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Introduction of economics

Nguyễn Việt Hưng

Cell phone: 0913.326.631

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What is economics?

Society and Scarce Resources:

The management of society’s resources is important because resources are scarce.

Scarcity. . .

means that society has limited

resources and therefore cannot produce all the goods and services people wish to have.

Economics is the study of how society

manages its scarce resources.

What is economics? Society and Scarce Resources: ◦ The management of society’s resources is important because

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Three key Economic questions

What products do we produce?

If the government rebuilds the sidewalk in Hanoi, it has fewer resources to care for the poor.

How do we produce the products?

Labor-intensive or capital-intensive industries

Who consumes the products?

Decide how to distribute the products of society

Three key Economic questions  What products do we produce? ◦ If the government rebuilds the

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factors of production

Natural resources Labor Physical capital Human capital Technology Entrepreneurship

Efforts to coordinate factors of production to produce

and sell products

factors of production  Natural resources  Labor  Physical capital  Human capital  Technology

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Macroeconomics vs. microeconomics  Macroeconomics is the study of the nation’s economy as a whole; it
Macroeconomics vs.
microeconomics
 Macroeconomics is the
study of the nation’s
economy as a whole;
it focuses on the
issues of inflation,
unemployment, and
economic growth
 Microeconomics is the
study of the choices
made by households,
firms, and government
and how these choices
affect the markets for
goods and services.
Macroeconomics Microeconomics
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Positive & Normative analysis

Positive analysis predicts the consequences of alternative actions by answering the question “What is?” or “What will be?”

Positive & Normative analysis  Positive analysis predicts the consequences of alternative actions by answering the

Normative analysis answers the question “What ought to be?”

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Comparing positive and normative Questions  If the government increases the minimum wages, how many workers
Comparing positive and
normative Questions
 If the government
increases the minimum
wages, how many workers
will lose their jobs?
 How does a college
education affect a
person’s productivity and
earnings?
 How do consumers
respond to a cut in
income taxes?
 Should the
government increase
the minimum wage?
 Should the
government subsidize
a college education?
 Should the
government cut taxes
to stimulate the
economy?
Positive questions
Normative questions
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Economic models

An economic model is a simplified representation of an economic environment, with all but the essential features of the environment eliminated. It is an abstraction from reality that enables us to focus our attention on what really matters.

Economic models  An economic model is a simplified representation of an economic environment, with all

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Figure 1: Supply & Demand Model Price A D Supply Consumer surplus Equilibrium E price Producer
Figure 1: Supply & Demand Model
Price
A
D
Supply
Consumer
surplus
Equilibrium
E
price
Producer
surplus
Demand
B
C
0
Equilibrium
Quantity
quantity

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FIGURE 2 THE CIRCULAR FLOW

Revenue Spending Goods MARKETS FOR GOODS AND SERVICES • Firms sell •Households buy Goods and and
Revenue
Spending
Goods
MARKETS
FOR
GOODS AND SERVICES
• Firms sell
•Households buy
Goods and
and services
services
sold
bought
FIRMS
• Produce and sell
goods and services
•Hire and use factors
of production
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
Labor, land,
Factors of
and capital
production
MARKETS
FOR
FACTORS OF PRODUCTION
Wages, rent,
Income
and profit
•Households sell
• Firms buy
= Flow of inputs
and outputs
= Flow of dollars

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The economy way of thinking

  • 1. Use assumptions to simplify and focus attention on what really matters

. The lesson is that we must think carefully about whether a simplifying assumption is truly harmless.

The economy way of thinking 1. Use assumptions to simplify and focus attention on what really

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Key principles of economics

  • 1. Principle of opportunity cost

  • 2. Real-nominal principle

  • 3. Marginal principle

  • 4. Principle of diminishing returns

  • 5. Rational people respond to incentives

  • 6. Principle of voluntary exchange

Key principles of economics 1. Principle of opportunity cost 2. Real-nominal principle 3. Marginal principle 4.

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Opportunity cost

Opportunity cost is what you sacrifice to get something

Example: A student spends total of $40,000 for tuition and books. Instead of going to college, he could have worked as a bank clerk for $20,000 per year and earned $80,000 over four years. What is the total opportunity cost of this student’s college degree?

Opportunity cost  Opportunity cost is what you sacrifice to get something ◦ Example : A

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FIGURE 3 THE PRODUCTION POSSIBILITIES FRONTIER

Quantity of Computers Produced 3,000 D C 2,200 A 2,000 Production possibilities frontier 1,000 B 0
Quantity of
Computers
Produced
3,000
D
C
2,200
A
2,000
Production
possibilities
frontier
1,000
B
0
300
600
700
1,000
Quantity of
Cars Produced

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Real-nominal principle

The nominal value of an amount of money is its face value.

