es2555.u1.ps1.joe.thykattil.spring2013.v3

1 of 38All Rights Reserved 2013 by Pearson Education, ITT, Various Commercial Firms, Universities and Joe Thykattil

Lect

ure

1

Economics ES2555

A practical approach to economics

Joe Thykattil

Adjunct Faculty Instructor

Spring 2014

ITT Technical Institute

School of BusinessLecture 1: Intro, Supply & Demand,

Marginal Value, Efficiency


Lect

ure

1

Economics – A Lot of Graphs and Math, right?


Lect

ure

1

Microeconomics – Expectations of you and me?

First me: I will give you the basics on how to think and incorporate economics so that you can make better decisions.

You: Participate – speak up and ask questions, especially during group exercises.


Lect

ure

1

Microeconomics – GE273 Syllabus Basics

Please read the full Syllabus for details


Lect

ure

1

Microeconomics – GE273 Project – Updated InstructionsPlease read the full Syllabus for details

Hints & Tips:

1. Syllabus says that you are a Project Manager giving economic advice and you and your clients are from a fictional country named Echovia. For our class, let’s make this country realistic – Germany.

2. Submit as a PowerPoint slide deck instead of a Word or PDF. Be ready to present in front of class.

3. Hint: use terms strategically from the class and readings in your presentation, showing you understand the concepts.

4. Creativity is encouraged.


Lect

ure

1

Class Group Case Analysis – Maker’s Mark

Recent news on Makers Mark attempted to manipulate the supply by diluting the alcohol content.

Good move?

What were the monetary impacts?

What were the economic impacts?


Lect

ure

1

Class Group Case Analysis – Maker’s Mark

In an attempt to sustain profits, Makers inflated the Supply by dilution.

Competitors took advantage of the situation by attacking Makers brand quality.

Customers were feeling that they received an inferior product.

Economic Impact: loss of brand value


Lect

ure

1

Maker’s Mark Group Discussion & Presentation

Student name(s): __________________________________

1. What was the issue that Maker’s faced?

1. How did Maker’s respond?

1. What were the response options available to Makers?

1. What should have been Maker’s response?


Lect

ure

1

Definition of Economics

Economics is a social science that studies human behavior and institutional arrangements in societies that influence the processes by which relatively scarce resources are allocated to alternative uses.


Lect

ure

1

Microeconomics The study of how households and firms make choices. How they interact in market and how the government attempts to influence their choices.

Microeconomics andMacroeconomics

Macroeconomics The study of the economy as a whole, including topics such as, inflation, unemployment and economic growth.

Distinguish between microeconomics and macroeconomics.

1.4 LEARNING OBJECTIVE


Lect

ure

1

Micro versus Macro Economics?


Lect

ure

1

When someone asks: How’s the economy?Micro or Macro?

Generally: People are talking macro, when they talk about the economy as a whole: unemployment, recession, cost of living.


Lect

ure

1

When someone or a firm asks: How’s the economy and what products should I produce?Micro or Macro?

Generally: When a firm is considering what types of products it should produce and at what price and quantity, they are talking microeconomics.


Lect

ure

1

Economics trains you to. . . .

Be mindful about the choices that you make.

Evaluate the cost of individual and social choices.

Examine and understand how certain events and issues are related.

But there is the issue of terminology, some math, and GRAPHS, GRAPHS AND SOME MORE GRAPHS!


Lect

ure

1

Economics: Foundations and Models

We use economics to answer questions such as the following:

• How are the prices of goods and services determined?

• How does pollution affect the economy and how should government policy deal with these effects?

• Why do firms engage in international trade and how do government policies affect international trade?

• Why does government control the prices of some goods and services. What are the effects of those controls?


Lect

ure

1

Economic Considerations

What goods and services should an economy produce?Should the emphasis be on agriculture, manufacturing or

services? Should it be on sport and leisure or housing?

How should goods and services be produced? Should they be labour intensive, land intensive, capital

intensive?Efficiency?

