if something is not clear. • Your ability to compete is largely a function of knowledge, preparation, and participation. • Email • I use email to communicate important information to students. Make certain your email account is able to receive mail. Dr. David P Echevarria

3. A Final Thought on Exams • Life is not fair. • Honesty is still the best policy. • Call or email me if your world blows up just before exams. We can always work something out. • If you don’t – it means you get Exam Version 2 which is the nightmare exam. • Proper prior planning prevents poor performance Dr. David P Echevarria

4. LECTURE #1: MICROECONOMICSCHAPTER 1 Ten Principles Economics as Science Dr. David P Echevarria

5. Economics & Scarcity • Society allocates people, land, buildings, and machines to various productive tasks. It also allocates the output of goods and services produced. • Society decides who will eat caviar and who will eat potatoes. It must decide who will drive a Ferrari and who will take the bus. • Allocation is necessary because goods and services are scarce relative to the demand for those same goods and services. Dr. David P Echevarria

6. Economics & Scarcity • Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Just as each member of a household cannot get everything he or she wants, each individual in a society cannot attain the highest standard of living to which he or she might aspire. • Economics is the study of how society manages its scarce resources. How are resources allocated and who makes the allocation decisions is the subject of economics. Dr. David P Echevarria

7. Ten Principles of EconomicsHow People Make Decisions • 1. Decision makers face trade-offs. • "Guns vs. Butter" argument • Clean environment vs. high levels of income argument • Efficiency vs. Equality: dividing the pie – the role of gov't • 2. All things incur opportunity costs • What must you give up in order to get something else? • 3. People are economically rational • Decision making at the margins • The concept of marginal costs vs marginal benefits • 4. Incentives Matter • What induces a person to act? • Government Policy and Social Objectives Dr. David P Echevarria

8. Ten Principles of EconomicsHow People Interact • 5. Trade makes every one better off • Comparative advantage and opportunity costs • 6. Free markets are the most efficient way to organize economic activity • Moving the allocation and production decisions to the individual • Price are an important allocation criterion • 7. Governments can sometimes improve market outcomes • The key word is 'sometimes' • The property rights issue • Market power: ability to influence outcomes • Market failure: inefficient allocation of resources Dr. David P Echevarria

9. Ten Principles of EconomicsHow The Economy As A Whole Works • 8. The Standard of Living reflects the ability to produce goods and services • What causes differences in the standard of living across countries? • Why is productivity important? • Why are property rights and stable democratic governments necessary? • 9. Governments can upset the economic cart • Financing public services by printing money >>> inflation • 10. Is there a short-term trade-off between Inflation and Unemployment • What causes inflation: too much money or too much demand or both? • Does the economy need some level of inflation to work? • The role of governmental policy Dr. David P Echevarria

10. Break Time Dr. David P Echevarria

11. Economist as Scientist/InvestigatorChapter 2 • Economics = Science => Economist=Scientist • The Scientific Method • Collect Data (observation or experimentation) • Formulate Behavioral Hypotheses • Make Predictions (attention to role of uncertainty) • Run Experiments to prove/disprove behavioral hypotheses. Dr. David P Echevarria

12. Economist as Scientist/InvestigatorChapter 2 • The Role of Assumptions • Simplifying facts about the world around us • Identifying the essential elements of the few to generalize about the many • The Role of Models • Models are used to describe the way the world works • Models consist of diagrams and equations • Example 1: The Circular Flow of Money and Goods (Figure 1) Dr. David P Echevarria

13. Circular Flow of Money and GoodsFactor Inputs and Outputs Diagram is a schematic representation of the organization of the economy. Decisions are made by households and firms. Households and firms interact in the markets for goods and services and in the markets for the factors of production. The outer set of arrows shows the flow of dollars, and the inner set of arrows shows the correspon-ding flow of inputs and outputs.

14. Production Possibilities Frontier • Production possibilities frontier • A graph showing the various combinations of output that the economy can possibly produce… • Given the available • Factors of production (labor, capital, materials) • Production technology (capital intensity)

15. Production Possibilities Frontier Quantity of Computers Produced The production possibilities frontier shows the combinations of output - in this case, cars and computers - that the economy can possibly produce. The economy can produce any combination on or inside the frontier. Points outside the frontier are not feasible given the economy’s resources. 3,000 Production Possibilities Frontier 2,200 2,000 1,000 B F A E C D 300 600 700 0 1,000 Quantity of Cars Produced

16. Productivity • Technological advance • Outward shift of the production possibilities frontier • Economic growth • Produce more of both goods

17. A shift in the production possibilities frontier Quantity of Computers Produced 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. 3,000 4,000 2,200 2,300 G A 600 650 0 1,000 Quantity of Cars Produced 3 17

18. Economist as Policy Advisor Chapter 2 • The Positive vs. Normative [Argument] • Positive – the way things are (descriptive) • Normative – the way things ought to be (prescriptive) • Business Week (April 27: "What Good Are Economists Anyway?“) • "Why they failed to predict the global economic crisis – and why their help is critical to a recovery." • The "reality" – predicting the future is more art than science. A lot has to do with our assumptions and our experiential memories. • Thomas Sargent (NYU): "…the economy is volatile, in part, because households and businesses hold 'fragile beliefs' that shift quickly." (pg 031) Dr. David P Echevarria

19. Sources of Disagreement among EconomistsChapter 2 • Differences in Scientific Judgments (opinions regarding interpretation) • Differences in Measuring Impact of Policy • The problem of perception versus reality Dr. David P Echevarria

20. A Quick Review of GraphingChapter 2 • Cause (X-axis) and Effect (Y-axis) • Magnitude (Y) and Time (X) • Grade Point Average (Y) and Time Spent Studying (X) • Slope and Intercept • Slope = the rate of change in Y given a change in X (Dy / Dx) • Intercept: The value of Y when X = zero. Dr. David P Echevarria

21. Homework Assignment • Chapter 1: • Questions for Review: 1, 3, 4, 6, 8, 9 • Problems and Applications: 1 (parts a, b, c, and e), 8, 12 (parts a and b) • Chapter 2: • Questions for Review: 2, 3, 4, 7, 9 • Problems and Applications: 4 (parts a, b), 6 Dr. David P Echevarria