Chapter 1 economics definitions and concepts

1 People face trade-offs 2 The cost of something is what you give up to get it 3 Rational people think at the margin 4 People respond to incentives 5 Trade can make everyone better off 6

Dr Tran Duc Hoc Faculty of Civil Engineering

PRINCIPLES OF CONSTRUCTION ECONOMICS AND

MANAGEMENT (CONSTRUCTION ECONOMICS)

CHAPTER 1: ECONOMICS_DEFINITIONS AND CONCEPTS

• An economy (from Greek οίκος – "household" andνέμoμαι – "manage") is an area of the production,distribution, or trade, and consumption of goodsand services by different agents

• Economics is the science about individuals ororganizations involved in the production,distribution, and consumption of goods or services

• Resources is limited => Every individual, organization, country must decide how to use resources.

o Should we watch any TV channel while only have 1 TV?

o Should a new car be bought?

o Should a new road be created?

o Should a school be built?

• World energy consumption

• Breakdown by energy (2018)

Ref:

https://yearbook.enerdata.net/total-energy/

• To predict economic possibilities or situations

• To develop policies, prevent or correct problems of unemployment, inflation, or excess of the economy

• Macroeconomics: study aggregated indicators

such as GDP, unemployment rates, national

income, price indices, and the interrelations among the different sectors of the economy

• Microeconomics: studies the behavior of

individuals and firms in making decisions regarding the allocation of scarce resources and the

interactions among these individuals and firms

• Scarcity (or paucity) is at the core of economics

• Unlimited human wants in a world of

limited resources

• It states that society has insufficient productive

resources to fulfill all human wants and needs

Scarcity

• Opportunity Costs: In microeconomic theory,

the opportunity cost, or alternative cost, of

making a particular choice is the value of the most valuable choice out of those that were not taken

When an option is chosen from alternatives, the

opportunity cost is the "cost" incurred by not

enjoying the benefit associated with the best

alternative (Ref: https://www.investopedia.com/terms/o/opportunitycost.asp )

• The loss of potential gain from other alternatives

when one alternative is chosen (Ref: New Oxford

American Dictionary)

• In economics, decision making always involves

opportunity costs

opportunity costs?

Scarcity

• Opportunity cost in Construction??? Give examples?

Ref:

http://www2.harpercollege.edu/mhealy/eco212i/lectures/5es/5

es.htm

Production possibility frontier

• The production possibility frontier (PPF) is a curve depicting all

maximum output possibilities for two goods, given a set of

inputs consisting of resources and other factors.

• Assumes that all inputs are used efficiently.

Production possibility frontier

Explain the meaning of Points A, B, C, D, E, F, X?

Production possibility frontier

Example: gun and butter

Principle of cost increase

• Resources can not be equally effective when

producing different types of goods or services

 It needs more resources to change from producing one commodity to another

Scarcity and market system

• Two important decisions of a society are what kind

of goods or services must be produced, and how to distribute resources for production

Scarcity and market system

Basically, there are two types of major market

Scarcity and market system

1) People face trade-offs

2) The cost of something is what you give up to get it

3) Rational people think at the margin

4) People respond to incentives

5) Trade can make everyone better off

6) Markets are usually a good way to organize economic

activity

7) Governments can sometimes improve market outcomes

8) A country's standard of living depends on its ability to

produce goods and services

9) Prices rise when the government prints too much money

10)Society faces a short-run tradeoff between Inflation and

unemployment.

How people make

decisions?

How people interact

with each other

How the Economy works as a Whole

How people make decisions?

1 People face trade-offs

“There is no such thing as a free lunch” To get one thing that we like, we usually have to give up another thing that

we like Making decisions requires trading one goal for

another.

"Mọi thứ đều có giá" - Để có được một thứ ưa thích,

người ta phải bỏ ra một thứ khác mà mình thích Nói cách khác, quá trình ra quyết định đòi hỏi phải đánh đổi một mục tiêu nào đó để đạt được mục tiêu khác.

Examples:

How people make decisions?

Examples

How people make decisions?

Guns or Butter

How people make decisions?

How people make decisions?

Guns or Butter

The more we spend on national defense(guns) to protect our borders, the less we can spend on consumer goods (butter)

to raise our standard of living at home.

Researchers in political economy have viewed the trade-off between military and consumer spending as a useful predictor

of election success [1]

In this example, a nation has to choose between two options when spending its finite resources It may buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both.

How people make decisions?

How people make decisions?

2 The cost of something is what you give up to get it

Significance of opportunity cost in decision

making Because people face tradeoffs, making

decisions requires comparing the costs and benefits of alternative courses of action

Opportunity cost

Examples:

The cost of

……going to college for a year is not just the tuition,

books, and fees, but also the foregone wages

…seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater

How people make decisions?

2 The cost of something is what you give up to get it

Opportunity cost???

How people make decisions?

3 Rational people think at the margin

Firms want to produce the level of output that

maximizes the profits

Many decisions in life involve incremental decisions:

Should I remain in school this semester ? Should I take

another course this semester ? Should I study an

additional hour for tomorrow’s exam ?

Rational people often make decisions by comparing

marginal benefits and marginal costs.

How people make decisions?

3 Rational people think at the margin

Comparing marginal benefits and marginal costs.

How people make decisions?

4 People respond to incentives

Incentive: something that encourages a person to do

 Offer a raise in the salary  a positive incentive

 Put a tax on a good, fuel  a negative incentive.

