Introduction to Economics

Egor Sidorov

egor.sidorov@ujep.cz

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Course details

─ Course consists of: ─ Lectures and project.─ Seminars – focused on practical application of theory.

─ Final written test: min. 60 percent, + project, and active attendance at lectures and seminars

─ Contact: egor.sidorov@ujep.cz

Literature

─ MCCONNELL, C., BRUE, S. Economics. New York: McGraw-Hill, 1990-?.

─ SAMUELSON, P., NORDHAUS, W. Economics. New York: McGraw-Hill, 1992-?.

─ www: rek.ujep.cz/~sidorov

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Course content

─ Introduction─ Supply and Demand─ Production & Cost Analysis─ Theory of the Firm─ Introduction to Macroeconomics─ The Output of National Economics─ Inflation─ Unemployment─ Monetary Policy─ Fiscal Policy─ International Trade and Economical Integration21.04.2023 4

Why study economics?

─ Our life is a variety of economic relations among others, so economics is a way to understand them.

─ Understand international relations and trade.─ Understand national policy.─ Get economic type of thinking – cost-benefit

analysis.

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Think as economist!

─How can number of divorces contribute to economic welfare (i.e. well-being)?

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1. Scarcity

2. Production factors

3. Market system

4. Economics as a science

5. Opportunity costs

6. Economic models

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Scarcity

─ Our needs and wants are unlimited─ They have different intensity ─ They change over time

─ Goods and services satisfy our wants and needs─ Our resources for their production

are limited.vs.

Types of Goods

─ Consumer goods

─ Capital goods

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Public and Merit goods, provided by the government

─ Public goods” (e.g. defense provision, etc.):─ these goods are available to everyone, regardless income

level, ─ everybody equally benefits from them.

─ “Merit goods” (health care, education, roads building, etc.):─ not all the people tend to use them; ─ privately gained benefits turn out to be external benefits.

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Production process

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Production

(input) (ouput)

1. Scarcity

2. Production factors

3. Market system

4. Economics as a science

5. Opportunity costs

6. Economic models

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Production factors

─ Labor

─ Land

─ Capital

─ Entrepreneurship

1. Scarcity

2. Production factors

3. Market system

4. Economics as a science

5. Opportunity costs

6. Economic models

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Limited sources vs. Unlimited needs

─ Scarcity is the reason for basic economic questions:─ 1. What to produce? ─ 2. How to produce?─ 3. For whom to produce?

─ Two marginal economic systems of solving these problems exist:─ Command economy model─ Market economy model

Command model: basics

─ Basic economic problems in the command economics:─ “What?” problem is solved by the planning authorities and

the state statistics bureau. ─ “How?” problem deals with the functions of respective

ministries. ─ “For whom?” – distribution of income is comparatively

equal among all the economic agents. All the property belongs to the state, institution of personal proprietorship does not exist.

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Command model: pro and contra

─ Positive features:─ Resources aren’t wasted on competitive duplication. ─ Planned distribution – same standards of living for all the people.─ Prices are stable, etc.

─ Negative features:─ Political and social complexity of administrating this system.─ The recourses tend to be distributed in insufficient way.─ It is impossible to plan the response for every economical agents’

need.─ etc.

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Market model: basics

─ Basic economic problems in the market economics:─ “What?” and “How?” problems are solved by market:

prices, supply and demand mechanisms. ─ “For whom?” – distribution of income is determined by the

ownership institute.

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Basic economic agents

─ Households

─ Firms

─ State

─ Rest of the World

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Market mechanism

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Market of goods

FirmsHouseholds

Production factormarket

Stát

Land, Labor, Capital

Wages, rents, rates

Payments

for prod.

factors

Production fa

ctors

Sales

Supplied goodsPayments

for goods

Demanded goods

Taxes Taxes

TransfersTransfers

Expenditures

Exp

endi

tur

esG

oods

Prod.

factors

Market model: pro and contra

─ Positive features:─ Automatic and efficient allocation of recourses without the need of

any planning. The demand is the reason for supply.─ The economy provides what the consumer want. The consumer

“votes” and shows his preferences by spending money.─ All the economic agents have a particular interest in accurate and

efficient system functioning.

