ECONOMICS why study it - PowerPoint PPT Presentation

1 / 42
About This Presentation
Title:

ECONOMICS why study it

Description:

Social Science. Efficiency. Scarcity. Economics and Policy. Positive economics (what is going on? ... Unit of analysis: individual economic agents: consumers, firms... – PowerPoint PPT presentation

Number of Views:74
Avg rating:3.0/5.0
Slides: 43
Provided by: ned74
Category:
Tags: economics | study

less

Transcript and Presenter's Notes

Title: ECONOMICS why study it


1
ECONOMICSwhy study it?
Social Science Efficiency Scarcity
2
Economics and Policy
  • Positive economics (what is going on?)
  • Normative economics (what should be going on?)

3
efficiency
  • Economic systems and fundamentals of economic
    efficiency
  • What? How? And For Whom? (productive and
    allocative efficiency)
  • Capitalism, Socialism, and Communism

4
Frameworks of analysis within economics
  • MACRO-
  • Unit of analysis economy as a whole
  • Variables of interest include inflation,
    unemployment, output
  • MICRO-
  • Unit of analysis individual economic agents
    consumers, firms
  • Variables of interest include costs of
    production, individual demands, prices

5
Economic cost
  • Opportunity cost (just how costly is this class
    to you or to me?)
  • Does the benefit of taking this class outweigh
    the cost?
  • Marginal analysis

6
Specialization and gains from trade
  • Specialization and division of labor
  • Resource composition
  • Capital
  • Labor
  • Human capital
  • Land (inclusive of natural resources)
  • Production process (state of technology)
  • Absolute and comparative advantage principles
  • Relative cost
  • Why no complete specialization?
  • US trade example BEA (www.bea.gov)
  • Consumer preferences
  • Increasing opportunity cost (marginal cost)

7
Principles of Trade
  • Absolute Advantage total cost
  • Comparative Advantage relative (opportunity)
    cost
  • Consider two economies (A, B), each endowed with
    200 worker-hours. Consider that there are only
    two goods being produced (X, Y). Consider that in
    country A the hourly wage is A10, while in
    country B it is B20, for simplicity assume that
    AB. Table below shows costs in each country

What can be said about the absolute and
comparative advantage principles in this
case? Productivity and trade (education, physical
capital) Currency and Trade
8
Should government influence our comparative
advantage? Can it do so?
  • Can frequent changes in terms of trade reduce
    incentives to accumulate human capital (Can some
    of this be seen in the US economy today?)
  • Asian economies of the 70s, 80s and early 90s
  • Recent aid from German government to AMD

9
Markets
  • Defining a market
  • Product definition (and competition)
  • Geographical boundaries (internet, shipping cost
    reduction globalization and outsourcing)
  • Market forces Buyers (demand) versus Sellers
    (supply)
  • Price and quantity as the outcome

10
demand
  • Quantity f (price, other factors)
  • Price and the Law of Demand
  • Other factors
  • Income (normal versus inferior)
  • Related in consumption goods
  • Substitutes
  • Complements
  • Expectations about the future
  • OTHER FACTORS

11
supply
  • Quantity f ( price, other factors)
  • Price and the Law of Supply
  • Other factors
  • Costs of Production (MC, and price as MB)
  • Goods related in production
  • Substitutes (agricultural products)
  • Note, identical to costs of production since is
    based on opportunity cost concept
  • Complements (like gold and silver)
  • Producer expectations of future prices
  • Other factors

12
Market equilibrium
  • Qs Qd
  • Shortage and surplus as unstable states and the
    stability property of the equilibrium
  • Market efficiency
  • Shifts in demand and supply
  • Roles of Prices
  • Is the equilibrium really efficient?
  • Productive and allocative efficiency

13
Market example ForEx
  • How can the US run a trade deficit consistently?
    Or, differently put, can one live on credit
    forever?

