Econ1001 day1 :Introduction to Microeconomics

What is Economics: Systems of production and consumption Old ideas—the ‘neoclassical’ view Mid 18th C to late 20th C Location important, transport was slowcostly The ‘new’ economy has manufacturing and supply of raw materials much less important—services and communication Adam Smith, 1776 “Theory of Moral Sentiments” Comparative advantage Advantages of specialisation Advantages of free trade David Ricardo, 1815 Higher rents for scarce resources Arthur Pigou, 1932 Taxes to discourage and prevent negative impacts of people on each other Jane Jacobs, 1960s Technological change crossing national boundaries

Introduction to Microeconomics Professor Gordon MacAulay and Dr Tran Van Hoa T h e U n iv e r s ity o f S y d n e y Introduction • Welcome to Microeconomics 1001 • Emeritus Professor Gordon MacAulay • Dr Tran Van Hoa • Lectures from 7.00am to 10.45 am • Tutorials from 2.00 pm to 4.30 pm in groups What is Economics? • The study of scarcity and how people can efficiently consume what they want • A cup of coffee • The traffic jam—congestion • The study of markets and how they work What is Economics • Systems of production and consumption • Old ideas—the ‘neoclassical’ view – Mid 18th C to late 20th C – Location important, transport was slow/costly • The ‘new’ economy has manufacturing and supply of raw materials much less important—services and communication What is Economics? • Adam Smith, 1776 – “Theory of Moral Sentiments” – Comparative advantage – Advantages of specialisation – Advantages of free trade Adam Smith • David Ricardo, 1815 – Higher rents for scarce resources • Alfred Marshall, 1881 – Businesses locating near each other What is Economics? • Arthur Pigou, 1932 – Taxes to discourage and prevent negative impacts of people on each other Arthur Pigou • Jane Jacobs, 1960s – Technological change crossing national boundaries What is Economics? • Branches of Economics – Macroeconomics • The whole economy—the national economy • For example, GDP, CPI – Microeconomics • The behaviour of firms, households and consumers • The behaviour of markets What is Economics • Key Ideas of Neoclassical Economics – Scarcity—resources insufficient to meet wants – Scarcity of income • Opportunity cost – Scarcity implies choices must be made – Thus something must be given up – Opportunity cost is the next best alternative Opportunity Cost • Choices – Scarcity implies making choices – Choose one thing in favour of another • Eg with $4 and icecream or chocolate – Opportunity cost is the value you place on the next best alternative Marginal Thinking • To choose requires considering the costs and the benefits • Easiest to think of small changes • Best to choose an activity so the marginal benefit equals the marginal cost – E.g the more chocolate you eat the poorer you feel The additional cost of each block of chocolate is constant so eventually the additional benefit equals the additional cost 10 Production and Exchange • Absolute advantage – When Hung and Chi have comparative advantages it pays to specialise – Note it is possible for a firm or country to have a comparative advantage in producing both rice and vegetables and this is an absolute advantage – It still pays to trade on the basis of comparative advantage 35 Production Possibilities • As people face scarcity and choices so it is with an economy • Gross domestic product is used to describe the value of goods and services newly produced 36 Production Possibilities • Suppose the economy consists of – Cars – Food • The choice is how much to invest in new cars of the future versus how much to consume today • Capital is used for investment in the future cars • Eating food satisfies us but is not focused on improving future production 37 Production Possibilities • Increasing opportunity costs – The opportunity cost of more food consumed is the value of foregone cars produced – Increasing opportunity costs occur because some of the resources are better suited to food production compared to cars and vice versa 38 Production Possibilities Produc on Possibili esCurve 30000 Cars(thousands) 25000 Efficient Impossible 20000 Inefficient 15000 10000 5000 0 100 200 300 400 500 600 Food (million tonnes) 39 Production Possibilities • The production possibilities curve represents – The available combinations – Using a given set of resources 40 Increasing Opportunity Cost • Cost of food in terms of cars given up 41 Economic Growth Cars Impossibilities converted into possibilities as a positive sum game Food • More land, more labour, more capital investment, new technologies, education 42 Market Economies and Prices • What to produce? • How to produce