Li_CLEAR-JE No.1 PDF

Preview

Summary

Download Li_CLEAR-JE No.1 PDF

Description

ECON1010 Introductory Microeconomics

LECTURE 1 Topic 1: Thinking like an Economist

1

Plan of Lecture 1. Firstly (Setting the scene) 1. Administration 2. Expectations.

Secondly 3. Economics and Choices – exploring some core concepts. Lecture 1 ECON1010

2

2

ECON1010 staff. Dr. Jorge Pereira = Lecturer (Weeks 1 to 13), Course Co-ordinator. and Tutorial Co-ordinator (details course profile) Pass Co-ordinator (details course profile) Course Administrators (details course profile) Staff contact email: [email protected]

3

3

Course Profile: Downloaded from Blackboard. Answers many student questions about ECON1010. Be aware of the contents. Note particularly the assessment sections. Take the time to read it thoroughly. Blackboard and your student email address - communication via Blackboard and your student email address. - please check these regularly during the semester. Lecture 1 ECON1010

4

4

TEXTBOOK • No specific recommended textbook. • Suggested reading: Robert H. Frank, Sarah Jennings and Ben S. Bernanke. Principles of Microeconomics (Australian 3rd Edition, 2012), McGraw Hill. • Other useful microeconomic textbooks can be found in the SSH library.

Lecture 1 ECON1010

5

5

Assessment (please refer to Course Profile)

CML Quizzes (50%)

CLEAR-JEs (50%)

(due dates, see ECP)

(due dates, see ECP)

Lecture 1 ECON1010

6

6

Expectations of students in ECON1010 ▪ Download lecture / tutorial materials from Blackboard. ▪ Check Blackboard regularly (announcements etc.) ▪ Attend tutorials & attempt questions (essential extension with practical applications of lecture material). ▪ For preparation, watch lecture videos, read lecture slides, attempt tutorial and other practice questions. ▪ For extra help, attend PASS sessions and go to consultations. ▪ Revise material weekly, meaning up to 10 hours a week of self directed study. 7

7

Do I need to come to Lectures? ▪ All lecture content is assessable. ▪ Lecture content cumulative (must aim to keep up).

▪ Lecture recordings and PowerPoint lecture slides are essential learning materials for this course. ▪ Lecturer styles are NOT the same from course to course.

8

8

Common ECON1010 Misconceptions. Economic theory is not relevant to the real world. Economics theory courses are all about maths. First year economic theory courses are easy.

Economic theories learnt in first year are not so important. You don’t learn anything interesting until second or third year. Lecture 1 ECON1010

9

9

Question. A cargo ship is used with economic efficiency if: a. The average cost per km travelled is minimised. b. Opportunity cost is minimised.

c. It is always fully loaded between the ports. d. Profit is maximised for each trip between ports. e. All of the above. Lecture 1 ECON1010

10

10

Thinking like an Economist (Part 1). Today, begin by defining some core concepts. 1. 2. 3. 4. 5. 6. 7.

Define Economics. Microeconomics and Macroeconomics Scarcity Principle Opportunity Cost Cost Benefit Principle Economic Surplus Rational Decision Making Criteria (and pitfalls) Lecture 1 ECON1010

11

11

1. What is Economics? “Life is about making choices.

Economics is the science of choice. That means economics is the science of life.”

by Mr. Alan Duhs (Senior Lecturer, UQ School of Economics)

Lecture 1 ECON1010

12

12

2. What is Microeconomics? ▪ How to use what you have (your resources) to get as much as possible of what you want. ▪ It’s mostly about how individuals make the most efficient (effective) choices. ▪ The systematic effects these choices have on other individuals.

Lecture 1 ECON1010

13

13

What Microeconomics is not. Microeconomics is NOT just about: ▪ the stock market ▪ financial transactions (the $$$) ▪ accounting

▪ how wealthy a country might be now or in the future Remember: Microeconomics is about choices. eg: How does Qantas decide to do maintenance work in Australia or overseas? Lecture 1 ECON1010

14

14

Other Views of Microeconomics. The study of: ▪ how individuals make choices when resources are scarce. ▪ how scarce resources can be efficiently allocated. ▪ how and why individuals trade/interact in markets. ▪ the implication for the changes in prices and quantities in individual markets. Lecture 1 ECON1010

15

15

What is Macroeconomics? (macro = large, and not covered in this course) ▪ the study of the performance of national economies as a whole. ▪ studies policies (choices) governments use to try and improve national performance. ▪ the focus is on things such as GDP, interest rates, inflation, unemployment, and exchange rates. Lecture 1 ECON1010

