paper 2 economics lecture 01 and 2

Paper 2: Economics

Lecture 1: Economic concepts

Copyright 2007. Richard Tang. All rights reserved. 2Sept 10, 2007

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Agenda

• Announcements

• Lecture

• Reading and preview


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Announcements

• About me

• Logistics

• How people failed in the past

• How to do well in P2 and P4


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Announcements

About me: Richard, not teacher

• Education

- AICPA, MBA, BS in accountancy

- Chicago, IL, USA

• Work experience

- Staff accountant, IL, 2000

- Foreign Business Instructor, Beijing, 2004

- AIA Lecturer, Shanghai, 2006 P2, P4, P9, P10 Others: P12 exam and English editing on AIA’s website


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Announcements


• Strengths (too many)

- Talking and using knowledge

- Working smart

- Books, network (friends working in different industries and different levels), DVDs, PPT,

• Weaknesses

- Poor health

- Can’t do useless things


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Announcements


• More me

- Email: [email protected]

- MSN: [email protected] SMS: 1-39-1780-8227

• Do not expect me to write a paragraph using SMS

• You need to EMAIL to get the PowerPoint!!!!


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Announcements

• About me

• Logistics (flow of materials; here, it means preparation)




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Announcements

Logistics (flow of materials; here, it means preparation)

• Syllabus (exam format)

• Schedule

- Tutorial

• Materials


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Announcements

Logistics: syllabus

• Syllabus first, always the syllabus first!

- 3 hours: choose 5 questions out of 8

• Do you have it?

• I guess not go to

- http://www.aiaworldwide.com/index.php?page=st_L4_Syllabus.php

http://www.aiaworldwide.com/index.php?page=st_L4_Syllabus.php

http://www.aiaworldwide.com/index.php?page=st_L4_Syllabus.php


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Click on this!!!


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Announcements

Logistics: syllabus what we have to follow

• Pay attention to the percentages

• They tell you how many questions there are for each syllabus area


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Announcements

Logistics: schedule

• Do you have it?

• I guess not


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Schedule


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Announcements

Logistics: schedule

• Tutorial

- You may have assignments (presentation)

- You are required to ask specific questions E.g. I don’t understand the first two ideas on slide 14 in

lecture 1

- More details on Wednesday and Thursday


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Announcements

• Logistics: materials- PPTs always PPTs first!

Why? Because it is better Because I used to PPTS to write the exams

- Textbook and past exam green book Most of the time, we don’t use them I will tell you when we use them

- How can you get my PPTs? Email before this Sat 11pm We only have 13 weeks for lecture


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Operating info: 55,10 + 50,15 + 30,10 + 30 =200

Announcements

• About me

• Logistics




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Announcements

How people failed in the past

• Didn’t believe me

- Memorizing the green book or the text

• Didn’t come to class

• Didn’t write things down in class

• Didn’t ask questions

• Didn’t study


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Operating info: 55,10 + 50,15 + 30,10 + 30 =200

Announcements

• About me

• Logistics




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Operating info: 55,10 + 50,15 + 30,10 + 30 =200

Announcements

How to do well in P2 and P4 (and in anything)

• Ideas expand the ideas use the ideas

• So, you need to write things down in class

- To expand the ideas in the PPT

• Ask questions when

- you cannot expand the ideas (in class or in tutorial or through email)

• English (more next slide)

- People who did well are not the people with the best English


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Announcements

• English

- You have to start using English to learn this year

- Never use the dictionary to learn concepts in P2 Simple words new words; don’t translate the whole book

into Chinese Don’t worry and Richard will help you along the way

- For non-concept words, you may use the dictionary E.g. announcements, expand, facilitate, fundamental and so

on


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Lecture: outline

• Fundamental concepts

• Central economic questions

• Economics as a social science

• Methods of organising an economy

- Natural resources, labour, capital and enterprise

• Entrepreneurship

• The nature of profit


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Lecture: Fundamental concepts

• Scarcity and choice

- Rationality

- Opportunity cost

- Efficiency (allocative and technical)

• Production Possibility Curve/Frontier

• Opportunity cost vs. financial cost


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Scarcity and choice

• If you have an unlimited amount of $$$, what would you buy?

