Transcript Lecture O: Overview

Economics 1000
Overview
C. L. Mattoli
Information Information
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Lecturer: Craig Mattoli
Email: [email protected]
Phone (text messages only) 136 3241 0877; include
your name and course in message.
Office hours: by appointment. Temporarily located in
room 221.
Don’t be shy. Ask Questions of your Instructor, not
your classmates. No one cares as much as he
does!
Sometimes, I talk fast, use words that you might not
know, and write abbreviations on the board. Again,
if you don’t understand my written or spoken word,
ask. It’s ok!
Introduction to the coursework
What is economics?
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Economics is the study of choice in the
allocation of scarce resources.
It is divided into macroeconomics, the big
picture, and microeconomics, the small
picture, which all mixes together to make the
big picture.
The analysis in this course will be
mathematical and logical/verbal.
Logical argument
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Much of the assessment in this course will be verbal
backed up by mathematical.
In argument, you start out with a question and perhaps
some details to define the situation.
For example, there is a dead dog. The question is why or
how did he die?
In order to answer that question, you might want to know
where he was found and if there are any injuries on him
before you begin to try to figure out how he died.
Thus, there is a certain procedure to answering questions
in a logical manner, which begins with asking yourself
questions, gathering all of the data that you have to begin
with, organizing the data, and then proceeding to try to
answer as much of the question that you can with the
information that you have.
The Scientific Method of analysis
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Economics uses the scientific method.
The scientific method involves: 1) observing a
system, 2) postulating a theory to explain the
workings of the system, 3) collecting appropriate
data, and 4) testing the theory against the data to
see how well data fits theory, then, 5) going back
to see how the theory might be revised to better fit
observation.
In economics it becomes: 1) identify a problem,
2) make a simplified model, and 3) test it.
Mathematical methods
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1.
2.
Mathematical methods will include arithmetic,
algebra and graphical analysis.
Equations, relate one variable, called the
dependent variable, plotted on the vertical axis in a
graph, to other variables, the independent
variables. For example, S = supply = AxP = A x
Price, relates the supply of something to the price.
We say that it is a positive relationship because S
increases with increasing P, i.e., supply will
increase with increasing price. That is how we
describe the information in an equation, in words.
To graph the equation, we need sets of values for
the two variables, like (S,P) = (0.5,1), (1,2),(2,4),
and (3,6). We show how to do that in the next
slide.
Graphing pairs of numbers
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Given the information for supply, S, and price, P,
from the preceding page, (S,P) = (0.5,1), (1,2),(2,4),
and (3,6). we graph them as follows:
S
3
2
1
0.5
0
1
2
3
4
5
6
P
Rate of change: variation of one variable
with another
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We will also look at changes in one variable due to changes in another. This is known as
rate of change, or variation.
For a straight line graph, this change is the slope of the line, given by slope = rise/run =
(S2 – S1)/(P2 – P1) = ΔS/ΔP, where Δ is a shorthand notation for change.
For the example from the previous page
S
ΔS/ΔP=
(2 – 1)/(4 – 2)
= 1/2
3
2
1
0.5
0
1
2
3
4
5
6
P
Other types of change
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The slope can also be found in the equation of the line.
The general equation of a line is S = aP + b where a and b
are constants.
Then, applying our definition of slope to the equation
without even using numbers, we have slope = rise/run =
ΔS/ΔP = (S2 – S1)/(P2 – P1) = (aP2 + b – (aP1 + b))/(P2 –
P1) = a(P2 – P1)/(P2 – P1) = a.
As an exercise pick numbers for a and b, draw the graph
and see for yourself. It will turn out that b is where the
line intersects the S-axis.
Another type of change that we look at in economics is
percentage change. That is simply given by: Percentage
change of S = ΔS/S1= (S2 – S1)/S1
Percentage change will be involved in the definition of
the economic concept of elasticity.
Required in the course
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Take data from tables and turn it into graphs.
Identify and interpret patterns in economic
data in graphs and tables.
Explain and use key economic concepts
Explain and apply theory of competitive
markets
Discuss selected instruments of economic
policy.
Discuss and apply economic theories and
indicators.
Discuss problems faced by real-world
economic managers.
Tests and assignment
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Each week there will be problem sets that you will be
required to hand in. Then, we will go over problems in
the tutorial.
Workshops will go over concepts and you will do in-class
problems to practice.
There will be an on-line mid-term exam with multiple
choice on April 27.
On May 18, an extended-answer assignment is due,
answering 3 questions, using logic, economics, and
mathematical methods. See: Intro book
The final exam will contain multiple choice, short answer
and long answer problems.
The course in overview
Introduction to Economics
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We start out talking about the basics of what
economics seeks to do and to describe.
Economics analyzes the allocation of the resources
of a society or nation.
A nation has limited labor, production facilities, and
technology to produce things for it’s members.
Thus, choices must be made about the mix of
products that will be produced.