14
  • Demand for the dollar
  • different economic agents that purchase the
    dollar
  • Foreigners who wish to purchase US goods or
    services, foreign
  • tourists who wish to travel to the US (US
    exports)
  • Foreigners who wish to invest in the US (higher
    US interest rate, attractive US stock market
    returns)
  • Supply of the dollar
  • different economic agents that sell the dollar
  • US consumers/firms that want to purchase foreign
    goods or services, US tourists who wish to travel
    abroad (US imports)
  • US residents who wish to invest abroad (higher
    interest rates abroad, etc.)
  • The dollar will appreciate if demand exceeds
    supply at the current exchange rate.
  • Note that when you purchase a foreign made
    product, the cost of the production of that
    product is paid in foreign currency, hence
    somewhere between the production process and your
    purchase someone would have to convert your
    currency into that foreign currency in order to
    pay for the production.

15
Demand and supply the USD
  • US trade deficit -gt sale of USD -gtdollar
    depreciation
  • US borrowing from abroad -gt purchases of USD -gt
    appreciation of the USD
  • 1990s and the post 9/11framework
  • US balance of payments BEA

16
Who is more flexible? Elasticity of demand
  • Elasticity of demand
  • D(Quantity
    demanded)/D(Price)
  • Elasticity as a measure of responsiveness of
    demand
  • Inelastic and elastic ranges marginal revenue
  • Elasticity and revenue maximization
  • Comparing demands in terms of their relative
    elasticities
  • What makes demand relatively less elastic?
  • Gasoline here
  • Health care
  • Health care insurance and elasticity of demand
    (moral hazard)
  • Sales Tax and elasticity of demand?
  • Who really pays sales tax and why?
  • Excise tax

17
Elasticity long and short run
  • Are our demands more flexible from the long-run
    perspective?
  • Defining short and long run in economics
  • Demand for gasoline
  • Demand for cars (capital goods in general, like
    PCs at GSU)

18
Other types of elasticity of demand
  • Income elasticity of demand
  • Cross price elasticities

19
When Markets Fail
  • Externalities (bad and good)
  • Internalizing external costs through taxation
  • Public goods
  • Non-excludability
  • Non-rivalry
  • Lack of certain institutions or mechanisms
  • Asymmetry of information
  • Used car market
  • eBay and emergence of a correcting mechanism (a
    local public good)

20
Role of government in a market based economy
  • INSTITUTIONS
  • Just think of how many different institutions set
    up and maintained by various government levels
    make this very class possible
  • Institutions at the micro and macro levels
  • Property rights and well functional legal system
  • Contract enforcement
  • Business culture
  • Negative institutions can also emerge (corruption
    is a good example)

21
Consumer Behavior
  • Utility function
  • Assumption of rationality
  • Total utility versus marginal utility
  • Diminishing marginal utility
  • DMU and consumption choice
  • MU per dollar spent
  • DMU and progressive income taxation
  • What if the Law of DMU is violated?

22
Productionfirms
  • Assumption of profit maximization
  • Do firms really maximize profits?
  • Principal-agent problem and the size of the firm
  • Conflict of interests and correcting mechanisms
  • Stocks and options as reward to
    workers/executives
  • External debt

23
Production
  • Production function or Total Product
  • Output f (inputs, technology) TP
  • Marginal Product change in output resulting
    from a change in an input
  • MPL, MPK
  • Diminishing Marginal Product
  • Choice of the combination of inputs
  • MP of input per dollar (long-run production)
  • Long-run versus Short-run (assumption about
    capital, why not labor?)

24
Production and costs in the short-run
  • Cost of labor Wage (w)
  • Cost of capital - ?
  • Defining user cost of capital (r)
  • Total cost of production
  • TC (Q) w L r K
  • Other inputs can be included (oil, land
    furthermore we assume homogeneous labor and
    capital)
  • Fixed cost versus variable cost
  • Sunk cost (stock price at the time of purchase)

25
Costs of production in short-run
  • Average costs
  • ATC AVC AFC
  • Marginal cost
  • Change in total cost of change in output
  • Marginal cost as a function of Marginal product
    of labor (in our simple case)
  • diminishing marginal product and rising marginal
    cost
  • AVC wage / APL
  • Relationship between MC and ATC, AVC

26
Profit maximization
  • In equilibrium, a profit maximizing firm will
    select to produce the level of output at which
    the wage rate is equal to the value of the
    marginal product of labor, in other words the
    marginal cost of a unit of labor (wage) is equal
    to the marginal benefit of that unit of labor
    expressed as the change in total revenues.

