Lecture one

1
Lecture one

• Introduction

2
WHAT DO ECONOMISTS STUDY?

• Scarcity the central economic problem
• How to reconcile the conflict of
  peoples limitless desires for goods and
  services and the scarcity of resources
  (labour, machines and raw materials) with
  which these goods and services are
  produced.

3
WHAT DO ECONOMISTS STUDY?

• Macroeconomic issues
• growth
• cyclical fluctuations
• unemployment
• inflation
• balance of payments problems

4
WHAT DO ECONOMISTS STUDY?

• Microeconomic issues
• choices what, how and for whom
• the concept of opportunity cost
• rational economic decision making
• marginal costs and marginal benefits
• MBgt MC ? do more
• MC gt MB ? do less

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Oil Prices
Rapid growth in demand from China
Iraq invades Iran
OPECs first quotas
Impending war with Iraq
Revolution in Iran
Iraq invades Kuwait
World-wide recovery
First oil from North Sea
World-wide slowdown
Recession in Far East
Cease-fire in Iran-Iraq war
New OPEC quotas
Yom Kippur War Arab oil embargo
6
An increase in the price of oil affects

• What to produce
• less oil-intensive products
• How to produce
• less oil-intensive techniques
• For whom to produce
• oil producers have more buying power importers
  have less

7
The distribution of world population and GNP, 2007
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WHAT DO ECONOMISTS STUDY?

• The production possibility frontier
• what the curve shows

9
A production possibility frontier
Units of food (millions)
Units of clothing (millions)
10
A production possibility frontier
a
Units of food Units of clothing (millions)
(millions) a 8m
0.0 7m 2.2m
6m 4.0m 5m
5.0m 4m 5.6m
3m 6.0m 2m
6.4m 1m
6.7m 0 7.0m
Units of food (millions)
Units of clothing (millions)
11
A production possibility frontier
b
Units of food Units of clothing (millions)
(millions) 8m
0.0 b 7m 2.2m
6m 4.0m 5m
5.0m 4m 5.6m
3m 6.0m 2m
6.4m 1m
6.7m 0 7.0m
Units of food (millions)
Units of clothing (millions)
12
A production possibility frontier
c
Units of food Units of clothing (millions)
(millions) 8m
0.0 7m 2.2m c
6m 4.0m 5m
5.0m 4m 5.6m
3m 6.0m 2m
6.4m 1m
6.7m 0 7.0m
Units of food (millions)
Units of clothing (millions)
13
A production possibility frontier
x
Units of food (millions)
Units of clothing (millions)
14
WHAT DO ECONOMISTS STUDY?

• The production possibility frontier
• what the curve shows
• microeconomics and the production possibility
  frontier
• choices and opportunity cost

15
Increasing opportunity costs
x

y
Units of food (millions)
Units of clothing (millions)
16
WHAT DO ECONOMISTS STUDY?

• The production possibility frontier
• what the frontier shows
• microeconomics and the production possibility
  frontier
• choices and opportunity cost
• increasing opportunity cost

17
Increasing opportunity costs
x
y
Units of food (millions)
z
Units of clothing (millions)
18
WHAT DO ECONOMISTS STUDY?

• The production possibility frontier
• what the frontier shows
• microeconomics and the production possibility
  frontier
• choices and opportunity cost
• increasing opportunity cost
• macroeconomics and the production possibility
  frontier
• production within the frontier

19
Making a fuller use of resources
Food
O
Clothing
20
WHAT DO ECONOMISTS STUDY?

• The production possibility frontier
• what the frontier shows
• microeconomics and the production possibility
  frontier
• choices and opportunity cost
• increasing opportunity cost
• macroeconomics and the production possibility
  frontier
• production within the frontier
• shifts in the frontier

21
Growth in potential output
Food
O
Clothing
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Growth in potential output
Food
Now
O
Clothing
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The role of the market circular flow of goods
and incomes
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Goods and services
25
Goods and services
Consumer expenditure
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Goods and services
Consumer expenditure
Services of factors of production (labour, etc)
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Goods and services
Consumer expenditure
Wages, rent dividends, etc.
Services of factors of production (labour, etc)
28
Goods and services
Consumer expenditure
GOODS MARKETS
FACTOR MARKETS
Wages, rent dividends, etc.
Services of factors of production (labour, etc)
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The price mechanism the effect of a rise in
demand
Goods Market
until Dg Sg
30
The price mechanism the effect of a rise in
demand
Goods Market
Sg

Dg
shortage (Dg gt Sg)
Pg


until Dg Sg
Dg

Factor Market
until Df Sf
31
Man has almost constant occasion for the help of
his brethren and it is in vain for him to expect
it from their benevolence only It is not from
the benevolence of the butcher, the brewer, or
the baker that we expect our dinner, but from
their regard to their own interest. We address
ourselves, not to their humanity, but to their
self-love, and never tall to them of our own
necessities, but of their advantages An Inquiry
into the Nature and Causes of the Wealth of
Nations, book I, chapter 2
32
Introducing Economics
Economic Systems
33
Classifying economic systems
Totally planned economy
Totally free-market economy
34
Classifying economic systems
Mid 1980s
N. Korea
UK
Hong Kong
China
Poland
Cuba
France
USA
Totally planned economy
Totally free-market economy
35
Classifying economic systems
Mid 1980s
N. Korea
Hong Kong
UK
China
Poland
Cuba
France
USA
Totally planned economy
Totally free-market economy
China
N. Korea
Poland
France
USA
Cuba
UK
China (Hong Kong)
Mid 2000s
36
A monopoly granted either to an individual or to
a trading company has the same effect as a secret
in trade or manufactures. The monopolists, by
keeping the market constantly under-stocked, by
never fully supplying the effectual demand, sell
their commodities much above the natural price,
and raise their emoluments, whether they consist
in wages or profit, greatly above their natural
rate An Inquiry into the Nature and Causes of
the Wealth of Nations, book I, chapter 7
37
Introducing Economics
The Nature of Economic Reasoning
38
Models and data

• Model
• a framework based on simplifying assumptions
• helps to organize our economic thinking
• Data
• the economists link with the real world
• time series
• cross section

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ModelWhat determines tube revenues?
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ModelWhat determines tube revenues?
Tube fare
Taxi fare
Petrol prices
Tube revenues
Bus fare
Passenger incomes
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ModelWhat determines tube revenues?

• Revenuefare x number of passengers
• Number of passengersf (tube fare, taxi fare,
  petrol price, bus fare, passenger incomes)

42
Real and nominal

• Many economic variables are measured in money
  terms
• Nominal values
• measured in current prices
• Real values
• adjusted for price changes compared with a base
  year
• measured in constant prices

43
Empirical evidence
44
Patterns and trends in data
45
Empirical evidence
46
Empirical evidence
47
The concept of ceteris paribus
High income
Low income