- Tutorial assignment for this week

• But, unfortunately, you only have 2000 RMB… What do you do now?

- So, when the resource (this time is $$$ in hand) is scarce/limited , i.e. scarcity of resources…

- You need to make a choice (i.e. by giving up something else)!!

- The next best thing/choice/alternative you have given up is called opportunity cost


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Scarcity and choice

Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)

• An assumption of how people (e.g. government, individuals, and companies) act

• In economics, rational behaviors can be

- Buying more (for individuals),

- Maximizing profits (for companies

- Improving the welfare of a country (for government)


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Scarcity and choice


• The next best option given up

• E.g. when you are in class, you can spend time

- Sleeping

- Talking to your boyfriend or your girlfriend

- Work and make money


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Scarcity and choice


• How to choose to meet different types of wants allocative efficiency

- E.g. Deciding the time spent on eating and studying…

• How to choose to meet one type of wants technical efficiency

- E.g. Deciding how to study (if you plan to spend 1.5 hours on a subject)


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- Rationality

- Opportunity cost



• Opportunity cost and financial cost


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Production Possibility Curve/Frontier (PPC/PPF)

• By using all the concepts below:

- Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)

• We can use PPC/PFF to

- Show the possible combination of goods that can be produced

- Given a limited amount of resources


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Units of guns

Units of butter

Go

Bo

A

BG1

B1

•Assume a country can produce two types of goods with its resources – guns and butter

Gm

Bm•If the country is at point A on the PPF, it can produce the combination of Go guns and Bo butter.

•If it reallocates its resources (moving round the PPF from A to B) it can produce more butter, but only at the expense of fewer guns.

•The opportunity cost of producing an extra Bo – B1 butter is Go – G1 guns.

•If it devotes all resources to guns, it could produce a maximum of Gm.

•If it devotes all its resources to butter, it could produce a maximum of Bm.

Production Possibility Frontier


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Units of guns

Units of butter

Go

Bo

A

G1

B1

Production Possibility Frontier

•B

C

It CANNOT produce at points outside the PPF (such as point C), unless:

1. it finds a way of expanding its resources or

2. improves the productivity of those resources it already has.

• 1) and 2) will push the PPF outwards.

Inefficient use of resource


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- Rationality

- Opportunity cost



• Opportunity cost and financial cost


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Opportunity cost vs. financial cost

• Financial cost (a.k.a. accounting cost) may include:

- Cost incurred (such as wages)

- Cost recorded under accounting conventions (such as depreciation)

- Opportunity cost ignored E.g. the amount of money you can make when you are NOT

working here

• More nature of profit


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Lecture: Fundamental concepts (recap)

• Scarce resource (assuming rationality) choose (opportunity cost) efficiency (allocative and technical)

• Production possibility curve/frontier

• Opportunity cost vs. financial cost


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Lecture: outline









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Lecture: Central economic questions

As a society,

• Scarce resources (can’t produce everything) choose what to produce want to produce efficiently (technical efficiency): how to produc

e? people who need, and/or afford it, will get it (allocative efficienc

y): for whom to produce?


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• What to produce?

- Food, weapons, technology, education, and etc..

• How to produce?

- A lot of people/machines/capital/land…

• For whom to produce?

- Who will get the goods and services produced?

- Every one has the same share? More for the rich (if things can be bought by $$$)? More for those who work hard?

- Income distribution: more next slide


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• Income distribution

- Functional distribution of income The percentage distribution of income among the factors of

production (rent, wages, interests, and profits)

- Personal distribution of income The percentage distribution of income among individual

persons

• The poorest 20% earned only 5% of total income.

• The richest 20% earned 47% of total income.