There will be opportunity costs from choosing one
over another.
In the end, we will find the production possibilities of
the economy.
Models and analysis
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We will look at construction of simple models
of economic variables in terms of other
variables.
We will look at equations, graphical and
tabular analysis of data to examine economic
relationships.
This will require logic, thinking and verbal
analysis of problems, which will be important
for your work in this course.
Supply, demand, and international trading
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We will learn about the basic concepts of
supply and demand, and how prices and
other market and non-market forces will help
determine some of the allocation problem.
International trade will also come into the
picture, early, because, some things that a
nation cannot or will not produce itself can be
gotten from other nations. Some nations will
find it to their advantage to produce more of a
good or service than they need and will sell it
to other nations.
We will discuss the concepts of comparative
and absolute advantage.
Costs, Profits and Production
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Supply will depend on price, and there will be price
elasticity of both supply and demand.
In the end, prices will affect profits of the producers.
On the microeconomic level a firm that produces
goods and services will have to worry about prices,
costs, and profits.
Opportunity costs will enter into the discussion even
for a single firm because it must decide how best to
use its resources.
Then, there will be real costs, which will be
subtracted from revenues (units sold x price) to get
profits.
We will look at fixed and variable costs in the shortrun and the long-run. What will be important will be
marginal analysis
Competition
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In reality, there are different types of market
structures.
In a monopoly, there is only one supplier, and
he can set his own price.
In oligopolies, there are only a few suppliers,
and not much competition.
In this course, we shall only study the case of
perfectly competitive markets in which no firm
can be a price setter. Price will be
determined in the market.
The Macroeconomic view
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We look at the broad measures of the
economy of nations, like national production.
We will look at other gross variables, like
consumption, savings, investment, and net
exports.
Then, we look at economic growth, inflation,
and unemployment, and how things change
over the business cycle.
We examine goals of macroeconomic policy.
Macro modeling
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We shall look at classical approach and
Keynesian macroeconomic theory.
We will study aggregate supply, demand and
macroeconomic equilibrium.
Then, we look at what leads to shifts,
including the affects of changes in other
variables.
The monetary and financial system
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As we move towards the close of the course,
we look at the underlying system of an
economy, the monetary and financial system.
Money is important to the modern economic
system. It facilitates buying and selling of
goods, services, and businesses.
Money is a means of putting a number to the
value of things.
Since money is just paper, it is important to
keep track of how much money is printed up.
Money supply and demand
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People and businesses need money for their
transactions, and they might keep extra money for
other reasons. Thus, there is a basic demand side
for paper money.
Money supply is defined by a number of different
measures.
Some people do not use all of their money for
consumption and have some extra around. Some
people want to spend more than they earn. Thus,
there will be a market for money.
Interest rates are the “prices” money determined by
supply and demand for the extra money that savers
keep and over spenders need.
Monetary Policy
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Since nations print money, they have to
manage the supply.
However, the supply will affect interest rates
and interest rates will affect the state of the
economy.
In addition, the supply of money will affect
general prices and inflation, and thus, again,
the overall economy.
The Money System
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The Reserve Bank of Australia (RBA) issues money:
it is a liability of the bank, much like paper issued by
corporations, bonds, but it is backed by the
government.
Under the umbrella of the RBA is the banking
system. Banks hold a special position in the
financial system.
Banks maintain Exchange Settlement Accounts
(ESA’s) at the RBA through which most of the
money in the financial system flows to settle
transactions among participants in the economy.
Banks can create money.
The RBA also uses the banking system to manage
money supply.
Financial Markets
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The other part of the system is financial
intermediation and financial markets.
These are places that money is allocated
over time with the inclusion of the concept of
risk.
Financial markets include stock & bond
markets, the markets for foreign exchange,
the futures markets, and options markets.
Monetary Policy
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Since governments print money, they have to have
some sort of policy about managing the supply of
money that they print.
Both price inflation of goods and services and
interest rates are affected by the supply of money.
Inflation is also part of interest rates.
Demand for money affects interest rate rates, and
loans can create money supply.
The way governments have executed monetary
policy has changed dramatically over the past
several decades.
The basic goals of monetary policy are a stable
financial system, underlying a stable economy with
reasonable price inflation.
Fiscal Policy
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Fiscal policy is the government's use of
spending and taxes to affect the nation’s
output, employment, and prices.
Part of policy is to try to smooth out business
cycles, the overall cycle of increasing and
decreasing output, especially to counter
recessions, the downturns in activity.
Other issues might be to encourage savings.
Problems can arise, however, from budget
deficits,
Classes
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Lecture: Tuesday 4-6:00
Workshop: Wednesday 4-5:00
Tutorials: Monday 2-4; 7-9; Tuesday 8-10;
10-12;
Choices
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Please at the end of class come up to sign up
for a tutorial.
Each one will be limited to a total of 25
people, first come, first serve.
End
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There will be no workshop or tutorials this
week.