1. 2017 Bootcamp John Glenn College of Public Affairs Zhongnan Jiang

2. 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

3. What is Economics • A study of how to allocate scarce resources Note: scarcity means opportunity cost > zero

4. 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!

5. 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

6. Microeconomics • Activities of individuals & markets, meaning: How a market allocates resources Individual decision-making

7. Focus on Microeconomics • Rationality assumption 1. Preferences 2. Utility maximizers. 3. Perfect information

8. 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

9. Budget Line • What is a budget line? X-axis, Y-axis, and Slope • A change in income, then… • A change in prices, then…

10. 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

11. 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.

12. 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

13. 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