Who should get the goods and services produced? Should there be even distribution? more for the rich? for

those who work hard?


Lect

ure

1

Q

PPersonal ConsExpenditure

$

Goods and Services

Households(Individuals)

$in

com

e

$ Expense

Roles: A. Resource ownersB. Consumers

Business Firms

Role: Producers hire resource

Resource offered

S

D

Resource hired

P

rice

Resource

Resource Market

(Mouse Click to advance)(Mouse Click to advance)

N

P

(Mouse Click to advance)(Mouse Click to Advance)

Our Economic World is Connected - Circular Flow

(Mouse Click to advance)

S


D

Goods andservices


Revenue

$


Mouse click for next slide© L Reynolds, 1999

Q

P

Goods Market


Lect

ure

1

Market A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Three Key Economic Ideas

Throughout this book, as we study how people make choices and interact in markets, we will return to three important ideas:

1. People are rational.

2. People respond to economic incentives.

3. Optimal decisions are made at the margin.

Marginal analysis that involves comparing marginal benefits and marginal costs.

Explain these three key economic ideas: People are rational. People respond to incentives. Optimal decisions are made at the margin.



Lect

ure

1

Classical Economics: People are Rational


Lect

ure

1

Futures Markets: How is the Price of Orange Juice Determined?


Lect

ure

1

Determinants of Demand

Market price

Consumer income

Prices of related goods

Tastes

Expectations

What are some examples?


Lect

ure

1

Copyright©2003 Southwestern/Thomson Learning

Quantity ofIce-Cream

Cones

0

Price ofIce-Cream

Cone

Demand

Supply

2 PriceceilingShortage

75

Quantitysupplied

125

Quantitydemanded

Equilibriumprice

$3

Classical Supply & Demand Curve


Lect

ure

1

Will Women Have MoreBabies if the GovernmentPays Them To?

Makingthe

Connection

More than 45 countries in Europe and Asia have taken steps to try to raise their birthrates. These policies suggest that people may respond to economic incentives even when making the very personal decision of how many children to have.

YOUR TURN: Test your understanding by doing related problem 1.7 at the end of this chapter.




Lect

ure

1

Solved Problem 1-1Apple Computer Makes a Decision at the Margin

Should Apple produce an additional 1 million iPhones?

In solving the problem, consider the following:

• Optimal decisions are made at the margin.

• An activity should be continued to the point where the marginal benefit is equal to the marginal cost.

• In this case, the correct decision requires information about additional revenue and additional cost.

YOUR TURN: For more practice, do related problems 1.4, 1.5, and 1.6 at the end of this chapter.




Lect

ure

1

Trade-off The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

Trade-offs force society to make choices when answering the following three fundamental questions:

1. What goods and services will be produced?

2. How will the goods and services be produced?

3. Who will receive the goods and services produced?

The Economic Problem ThatEvery Society Must Solve

Opportunity cost The highest-valued alternative that must be given up to engage in an activity.

Discuss how an economy answers these questions: What goods and services will be produced? How will the goods and services be produced? Who will receive the goods and services produced?



Lect

ure

1

Marginal analysis

Marginal benefit = additional benefit resulting from a one-unit increase in the level of an activity

Marginal cost = additional cost associated with one-unit increase in the level of an activity


Lect

ure

1

MB > MC expand the activity

MB < MC contract the activity

optimal level of activity: MB = MC (Net benefit is maximized at this point)

Marginal analysis


Lect

ure

1

Class Group Exercise: Study Time?Student name(s): __________________________________

4 hours left to study for two exams: economics and calculus, how do you decide which one to study for and how much you should study for each one, if at all?

1. Should you study for 2 hours for each exam?

1. Should you study for 4 hours for economics only?

1. Should you not study at all, relax and grab a tv show on Hulu instead?


Lect

ure

1

Centrally planned economy An economy in which the government decides how economic resources will be allocated.


Market economy An economy in which the decisions of households and firms interacting in markets allocate economic resources.