16

16

Defining the core concepts. 3. Scarcity Principle ▪ Our resources are limited, so getting more of one thing means getting less of another. ▪ Core principle of economics: = wants exceeds available resources = choices between alternatives needed = Scarcity Principle Lecture 1 ECON1010

17

17

Defining the core concepts. Scarcity Principle ▪ Something is scarce if you: - have to sacrifice something else to get it (e.g. money, time, effort) - need to pay a price for it (i.e. not free)

Lecture 1 ECON1010

18

18

Defining the core concepts. Scarcity Principle Getting more of one thing means getting less of another. a. Consumers will be forced to decide what to consume. b. Producers will be forced to decide what to produce. c. Governments will be forced to decided how to allocate resources to achieve specified objectives. Economics is based on using what we have to get as much has possible of what we want tradeoffs. Lecture 1 ECON1010

19

19

Defining the core concepts. Scarcity Principle Wants exceed available resources

Scarce resources

Rational choices have to be made

Marginal analysis to make decisions 20

20

Defining the core concepts. 4. Opportunity Cost - it’s all about what was NOT chosen. - economic concept to help make a rational choice! ▪ the alternative NOT chosen when making a decision. ▪ the value of the next best alternative not chosen. ▪ what was sacrificed. ▪ what is given up once a decision has been made. Lecture 1 ECON1010

21

21

Example 1. Opportunity Cost You are at a bakery and trying to decide whether to buy a slice of cake or 3 donuts.

a. What is the opportunity cost of choosing the slice of cake? Answer: b. What is the opportunity cost of choosing the 3 donuts? Answer: Lecture 1 ECON1010

22

22

Defining the core concepts. 5. Cost Benefit Principle - chose to do something only if the extra benefit (incremental benefit) from doing it is greater than (or equal to) the extra cost (incremental cost), assuming the individual is rational. Rational individual ▪ has well defined goals ▪ fulfills these goals as best as possible ▪ rational choices based on costs and benefits given resources are limited/scarce 23

23

Defining the core concepts. 5. Cost Benefit Principle Rational choices DO IT if : extra benefit ≥ extra cost Remember: Economics is about the efficient allocation of resources. This cost benefit principle aims to help identify what choices should be made.

24

24

Defining the core concepts. 6. Economic Surplus = (incremental benefits of an action) – (incremental explicit and implicit costs of that action) Explicit cost = a cost that involves spending money (ie: a transaction physically occurs) Implicit cost = a non-monetary “opportunity cost” (no transaction occurs but an alternative is not chosen) Lecture 1 ECON1010

25

25

Defining the core concepts. Economic Surplus - economic decisions strive to maximise economic surplus by: 1. maximising the benefits 2. minimising the costs Economic surplus can be maximised by making choices that minimise the opportunity cost. Opportunity cost in economics is about assessing if an efficient choice of resources has been made. An outcome is efficient if opportunity cost is minimised. 26

26

Example 2. Economic Surplus Suppose a new TV in the city costs $1850. If you travel to the city to collect it, you can save $150 (and hence only pay $1700). However, if you travel to the city, it will mean giving up two hours of paid work of $140. Should you travel to the city to buy the TV?

Answer: The choice = keep working and pay $1850 for the TV, or compare the incremental benefit of gaining $150 saving if give up two hours of work valued at $140 (this is the choice that has to be made). 27

27

Example 2. Economic Surplus Answer: if decide to go an pickup TV, then incremental benefit of an action – incremental costs = savings made – opportunity cost of going to the city = (1850 – 1700) – (140) = 150 – 140 = +10 (the + sign is what is most important)

Conclusion: The benefit (saving) from picking up is $150. The cost of $140 to give up two hours of work is less than the benefit of picking up the TV. So, yes, go and pickup the TV. Lecture 1 ECON1010

28

28

Cost – Benefit Principle: 7. Rules for Making Rational Economic Choices In economics, a rational choice should: i) include opportunity cost

ii) exclude sunk cost iii) measure costs in absolute dollar amount, not percentages iv) be based on Marginal Analysis Lecture 1 ECON1010

29

29

Example 3. Opportunity Cost You have a business choice to make. You can either: 1. Continue to collect rent of $2000 per week from a commercial property you own, or 2. You can stop renting the property, move in to occupy the property, then start work on your own new venture. You expect new venture revenues to be $3500 per week, with other operating expenses being $1200 per week. What would be the most rational choice? 30

