Basic concepts in economics (KINH tế VI mô SLIDE)

ECONOMIC MODELS Economic model: an explanation of how the economy or part of the economy works..  Visual model of the economy Shows how dollars flow through markets among households

For Undergraduates

 Objectives : to improve economic literacy as well as critical thinking and problem solving skills to explain and predict economic issues.

 Pre-requisites : Math

 Student task :

 Class attendance (90%)

 Actively participate in-class activity

 Complete all homework and other tasks

 Don’t have private conversation or arrive at class late, which can disrupt the learning environment

of the class

BOOKS AND READING

LECTURE 1

Basic concepts in economics

and microeconomics

 Economists try to explain puzzling

observations and facts about the

economy.

WHAT IS ECONOMICS?

 Economy – “oikonomos” (Greek):

“One who manages a household”

 Household - many decisions of

a llocate limited resources

 Society - many decisions

 Allocate resources

 Allocate output

1.2 WHAT IS ECONOMICS?

 Economics is to s tudy of how society manages its scarce resources

 Economists study:

 How people make decisions

 How people interact with one another

 Analyze forces and trends that affect the economy as a whole

FOUNDATIONS OF MODERN

ECONOMICS

CLASSICAL

 ADAM SMITH: The Wealth of Nations (1776)

 ALFRED MARSHALL: Principles of Economics (1890)

NEOCLASSICAL

 During the 1940s - 1950s

 Modern classical school of economics with 5

key ideas

KEY IDEAS OF NEOCLASSICAL ECONOMICS

 Scarcity

 Opportunity cost

 Thinking at the margin

 Incentives in individual decision making

 The role of the markets

 Market failure

1.3 The scientific method

Observation, theory, and more observation

ECONOMIC MODELS

 Economic model: an explanation of how the economy or part of the economy works

 Assumption: Judgements about features

that can be ignored to make the world

easier to understand

 Ceteris paribus assumption: All other things being equal The term refers to holding all other variables constant when one variable

is changed

 Visual model of the economy

 Shows how dollars flow through markets

among households and firms

 Decision makers

 Firms & Households

 Markets

 For gods and services

 For factors of production

15

Our first model: The circular-flow diagram

Our first model: The circular-flow diagram

 Firms

 Produce goods and services

 Use factors of production / inputs

 Households

 Own factors of production

 Consume goods and services

16

The circular flow

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1.5 Economics and Policy

Three Questions

 What is to be produced?

 How are the goods to be produced?

 How can resources be used efficiently?

produced?

The market economies

 What are the key elements of the

market economy?

 Freely determined price

 Property rights and incentives

 Competitive markets

 Freedom to trade at home and abroad

 A role for the Government

 The role of NGOs

2 The optimum economic choice

2.1 People face trade-offs

Make decisions: Compare cost with benefits of alternatives

Second model: The production possibilities frontier

 Production possibilities frontier

The production possibilities frontier

Produced

0 300 600 700 1,000

3,000

A B C

The production possibilities frontier shows the

combinations of output - in this case, cars and

computers - that the economy can possibly produce

The economy can produce any combination on or

inside the frontier

Points outside the frontier are not feasible given the economy’s resources.

 Efficient levels of production

 Points on the PPF

 Trade-off: The only way to get more of

one good is to get less of the other good

 Inefficient levels of production

 Points inside PPF

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Second model: The production possibilities frontier

Second model: The production possibilities frontier

 Bowed out production possibilities frontier

 Opportunity cost of one good= Give up

the other good

 Resource specialization

28

A shift in the production possibilities frontier

0 600 650 1,000

3,000

A 2,200

2,300

A technological advance in the computer industry

enables the economy to produce more computers for any given number of cars As a result, the production possibilities frontier shifts outward If the economy moves from point A to point G, then the production of both cars and computers increases.

4,000

G

1 2

20

28

Slope= (28-20) = 8 2-1

Revision (cont.)

 Six types of relationship

Increasing positive slope Decreasing Positive

Math revision (Cont.)

 Constant slope

Constant

positive slope

Constant negative slope

Facts and impacts

 Movement along the curve vs shift of the curve

 Movement along the curve:

 When x and y changes.

 Shift of the curve:

 When another variable

other than x and y change.

 A third variable shift the

Z changes