KINH TẾ VI MÔ Chapter 1 microeconomics 2015

FTU- MICROECONOMICS Contents Basic Concepts Economy and Three basic questions The optimum economic choices Chapter 1: Basic Concepts in Economics and Microeconomics Basic Microeconomics For Undergraduates KieuMinh-FTU KieuMinh-FTU Resources 1.1.Basic Concepts Land: Nature resources Labor (L): Capital: Physical capital (K) Entrepreneurship Limited nature of society’s resources •Economy •Resources Resources are scarce •Individuals KieuMinh-FTU KieuMinh-FTU FTU- MICROECONOMICS Scarcity Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have Limited Resources Unlimited Wants KieuMinh-FTU Economy   KieuMinh-FTU Individuals “oikonomos” (Greek): “One who manages  a household”  Household - many decisions of allocate Household = Consumers Firms = Producers Government  limited resources  Ability, effort, desire  Society - many decisions  Allocate  Allocate resources outputs (goods and services) KieuMinh-FTU KieuMinh-FTU FTU- MICROECONOMICS Our first model: The circular-flow diagram  Visual model of the economy how dollars flow through markets among households and firms  Shows  Decision  makers Firms & Households  Markets   KieuMinh-FTU For goods and services For factors of production 10 KieuMinh-FTU The circular flow 1.2 Economics and Three Basic Questions of the Economy • 11 KieuMinh-FTU 12 • Principles Microeconomics and Macroeconomics • Positive vs Normative Analysis • Models KieuMinh-FTU FTU- MICROECONOMICS 1.2.1 Three Questions of an economy Scarcity raises three questions, which every economy must answer 13 KieuMinh-FTU 1.2.2 Economics Definition   What to produce? How to produce? For whom? • Using the economy’s scarce resources to produce one good requires giving up/sacrificing/trade off another good Every society must decide what it must produce with its scarce resources • Society has to make best decision or choices in determining how goods and services should be produced • If goods or services are produced, a decision must be made about who will get it A decision to have one person or group receive a good or services usually means it will not be available to someone else 14 Economics Economics is to study of how society allocates its scarce resources for competitive goals (D.Begg)  Economics is to study of how society manage its scarce resources (G.Mankiw)   Economics is a social science Economists try to explain puzzling observations and facts about the economy Economists study:    15 KieuMinh-FTU KieuMinh-FTU 16 How people make decisions: how much they work, what they buy, how much they save, and how they invest their savings How people interact with one another Analyze forces and trends that affect the economy as a whole KieuMinh-FTU FTU- MICROECONOMICS FOUNDATIONS OF MODERN ECONOMICS 1.2.3 Microeconomics and Macroeconomics  CLASSICAL  ADAM SMITH: The Wealth of Nations (1776)  ALFRED MARSHALL: Principles of Economics (1890) NEOCLASSICAL  During the 1940s - 1950s  Modern classical school of economics 17 KieuMinh-FTU   Studies how households (or individuals), business (or firms, enterprises) and the government make decisions, given scarcity of resources Studies the interactions among those market members and how these interactions have impacts on their economic benefits and the economy focuses on how the markets work 19    The study of how households and firms make decisions And how they interact in markets Macroeconomics  18 The study of economy-wide phenomena, including inflation, unemployment, and economic growth KieuMinh-FTU 1.2.4 The scientific method of economics Microeconomics  Microeconomics KieuMinh-FTU Observation, theory, and more observation  Observation  Theory (Model)  Conducting experiments  More observation 20 KieuMinh-FTU FTU- MICROECONOMICS Economics model   Economic model Economic model: an explanation of how the economy or part of the economy works Assumption: Judgements about features that can be ignored to make the world easier to understand  Ceteris paribus assumption:All other things being equal The term refers to holding all other variables constant when one variable is changed 21 KieuMinh-FTU Come in many forms:  Numerical tables  Graphs  Algebraic equations  Wordy descriptions 22 KieuMinh-FTU Positive vs Normative economic analysis  Positive statements      Attempt to describe the world as it is Descriptive Confirm or refute by examining evidence Answer for “What be” Normative statements    23 Attempt to prescribe how the world should be Prescriptive Answer for “What should be” KieuMinh-FTU 1.3 The optimum economic choice 24 KieuMinh-FTU FTU- MICROECONOMICS 1.3.1 Why people choice?   