30

Example 3. Opportunity Cost Answer: Use the Cost Benefit Principle Note: sacrificing existing rent of $2000 per week, so as to move into the building, will be an opportunity cost. Economic Surplus = (incremental benefits of an action) – (incremental explicit and implicit costs of the action) Economic Surplus = 3500 – (1200 + 2000) = 3500 – 3200 = + $300 per week ie: better off by $300 per week if start the new venture and occupy the building. 31

31

Sunk Cost = expenses that have occurred in the past before a decision has been taken. = costs that would have had to occur in order for a choice to be made. = costs that are typically not able to be directly recovered. i) exploration costs (oil well, mining) ii) market research costs (focus groups, surveys) iii) feasibility study costs (before a decision is made)

Lecture 1 ECON1010

32

32

Example 4. Use Absolute values (not proportions) Suppose a new TV in the city costs $5000 (not $1850 previously). If you travel to the city to collect it, you can save $150 (and hence only pay $4850). However, if you travel to the city, it will mean giving up two hours of paid work of $140. Should you travel to the city to buy the new TV?

Conclusion: The benefit (saving) from picking up is $150. The cost of $140 to give up two hours of work is less than the benefit of picking up. So, yes, go and pickup the TV. This is the same answer as when the TV cost $1850 (independent of price).

33

Example 5. Choices based on Marginal Analysis (not averages) Marginal Benefit = the change in total benefit from doing one extra unit of an activity If you can sell 10 donuts for $20, and sell 11 donuts for $21.50, the marginal benefit of the 11th donut: change in total benefit one extra unit sold $21.50 - $20 = (11 - 10) donuts =

= $1.50 for the 11th donut sold

34

34

Choices are based on Marginal Analysis (not averages) Marginal Cost = the change in total cost from doing one extra unit of an activity

If you can make 10 donuts for a total cost of $18, and produce 11 donuts for a total cost of $18.50, the marginal cost of the 11th donut is change in total cost one extra unit produced $18.50 - $18 = (11 -10) donuts = $0.50 for the 11th donut =

35

35

Choices are based on Marginal Analysis (not averages) Cost Benefit Principle Definition DO IT when the extra benefit ≥ extra cost DO IT when the marginal benefit ≥ marginal cost Do it when the MB ≥ MC MB of selling the 11th donut = $1.50 MC of making the 11th donut = $0.50

Decision: 36

36

Choices are based on Marginal Analysis (not averages) Average Cost total cost of producing a total number of items total number of items produced $18 = 10 donuts = $1.80 on average per donut =

Average costs do not give a clear indication as to whether or not to produce the next donut from an efficient use of resources perspective. Lecture 1 ECON1010

37

37

Example 6. Rational Decision Making Should NASA expand the space shuttle program from three to four launces per year? Launches (per year)

Total cost ($ billion)

Average cost (AC) ($ billion/launch)

1

3

3

2

7

3.5

3

12

4

4

20

5

5

32

6.4

Assume: Average Benefit = $6 billion/launch

38

Example 6. Rational Decision Making Decision to expand is incorrect by using: - average cost rises to $5 billion to per launch - average benefit constant at $6 billion per launch

It is incorrect to expand launches from 3 to 4 per year based on average benefit greater than average cost! Decision should be based on the extra benefits from one extra launch compared to the extra costs from one extra launch using marginal analysis. Lecture 1 ECON1010

39

39

Example 6. Rational Decision Making Now correctly use Marginal Analysis Launches (per year)

Total cost ($ billion)

Average cost (AC) Marginal cost (MC) ($ billion/launch) ($ billion/launch)

1

3

3

3

2

7

3.5

4

3

12

4

5

4

20

5

8

5

32

6.4

12

Assume: Marginal Benefit (MB) = $6 billion/launch

40

Example 6. Rational Decision Making Launches (per year)

Marginal benefit (MB) ($ billion/launch)

Marginal cost (MC) ($ billion/launch)

1

6

3

2

6

4

3

6

5

MB > MC

4

6

8

MB < MC

5

6

12

What is the optimal number of launches per year? 3 (ie: where MB ≥ MC) Assume: Marginal Benefit (MB) = $6 billion/launch

41

Conclusion Microeconomics 1. relates to how individuals make choices. 2. involves methodologies and decision rules to help individuals make rational choices. 3. uses benefits & costs to make choices, with a focus on marginal analysis (more to come in later lectures).

Lecture 1 ECON1010

42

42

Next week: Lecture 2. Thinking like an Economist (Part 2)

Lecture 1 ECON1010

43

43...