Transcript What is economics

Macroeconomics
EFREI - Michel KUTTLER 2012
οἰκονόμος "one who manages a
household"
Economics studies economy
A general
introduction
to economy
OUR
PROGRAM
Monitoring macroeconomic performance (GDP)
Production and the circular flows
Consumption and saving
Money and financial products
Government in the economy
Eurozone
From Bretton Woods to the subprimes
The Toyota way
A TEXTBOOK
OUR ASSESSMENTS
Final examination
What is economics ?
A “science” based on observation and not on
experiment
Objectivity is difficult to achieve.
Importance of econometrics
Economics uses statistics and
mathematics
The economist's job :
Quantification of the phenomenons ;
Comparisons in time and space ;
Hypotheses testing and issuing new hypotheses ;
Necessary prediction before choosing a policy.
Positive economics / Normative economics
Positive economics describes what exists and
how it works (or how it is supposed to work)
Normative economics or policy economics tells
us what should be done.
But the way to describe often involves ideas on
what should be done !
Microeconomics vs macroeconomics
Microeconomics studies the decision of
individuals or firms (“Should we buy this or that
?”)
Macroeconomics is the study of the economy as
a whole (inflation, government policy,
aggregate expenditure...).
Economics uses models
The model of supply and demand
Some common mistakes or way of
thinking
Post hoc, ergo propter hoc (after this,
therefore because of this)
Fallacy of composition (what is true for a part
is true for the whole)
Ceteris paribus (all else equal) : we eat less
meat when its price rises.
Econometrics or how to make
causal inferences without
Econometrics relies on statistics
experiment
But correlation does not imply causation.
2000 : Daniel McFadden (1937) gets Nobel Prize
for choice modelling
1994 : John Nash gets Nobel Prize for the Nash
equilibrium (theory of games)
Study economics is to learn a way
of thinking
Economics focuses on decision making in a
world of scarcity :
Work ?
Study ?
Consume ?
Save ?
SOME BASIC IDEAS
Scarcity means that we have
limited ressources
Therefore, 3 basic questions :
What is produced ?
How is it produced ?
Who gets what is produced ?
Opportunity cost
The best alternative that we give up, or forgo,
when we make a choice.
Exemple : opportunity cost and
investment
What if your return on investment is lower than
what you would get on the capital market ?
As a shareholder, should you agree to finance a
diversification or an acquisition, if you could
buy directly shares of more rentable company ?
Marginal cost – Sunk cost
Marginal cost is the incremental cost of
producing one more unit
Sunk cost already incurred and cannot be
recovered
Efficient market
An efficient market is a market in which profit
opportunities disappear quickly
Expectations are selffulfilling
3 main schools of economic
thought
Adam Smith (1723-1790)
Karl Marx (1818 – 1883)
John Maynard Keynes
(1883 - 1946)
Economic liberalism, classical or
neoclassical economics (A. Smith)
Free-market, invisible hand, equilibrium
No government intervention in the market
Rational self-interest in a free-market economy
leads to economic well-being
David Ricardo (1772 – 1823) absolute
and comparative advantage
UNIT
MAN per
YEAR
WINE
X LITERS
CLOTH
Y YARDS
PORTUGAL
ENGLAND
80
Comparative
advantage
120
90
100
Comparative
advantage
Comparative
wine/cloth : 80/90 = 0.88
cost WITHOUT
specialization cloth/wine : 90/80 = 1.12
wine/cloth : 120/100 = 1.2
cloth/wine : 100/120 =0.83
David Ricardo (1772 – 1823) and
comparative advantage
UNIT
PORTUGAL
ENGLAND
WINE
X LITERS
160
0
CLOTH
Y YARDS
0
MAN per YEAR
Gain in man per year
Portugal : 10
200
England : 20
Gain for the consumer : Portugal gets 1.2 cloth for 1
wine (instead of 0.88) and England gets 1.12 wine for
1 cloth (instead of 0.83)
Adam Smith, the pin factory and
the invisible hand
This is just a very small part of Adam Smith's
work.He was concerned by growth.He was not
a laissez-faire economist.
Marxian economics
Capitalism creates growth but also inequality
No natural law but Modes of production : primitive
communism, slavery, feudalism, capitalism...
Surplus-value is a part of labour appropriated by the
owners of the means of production
Tendency of the rate of profit to fall
Capitalism is not stable, it leads to crisis
John Maynard
Keynes1883 - 1946
Equilibrium cannot be achieved in a free
economy. Market cannot regulate everything.
Therefore, government action is necessary.
Prices result from a balance of power
Joseph Schumpeter
(1883 – 1950)
“Economic progress, in
capitalist society, means
turmoil.”
Creative destruction
Entrepreneurship
Can capitalism survive ? Can socialism work ?
(Capitalism, Socialism and Democracy, 1942)
Circular flow : input = output