27
Production and costs in the long-run
  • Full flexibility
  • LRAC (to LRAC from S-R AC)
  • Deriving LRAC from SR AC
  • Economies of scale
  • Increased specialization
  • Use of indivisible inputs (trade mark)
  • Constant returns to scale
  • Diseconomies of scale
  • Principal-agent problem and size of business
  • Possible increase in input costs due to increased
    demand
  • Long term cost improvements
  • Technological progress
  • Learning by doing

28
market structure

oligopoly
mc
monopoly
Perfect competition
29
Perfect competition and the internet
  • Assumptions
  • number of firms
  • Ease of entry and exit
  • Perfect information
  • Identical transaction costs
  • Homogeneous good
  • Consequences of these assumptions
  • - Competition along one dimension the price
  • - Lack of collusion
  • - Horizontal demand and MR price taking
    behavior
  • - MC as the supply curve
  • Shut down and break even price levels cost
    diagram in the short-run
  • K-Mart example
  • Long-run and cost structure of the industry

30
Market Supply Curve
  • Individual firms supply curve MC
  • Recall that PMR, and profit maximization
    requires MRMC
  • Market supply curve is the horizontal summation
    of individual curves

31
Adjustment to a change in demand
  • Industry Demand Increases
  • SHORT-RUN
  • Each firm expands output
  • The number of firms remains the same
  • Recall that changing the number of firms requires
    changes in capital stock
  • LONG-RUN
  • Positive economic profits attract entry number
    of firms increases

32
  • Entry of new firms and the impact on costs of
    production
  • Does building more fast food restaurants around
    the campus change the cost of low-skilled labor?
  • Does an increased demand for computer programmers
    change the cost of training a software engineer?
  • Note that MC, ATC, AVC are all functions of input
    costs (if labor is the only variable input then
    MC wage/MPL, and AVC wage/APL)

33
  • Increasing Cost Industry
  • Industry expansion rises the demand for inputs,
    and as a result the cost of those inputs
    increases, and thus the price (equilibrium) at
    which the firms earn zero economic profits also
    increases
  • Diseconomies of scale in the production of inputs
  • Inelastic supply of inputs
  • Lack of substitutability of inputs
  • Decreasing Cost Industry
  • Industry expansion rises the demand for inputs,
    and as a result the cost of those inputs
    declines, and thus the price at which the firms
    earn zero economic profits decreases
  • Economies of scale in the production of inputs
    (adjustments in the educational system in the
    1990 as a result of increased demand for software
    engineers)
  • Constant Cost Industry
  • Industry expansion does not affect input costs

34
MONOPOLY
  • Monopoly diagram and profit maximization
  • Social costs of monopoly
  • Price discrimination
  • Natural monopoly

35
Monopolistic Competition
  • Product differentiation
  • Large number of firms differentiated products
  • Entry/Exit
  • Diagram and equilibrium outcome

36
OLIGOPOLY
  • Barriers to entry and formation of oligopolies
  • Strategic interdependence
  • Understanding an Oligopoly
  • Kinked Demand Model
  • Cournot Duopoly Model
  • Game Theoretical Approach

37
Game Theory
  • Modeling decisions as strategies in an
    interactive game
  • Simultaneous move games and matrix form
  • Nash Equilibrium and Best Response Strategies
  • Dominant Strategies
  • Sequential move games and tree form approach
  • Entry deterrence game

38
Monopoly, Oligopoly and Anti-trust
  • Sherman Act
  • Clayton Act
  • http//www.usdoj.gov/atr/foia/divisionmanual/ch2.h
    tm
  • Price discrimination

39
Public Sector
  • Government role in the economy
  • Institutional support
  • Provision of public goods and services
  • Correction of externalities
  • Economic policies (stabilization and development)

40
Data for 2001, source World Bank
41
How do we pay for the government?
  • Taxes and user fees
  • Income tax
  • Sales tax
  • Excise tax
  • Property tax
  • Value added tax
  • Fiscal Federalism US example

42
Taxes and Incentives
  • Income tax
  • Marriage neutrality
  • Labor force participation
  • Impact on revenues of government
  • Impact on population growth
  • Savings and investment (capital gains taxation
    and IRAs)
Write a Comment
User Comments (0)
About PowerShow.com