The nominal tuition fee is $4,000 per year The money wage is 5 million VND

The real value of an amount of money is measured in terms of the quantity of goods the money can buy.

The real value of tuition fee would fall as the prices of other goods and services increase, even though the nominal tuition fee stayed the same

Real-nominal principle  The nominal value of an amount of money is its face value. ◦

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Marginal principle

The marginal principle is based on a comparison of the marginal benefits and marginal costs of a particular activity.

The marginal benefit of an activity is the additional benefit resulting from a small increase in the activity.

The marginal cost of an activity is the additional

cost resulting

from a small increase in the activity

Marginal principle  The marginal principle is based on a comparison of the marginal benefits and

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Marginal principle

People make decisions by comparing costs and benefits at the margin

No of

Total

Total

Marginal

Marginal

products

costs

benefits

cost

benefit

  • 1 10

20

10

20

  • 2 22

36

12

16

  • 3 36

50

14

14

  • 4 52

62

16

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Marginal principle  People make decisions by comparing costs and benefits at the margin No of

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Marginal principle

. Marginal changes in costs or benefits motivate people to respond.

. The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs!

Marginal principle . Marginal changes in costs or benefits motivate people to respond. . The decision

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Figure 4: The marginal principle

$ A D Marginal cost E Marginal benefit B C 0 1 2 3 Quantity
$
A
D
Marginal cost
E
Marginal benefit
B
C
0
1
2
3
Quantity

Diminishing marginal benefit

increasing

marginal cost

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Principle of diminishing returns

Suppose output is produced with two or more inputs, and we increase one input while holding the other input. Beyond some point – called the point of diminishing returns – output will increase at a decreasing rate.

Principle of diminishing returns  Suppose output is produced with two or more inputs, and we

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Principle of diminishing returns

Bags of nitrogen fertilizer Bushels of corn per acre Marginal returns 0 85 85 1 120
Bags of
nitrogen
fertilizer
Bushels of
corn per acre
Marginal
returns
0
85 85
1
120 35
2
135 15
3
144 9
4
147 3
Principle of diminishing returns Bags of nitrogen fertilizer Bushels of corn per acre Marginal returns 0

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People respond to incentives

How does law of fastening seat-belt when driving affect the number of deaths due to car accidents?

People respond to incentives  How does law of fastening seat-belt when driving affect the number

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Principle of Voluntary exchange

People act in their own self-interest, therefore, they won’t exchange one thing for another unless the trade makes them better off.

Trade allows people to specialize in what they do best, so you can enjoy a better standard of livings than producing everything themselves, or self-sufficiency.

Market is usually a good way to organize the economy

Principle of Voluntary exchange  People act in their own self-interest, therefore, they won’t exchange one

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Market failure and role of government

Market failure happens when a market doesn’t generate the most efficient outcome, then government interventions can be expected to improve the efficiency of market outcomes.

Externalities Public goods Imperfect information Imperfect competition

Uncertainty

Market failure and role of government  Market failure happens when a market doesn’t generate the

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Market failure and role of government

Externalities

The effects of a decision on a third party that are not taken into account by the decision maker They can be classified into either positive or negative one. Government can use direct regulation, incentive policies such as tax or subsidy, or voluntary solutions to achieve the socially desirable outcomes.

Market failure and role of government  Externalities ◦ The effects of a decision on a

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Market failure and role of government

Public goods

A good that is nonexclusive (no one can be excluded from its benefits) and nonrival (consumption by one does not preclude consumption by others). Public goods could not be provided by the private business which only pays attention to its self-interest Government generally provides goods with significant public aspects to them.

Market failure and role of government  Public goods ◦ A good that is nonexclusive (no

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Market failure and role of government

Imperfect information

People could not gather enough information to make informed decisions about how much to produce or consume most efficiently. Government can disseminate information and promote informed choices.

Market failure and role of government  Imperfect information ◦ People could not gather enough information

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Market failure and role of government

Imperfect competition

Some markets are dominated by a few large firms, and the lack of competition leads to high prices and small quantities, which can be considered as social inefficiency. Government can foster competition to achieve socially optimal output.

Market failure and role of government  Imperfect competition ◦ Some markets are dominated by a

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Market failure and role of government

A lot of risks and unfair allocations exist in the real life which are not considered by markets

Poor child has no education and continue with a life of misery. Natural disasters or human accidents Unemployment due to recession

Government can reduce economic uncertainty by providing the poor with a “social safety net”,

Market failure and role of government  A lot of risks and unfair allocations exist in

implementing stabilization policies.

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