─ Negative features:─ Market model tends to be inefficient in solving social problems. Low

income means the respectively lower life level.─ Some significant parts of social reality “fall out” from the interest of

market economy, e.g. environment protection.

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Economic models of the modern world

─ In the end, what we used to call “the contemporary market oriented economy model” is the …─ … mix of the most important features of market model, we

have discussed… ─ …and governmental interventions in certain spheres of

vital importance.

─ The participation of the government is necessary for providing conditions for social oriented market functioning.

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Where’s your country at on the scale?

─ Economies of the contemporary worlds’ countries have the features of both models.

─ “Tastes differ”: some economies have more command model features, others more market oriented. But both have positive and negative traits.

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Command Market

1. Scarcity

2. Production factors

3. Market system

4. Economics as a science

5. Opportunity costs

6. Economic models

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What is “Economics”?

─ Economics: ─ Analyzes how individuals, firms and states use their

scarce resources in order to satisfy their unlimited needs─ Collects, analyzes and interprets the related data─ Develops theories and laws trying to explain these

phenomena and predict the future trends

─ Economics = science about wealth. ─ How to use scare resources, how to distribute them

among society members and how to use them.

Positive and normative economics

─ Positive economics – describes reality.─ „what is“

─ Normative economics – describes how the reality should look like. ─ „what ought to be“

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Two levels of economics

─ Microeconomics─ is focused on analysis of market structures,

consumer behaviour and company behaviour (production, costs, prices of input / output, profit, investments).

─ Macroeconomics theory ─ acquaints us with macroeconomics aggregates,

problems of economic growth, money supply, unemployment and inflation. In the end we will also be able to understand monetary and fiscal policy of state, theory of international market and balance of payments.

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Economics methods

─ Observation─ Statistical analysis─ Economic modeling─ Experiment

─ Cause-effect type of models

1. Scarcity

2. Production factors

3. Market system

4. Economics as a science

5. Opportunity costs

6. Economic models

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Opportunity costs

─ Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision.

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We can go ride a bike We can go to work for USD 6,50 an hour.

vs.

─Should Bill Gates move his lawn?

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1. Scarcity

2. Production factors

3. Market system

4. Economics as a science

5. Opportunity costs

6. Economic models

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Economic modeling

─ Model is a simplified reality

─ Mathematic models reflect trends, however they aren’t capable of reflecting the whole range of elements making up a human nature

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Economic laws

─ Law of Downward-sloping Demand─ When the price of commodity raises (given other conditions do

not change – ceteris paribus) consumers tend to buy less of the commodity. Accordingly, when the price is lowered, other things equal, the quantity demanded increases.

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Budget = USD 10

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Ceteris paribus principle

─ If the other conditions change we switch from the initial model to the totally new model.

─ This doesn’t mean that the considered economic law doesn’t work – it works given other factors remain equal.

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Budget = USD 5

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Production Possibility Frontier - (PPF)

PPF presents─ law of scarcity.─ economic efficiency.─ economic development.─ choices between public

and private goods.─ choices between current

and future consumption,─ etc.

Variant Cookies(mil. kg)

Ovens(thous. pieces)

A 0 5B 8 4C 16 2D 20 0

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Ovens

Cookies

A

D

C

B

F

E

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PPF based analysis

─ choices between luxury and normal goods.

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Normal goods

Luxury goods

A

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Luxury goods

B

A

r. 1950: Developing country r. 2009: Developed country

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PPF based analysis

─ The whole curve will move in case of change of production factors

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Consumption

Investment goods

Country A

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Investment goods

Today’s choice Expected future result

Country B

Country A

Country B

Thank you for attention!

Sources:SAMUELSON, P. A., NORDHAUS, W. D. Ekonomie 18. vydání. Praha: Svoboda, 2005.

KRAFT, J., RITSCHELOVÁ, I. Ekonomie pro environmentální management. Ústí n. L.: UJEP, 2003.

MCDOUGAL LITTELL. Economics: Concept and Choices. Canada: McDougal Littell, 2008.

Mankiw, G. Principles of Microeconomics. UK: Thomson Learning, 2003.