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Lecture: outline









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Lecture: Economics as a social science

Just like a science, economics…• Positive (descriptive) statements

- not normative (value/judgment) statement• Laws

- Diminishing marginal returns (e.g. the more hamburgers you eat, the less satisfaction from each hamburger)

- Correct under most (normal) situations • Hypotheses

- Educated guess on how one variable can affect the total outcome, while others being equal (ceteris paribus)

- Verifiable by further investigation


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Lecture: Economics as a social science

Unlike science, economics

• No control experiment can be done

- i.e. we cannot really keep all other things equal in the real world

- E.g. your performance today


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Lecture: Economics as a social science (recap)

• Positive, not normative

• Laws

• Hypotheses

• No control experiment


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Lecture: outline









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Lecture: Methods of organizing an economy

• They are answers to three central economic questions

• The command economy

• The free market economy

• The mixed economy


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The command economy

• The government/state decides:

- What to produce (based on her estimation)

- How to produce

- For whom to produce (distribution, i.e. who gets what)

• Prices fixed by the government

• E.g. food is cheap everybody can afford it



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The command economy

• Advantages

- All resources employed (no waste…no unemployment)

- Basic needs will be met and weaker members can be cared for

• Disadvantages

- Lack of incentives

- Inefficient and inaccurate planning

- Black market



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The free market economy

• What to produce?

- Determined by businesses’ perception of what the customers want through rise and fall of prices

• How to produce?

- Businesses produce at the lowest cost possible

• For whom?

- Determined by income and willingness to spend on certain goods



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• Advantages

- Efficient

- Responsive

- Incentives for producer (technical efficiency)

- Freedom and incentives for people to make their economic choice



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• Disadvantages

- Market inequalities

- No incentive to produce public goods such as national defense, public sanitation, etc.

- Too little supply of socially desirable goods (merit goods) to too few people (who can afford it)



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The mixed economy

• It is the same as free market economy except

- The government will produce merit goods (e.g. health care and education) and public goods

- Uneconomic goods (no one would have produced it in a pure market economy), the government may subsidize

- Banning goods that are bad (e.g. drugs) or tax them heavily (such as cigarettes)



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Natural resources, labour, capital and enterprise

• Factors of production

• Remember words mean differently in different courses!!!!

• Natural resources/land (include all natural resources) rent

• Labor wages

• Capital (physical and monetary) interest

• Enterprise (the ability to manipulate the above three factors) profit



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Lecture: outline









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Lecture: Entrepreneurship

• Risk

- When the predicted demand is different from the actual

• Reward

- Profit, brand name

• Ownership and control

- An organization grows owner (shareholders) + manager

- When that happens, we can’t really call those owners and managers as entrepreneurs


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Lecture: outline









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Lecture: Nature of profit

Economic profit vs. accounting profit

• Economic profit: opportunity cost taken into consideration

• Accounting profit: opportunity cost NOT taken into consideration

• Normal profit

- Minimum profit to stay in a business,

- i.e. opportunity cost of the services of an entrepreneur + the potential reward

(interest) of the capital used + …other resources


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Economic profit vs. accounting profit

Example 1 Example 2 Example 3

£'000 £'000 £'000

Annual sales 500 250 240

Annual costs 350 200 195

Annual accounting profit 150 50 45

Current salary 25 25 25

Interest on capital tied up 15 15 15

Rental value of premises used 4 4 4

Risk premium 6 6 6

50 50 50

Net economic (normal) profit/loss 100 0 -5


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• Supernormal profit

- Profit after normal profit


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Lecture: outline (recap)








Time to test yourself!

How far can you expand the concept when you look at this

outline?


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Lecture: outline (recap)








E.g. If we look at the first one…

Scarcity of resource and unlimited wants

Choose

Opportunity cost

Efficiency (allocative and technical)


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Reading

• Review: you must

- What we have covered

• Preview

- The rest of the ppt

• Email Richard to get the ppt before this Sat 11pm

- You don’t use the textbook or the green book to study Unless you want to waste your time and then Fail!!

• See you in the tutorial!

Paper 2: Economics

Lecture 1: Economic concepts