People face the fact that resources are scared People want to maximize their benefit    25 KieuMinh-FTU 1.3.2 How People Make Decisions   Principle 1: People face trade-offs Making decisions     Trade off one goal against another Student – time Parents – income Society    27 26 KieuMinh-FTU KieuMinh-FTU Opportunity Cost Principle 2: The cost of something is what you give up to get it  National defense vs consumer goods Clean environment vs high level of income Efficiency vs equality Households (consumers): maximizing benefit (utility) Firms (producers): maximizing profit Government: maximizing social welfare  28 Make decisions  Compare cost with benefits of alternatives Opportunity cost  Whatever most be given up to obtain one item KieuMinh-FTU FTU- MICROECONOMICS Principle 3: Rational people think at the margin  Rational people   Incentive: Something that induces a person to act  Systematically & purposefully the best they can to achieve their objectives    Small incremental adjustments to a plan of action  Marginal benefits > Marginal costs 29 KieuMinh-FTU Second model: The production possibilities frontier-PPF A graph Combinations of output that the economy can possibly produce  Given the available   Factors of production  Production technology  Buyers - consume less Sellers - produce more Public policy  Rational decision maker – take action only if  Higher price  Marginal changes   Principle 4: People respond to incentives Change costs or benefits Change people’s behavior 30 KieuMinh-FTU The production possibilities frontier Quantity of Computers Produced C F 3,000 A 2,200 2,000 B Production Possibilities Frontier D 1,000 E 31 KieuMinh-FTU 32 300 600 700 The production possibilities frontier shows the combinations of output - in this case, cars and computers - that the economy can possibly produce The economy can produce any combination on or inside the frontier Points outside the frontier are not feasible given the economy’s resources 1,000 Quantity of Cars Produced KieuMinh-FTU FTU- MICROECONOMICS Second model: The production possibilities frontier  Bowed out production possibilities frontier Opportunity cost  Resource specialization  Efficient levels of production  Points on the PPF  Trade-off: The only way to get more of one good is to get less of the other good  Inefficient levels of production  Points inside PPF  33 KieuMinh-FTU MATHEMATICS REVISION  A shift in the production possibilities frontier Quantity of Computers Produced 4,000 A technological advance in the computer industry enables the economy to produce more computers for any given number of cars As a result, the production possibilities frontier shifts outward If the economy moves from point A to point G, then the production of both cars and computers increases 3,000 G 2,300 2,200 A 600 650 1,000 Quantity of Cars Produced 34 KieuMinh-FTU Revision (cont.)  Six types of relationship Increasing positive slope Slope of the curve Decreasing Positive slope y 28 20 35 Increasing negative slope 2-1 Decreasing negative slope Slope= (28-20) = x KieuMinh-FTU 36 KieuMinh-FTU FTU- MICROECONOMICS Math revision (Cont.)  Facts and impacts Constant slope Movement along the curve vs shift of the curve Movement along the curve:  When x and y changes y  Shift of the curve:  When another variable other than x and y change  A third variable shift the z1 curve   Constant positive slope Constant negative slope The line shifts when Z changes Z2 x 37 KieuMinh-FTU 38 KieuMinh-FTU 10 ... services For factors of production 10 KieuMinh-FTU The circular flow 1. 2 Economics and Three Basic Questions of the Economy • 11 KieuMinh-FTU 12 • Principles Microeconomics and Macroeconomics... Analysis • Models KieuMinh-FTU FTU- MICROECONOMICS 1. 2 .1 Three Questions of an economy Scarcity raises three questions, which every economy must answer 13 KieuMinh-FTU 1. 2.2 Economics Definition  ... FTU- MICROECONOMICS FOUNDATIONS OF MODERN ECONOMICS 1. 2.3 Microeconomics and Macroeconomics  CLASSICAL  ADAM SMITH: The Wealth of Nations (17 76)  ALFRED MARSHALL: Principles of Economics (18 90)