it? • For whom is ot produced? • Market economy vs the command economy—two major alternatives 43 Market Economies and Prices • Market economy – Prices freely determined – Provide information on what consumers want • Non-market economies – Prices usually set centrally – Provide little information on what consumers want 44 Property Rights and Incentives • Property rights important in a market economy – Individuals have the legal authority to hold or sell property (land, capital, resources, etc) – Gives the ability to buy and sell, ie exchange – Exchange has people better off – Incentives are also provided to invest if you can hold or sell and gain the benefits of the division of labour 45 Role of Government • In market economies government is needed to: – Provide defence and police – Establish property rights and associated law • How far should government go? – Safety nets to deal with poverty – Deal with bankrupts and homeless – Support the unemployed • Role in keeping economy reasonably stable 46 Role of Private Organisations • Many exchanges take place in organisations rather than markets • Interaction take place at transfer prices set by the organisation—not market prices (arms length) • This interaction reduces transactions costs, eg legal staff in a firm 47 The Price System • Prices – Serve as signals for what should be produced and consumed – Incentives to alter production and consumption levels – They alter the distribution of income 48 Thank you 49 [...]... interaction then each of Hung and Chi produce 2 tonnes each of rice and vegetables a total of 4 tonnes each 31 Production and Exchange • Now allow trade between the farmers – – – – Hung could produce only rice and get 6 tonnes Chi could produce only vegetables and get 6 tonnes Total production 12 tonnes, previously was 8 tonnes Hung could exchange 2 tonnes of rice for 2 tonnes of vegetables and similarly Chi... What goods and services to produce? – What goods and services to consume? • How would you spend US$100? – What are your alternatives? • How would you use tonight? – What are your alertnatives? What is the next best alternative to your choice? Opportunity cost? 25 Scarcity and Choice • Gains from trade – I have 100 kg of rice but nowhere to cook it – You have an rare English microeconomics book you... Production and Exchange • Hung can increase rice production by 1 tonne and foregoes 0.5 tonnes of vegetables • Chi can increase rice production by 1 tonne and foregoes 2 tonnes of vegetables 34 Production and Exchange • Absolute advantage – When Hung and Chi have comparative advantages it pays to specialise – Note it is possible for a firm or country to have a comparative advantage in producing both rice and... versus Normative • Positive economics—the way the world is – Aims to explain why • Normative economics—the way the world ought to be – Recommendations on what governments or business should do • Role of the productivity Commission • Role of the public service 21 Economics as a Science • Science or partisan policy tool? – Can be used to argue a case (eg the “Hot Tub”) – Need for balance – Much economics... create a market price 13 Market Failure • Markets can be inefficient • Referred to as market failure – E.g firms allowing pollution to go into drinking water • Government intervention may be appropriate where there is market failure 14 Economic Thinking • Economic research – Cannot easily experiment with the system – Hard to measure why decisions are made • Why does the price of rice vary? • Why does... – The chance of being caught and the possible fine provide an incentive to stay under the speed – Alternatively, consider the possibility of a promotion having you work long hours – These are incentives and they are refect marginal benefits and costs 12 A Market • Market—is people interacting economically • Two people agreeing to an exchange has both better off • Prices in a market help reflect the... have a comparative advantage in producing both rice and vegetables and this is an absolute advantage – It still pays to trade on the basis of comparative advantage 35 Production Possibilities • As people face scarcity and choices so it is with an economy • Gross domestic product is used to describe the value of goods and services newly produced 36 ... vary? • Why does the exchange rate change? – Can measure, observe and interpret • Econometrics makes use of statistical techniques 15 Economic Thinking • Correlation versus causation – Variables may move together—correlation – Is one causing the other? – Correlation does not mean causation Correlation of -0.9 16 Economic Theory or Model • Economic model—an explanation of how part of the economy works (specific