ETP Econ Lecture Note 1 Fall 2014

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PRINCIPLES OF ECONOMICS
Lecturer: Jack Wu
Economics 101
WHAT IS ECONOMY (經濟,經濟體)?
The word economy originally comes from a Greek
word for “one who manages a household.”
 Broader definition: household, society, and
country.
 Taiwan was called Newly Industrialized
Economy (NIE) or Country (NIC).

FUNDAMENTAL PROBLEM FACED BY
ECONOMY
 Fundamental
economic problem: scarce resources.
-- Scarcity. . . means that economy has limited
resources and therefore cannot produce all the
goods and services people wish to have.
-- Resources : physical resource, financial resource,
human resource, natural resource
WHAT IS ECONOMICS (經濟學)?
Economics is the study of how society or economy
manages its scarce resources.
 It comprises of Microeconomics and
Macroeconomics.

MICROECONOMICS 個體經濟學(台灣),
微觀經濟學(大陸)
Microeconomics: the study of how households and
firms make decisions and how they interact in
markets (Econ 101: introductory Microeconomics,
Econ 201: intermediate Microeconomics)
 Examples: mobile phone consumption choice
decision, mobile phone production decision, and
mobile phone market

MACROECONOMICS 總體經濟學(台灣),
宏觀經濟學(大陸)
Macroeconomics: the study of economy-wide
phenomena including inflation, unemployment,
and economic growth (Econ 102: Introductory
Macroeconomics, Econ 202: Intermediate
Macroeconomics)
 Examples: Quantitative Easing (QE) Policy, Euro
Zone Crisis, Abenomics, China Economy Soft
Landing, Sluggish Income Growth of Taiwan

EVERYBODY SHOULD LEARN
ECONOMICS

<Reason>. Economics is a subject that we must
confront in our everyday lives. As a matter of
fact, we already spend a great deal of our time
thinking about economic issues: prices(inflation),
incomes (economic growth), consumption
decisions, use of our time, job opportunity
(unemployment), and so on.
MICRO AND MACRO EFFECTS
Event: An increase in gasoline price
 _ Micro effect: vehicle driver, bicycle market,
electricity
 _Macro effect: inflation, unemployment

TEN PRINCIPLES OF ECONOMICS



How people make decisions. (4 principles)
How people interact with each other. (3
principles)
The forces and trends that affect how the
economy as a whole works. (3 principles)
How
People Make
Decisions
PRINCIPLE #1: PEOPLE FACE
TRADEOFFS.
There is no such thing as a free lunch.
 To get one thing, we usually have to give up
another thing.
 Making decisions requires trading
off one goal against another.

EXAMPLES OF TRADE OFF
How a student spends her time
 How a family decides to spend its income
 How the Taiwanese government spends tax
dollars
 How regulations may protect the environment at
a cost to firm owners

SPECIAL EXAMPLE OF TRADEOFF
 Efficiency
v. Equity
 Efficiency
means society gets the most that it can
from its scarce resources.
 Equity means the benefits of those resources are
distributed fairly among the members of society.
Example: Tax paid by wealthy Taiwanese and then
distributed to those less fortunate.
Outcome: Increased equity and reduced efficiency
PRINCIPLE #2: THE COST OF
SOMETHING IS WHAT YOU GIVE UP
TO GET IT.

Decisions require comparing costs and benefits of
alternatives.



Whether to go to college or to work?
The opportunity cost of an item is what you give
up to obtain that item.
Opportunity cost comprises of both explicit cost
and implicit cost.
QUICK QUIZ

What are the opportunity costs of going to college?
_ Tuition costs?
_ Room and board?
_ Forgone pay?
QUICK QUIZ
 What
is the opportunity cost of seeing a movie?
_ cost of admission?
_ time cost of going to the theater?
_ time cost of attending the show?
Note: Time cost depends on what else you might do
with that time. Examples: staying at home and
watch TV, working an extra three hours at paid
job.
PRINCIPLE #3: RATIONAL PEOPLE
THINK AT THE MARGIN
Many decisions in life involve incremental
decisions: should I take another course this
semester?
 Marginal changes are small, incremental
adjustments to an existing plan of action.
 People make decisions by comparing costs and
benefits at the margin.

PRINCIPLE #4: PEOPLE RESPONDS TO
INCENTIVES
Because people make decisions by weighing costs
and benefits, their decisions may change in
response to changes in costs and benefits.
 Example: Seat Belt Laws increase use of seat
belts and lower the incentives of individuals to
drive safely.


How People Interact
PRINCIPLE #5: TRADE CAN MAKE
EVERYONE BETTER OFF
People gain from their ability to trade with one
another.
 Competition results in gains from trading.
 Trade allows people to specialize in what they do
best.


Examples: Most families do not build their own
homes, make their own clothes, or grow their own
food.
PRINCIPLE #6: MARKETS ARE USUALLY
A GOOD WAY TO ORGANIZE ECONOMIC
ACTIVITY
A market economy is an economy that allocates
resources through the decentralized decisions of
many firms and households as they interact in
markets for goods and services.
 Adam Smith made the observation that
households and firms interacting in markets act
as if guided by an “invisible hand”—Market
Prices.

PRINCIPLE #7: GOVERNMENT CAN
SOMETIMES IMPROVE MARKET
OUTCOMES
Market failure occurs when the market fails to
allocate resources efficiently.
 Market failure may be caused by

an externality, which is the impact of one person or
firm’s actions on the well-being of a bystander.
 market power, which is the ability of a single
person or firm to unduly influence market prices.


When the market fails (breaks down) government
can intervene to promote efficiency and equity.

How the Economy as a
Whole Works
PRINCIPLE #8: THE STANDARD OF
LIVING DEPENDS ON A COUNTRY’S
PRODUCTION

Standard of living may be measured in different
ways:
By comparing personal incomes.
 By comparing the total market value of a nation’s
production (GDP, Gross Domestic Product).

Almost all variations in living standards are
explained by differences in countries’
productivities.
 Productivity is the amount of goods and services
produced from each hour of a worker’s time.

PRINCIPLE #9:PRICES RISE WHEN THE
GOVERNMENT PRINTS TOO MUCH
MONEY
Inflation is an increase in the overall level of
prices in the economy.
 One cause of inflation is the growth in the
quantity of money.
 When the government creates large quantities of
money, the value of the money falls.

PRINCIPLE #10: SOCIETY FACES A
SHORT-RUN TRADEOFF BETWEEN
INFLATION AND UNEMPLOYMENT

The Phillips Curve illustrates the tradeoff
between inflation and unemployment:
Inflation is lower  Unemployment is higher
It’s a short-run tradeoff!

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