How People Interact With Each Other

5) Trade can make everyone better off

6) Markets are usually a good way to organize

economic activity

7) Government can sometimes improve market

outcomes

How People Interact With Each Other

5 Trade can make everyone better off

Thương mại làm cho mọi người đều có lợi

• Trade is not like a sports competition, where one sidegains and the other side loses

• Consider trade that takes place inside your home.Your family is likely to be involved in trade with otherfamilies daily Most families do not build their ownhomes, make their own clothes, or grow their ownfood

• Countries benefit from trading with one another aswell

• Trade allows for specialization in products thatbenefits countries (or families)

How People Interact With Each Other

Thank you

Need pencils Need pen

You’re welcome

How People Interact With Each Other

5 Trade can make everyone better off

Thương mại làm cho mọi người đều có lợi

 Columbia in Coffee

 Japan in automobile sector

 Tiger wood in golf

 James in basketball

How People Interact With Each Other

6 Markets are usually a good way to organize economic activity

Thị trường thường là phương thức tốt để tổ chức hoạt động kinh tế

• Market economy : an economy that allocates resources through the decentralized decisions

of many firms and households as they interact

in markets for goods and services.

• Market prices reflect both the value of a product toconsumers and the cost of the resources used toproduce it

How People Interact With Each Other

6 Markets are usually a good way to

organize economic activity

What to buy

How People Interact With Each Other

7 Government can sometimes improve market outcomes

Đôi khi chính phủ cải thiện được kết cục thị trường

• Government policy can be most useful when there is market failure.

• Nguyên lý này hàm ý rằng mặc dù thị trường là phương thức tốt

để tổ chức hoạt động kinh tế, nhưng sự can thiệp của chính phủ cũng cần thiết để cải thiện sự công bằng và hiệu quả Lý do ở đây là thị trường có thể thất bại trong việc phân bổ nguồn lực một cách có hiệu quả và không thể đảm bảo sự phân phối công bằng Tuy nhiên, không phải lúc nào chính phủ cũng cải thiện được kết thúc thị trường, vì bản thân chính phủ cũng có thể thất bại khi can thiệp vào thị trường

How People Interact With Each Other

How the Economy works as a Whole

8) A country's standard of living depends on its

ability to produce goods and services

9) Prices rise when the government prints too

much money

10)Society faces a short-run tradeoff between

Inflation and unemployment.

How the Economy works as a Whole

8 A country's standard of living depends on its ability to produce goods and services

Mức sống của một nước phụ thuộc vào năng lực sản xuất của nước đó

productivity: the quantity of goods and services

produced from each hour of a worker’s time.

High productivity implies a high standard of living.

Hầu hết sự khác biệt về mức sống có nguyên nhân ở sự

khác nhau về năng suất lao động của mỗi quốc gia (số

lượng hàng hóa được làm ra trong mỗi một giờ lao động của một công nhân) Ở những quốc gia, người lao động sản xuất

ra được lượng hàng hóa và dịch vụ lớn hơn trong một đơn vị thời gian, thì hầu hết người dân được hưởng mức sống cao; còn những quốc gia có năng suất kém hơn, thì hầu hết

người dân phải chịu cuộc sống khó khăn Thực chất, tốc độ tăng năng suất lao động của một quốc gia quyết định tốc độ tăng thu nhập bình quân của quốc gia đó.

How the Economy works as a Whole

8 A country's standard of living depends on its ability to produce goods and services

How the Economy works as a Whole

9 Prices rise when the government prints too much money

Giá cả tăng khi chính phủ in quá nhiều tiền

Inflation: sustained increase in the overall level of prices

in the economy.

Examples:

• Germany after World War I (in the early 1920s),

• the United States in the 1970s and

• Zimbabwe in the 2000s

How the Economy works as a Whole

9 Prices rise when the government prints too much money

Giá cả tăng khi chính phủ in quá nhiều tiền

How the Economy works as a Whole

10 Society faces a short-run tradeoff between Inflation and unemployment.

Chính phủ đối mặt với sự đánh đổi ngắn hạn giữa lạm phát và thất nghiệp

Inflation and unemployment

How the Economy works as a Whole

10 Society faces a short-run tradeoff between Inflation and unemployment.

Chính phủ đối mặt với sự đánh đổi ngắn hạn giữa lạm phát và thất nghiệp

Most economists believe that the short-run effect of a monetary injection (injecting/adding money into the economy) is lower

unemployment and higher prices.

• An increase in the amount of money in the economy stimulates spending and increases the demand of goods and services in the economy.

• Higher demand may over time cause firms to raise their prices but in the meantime, it also encourages them to increase the quantity of goods and services they produce and to hire more workers to produce those goods and services More hiring

means lower unemployment.

How the Economy works as a Whole

1 Video:

https://www.youtube.com/watch?v=2YULdjmg3o0&fbclid=IwAR3mEYluECBHj473IMvol8VS8qWxowHklSP-u3b0TmEarHvcBNPbFhLLQ5g

https://www.youtube.com/watch?v=wvwgIiP4gjY&fbclid=IwAR00Q6Xjzaqts0NMwyxaiYQw6QtFYsHxeT79nWfQKadxLr3inc6K0LDkiD4

https://www.youtube.com/watch?v=zcN0d8foBXI&fbclid=IwAR2ROJZ74NzZBbkvSPl8eoFNBXVXSasYJ0ZMvkn7R714045BQm7bUSaqO-s

How the Economy works as a Whole