Centrally Planned Economies versus Market Economies




Lect

ure

1

Mixed economy An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.


The Modern “Mixed” Economy




Lect

ure

1

Productive efficiency A situation in which a good or service is produced at the lowest possible cost.


Efficiency and Equity

Allocative efficiency A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.




Lect

ure

1

Voluntary exchange A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.


Efficiency and Equity

Equity The fair distribution of economic benefits.




Lect

ure

1

To develop a model, economists generally follow these steps:

1. Decide on the assumptions to use in developing the model.

2. Formulate a testable hypothesis.

3. Use economic data to test the hypothesis.

4. Revise the model if it fails to explain well the economic data.

5. Retain the revised model to help answer similar economic questions in the future.

Economic Models Understand the role of modelsin economic analysis.



Lect

ure

1

Economic models make behavioral assumptions about the motives of consumers and firms.

Economic Models

The Role of Assumptions in Economic Models

Economic variable Something measurable that can have different values, such as the wages of software programmers.

Forming and Testing Hypotheses in Economic Models

Understand the role of modelsin economic analysis.



Lect

ure

1

Positive analysis concerned with what is.

Economic Models

Normative and Positive Analysis

Normative analysis concerned with what ought to be.

Don’t Let This Happen to YOU!Don’t Confuse Positive Analysis with Normative Analysis





Lect

ure

1

What is versus what ought to be?


Lect

ure

1

Should the Federal GovernmentHave Increased Restrictions onthe Immigration of Skilled Workers?

Makingthe

Connection

Does restricting the immigration of skilled workers affect the employment opportunities of recent U.S. graduates?

Like many other policy debates, the debate over the immigration of skilled workers has both positive and normative elements.

The debate over the immigration of skilled workers demonstrates that economics is often at the center of important policy issues.





Lect

ure

1

Economic Models

Economics as a Social Science

Because economics studies the actions of individuals, it is a social science. Economics is therefore similar to other social science disciplines, such as psychology, political science, and sociology. As a social science, economics considers human behavior—particularly decision-making behavior—in every context, not just in the context of business.




Lect

ure

1

Economics ReviewTrains you on how to make choices: what you buy and what you produce due to scarce resources.


Lect

ure

1

Economics ReviewUse Models to help guide your decision making.

Not Fashion Models Graphical Models


Lect

ure

1

Economics Review QuizStudent name: __________________________________

1. Economic principles guide Apple Computer to:

a. choose if it should enter the mobile phone market.

b. decide on how much money to spend on producing an iPhone.

c. whether if their employees should stay home for dinner or eat out.

2. Economic principles guide Maker’s Mark to:

a. dilute, water-down their whiskey.

b. charge more for their whiskey if the supply is less.

c. do nothing is the supply is less.


Lect

ure

1

A Preview of ImportantEconomic Terms

• Entrepreneur

• Innovation

• Technology• Firm, company, or

business

• Goods

• Services

• Revenue

• Profit

• Household• Factors of production or

economic resources

• Capital

• Human capital

Become familiar with importanteconomic terms.



Lect

ure

1

Do Immigrants Displace or Complement Domestic Workers?

AN INSIDE LOOK at Policy >>

Figure 1 Foreign-Born Scientists and Engineers as a Percentage of All Scientists and Engineers in the United States

Figure 2 Foreign Recipients of U.S. Science and Engineering Doctorates, 1985–2005


Lect

ure

1

Allocative efficiency

Centrally planned economy

Economic model

Economic variable

Economics

Equity

Macroeconomics

Marginal analysis

Market

Market economy

Microeconomics

Mixed economy

Normative analysis

Opportunity cost

Positive analysis

Productive efficiency

Scarcity

Trade-off

Voluntary exchange

KEY TERMS

es2555.u1.ps1.joe.thykattil.spring2013.v3

Documents

various commercial firms

pearson education

makers response

makers brand quality

group exercises

economic impacts

supply demand

economic advice