Topic 1 ECO

FUNDAMENTALS
OF ECONOMICS PPE
Topic 1.
Introduction to Economics
1
FUNDAMENTALS OF ECONOMICS PPE
CONTENT
I. ECONOMY
II. THINKING LIKE AN ECONOMIST
III. TEN PRINCIPLES OF ECONOMICS
IV. PERSPECTIVES IN ECONOMIC SCIENCE
2
I. ECONOMY
(C1, pp. 3‐5)
3
I. ECONOMY
• Oikonomos (ones who manages a household)
• The economic problem‐3 questions:
 What?
 How?
 Who?
4
• Scarcity: the management of society’s

resources is important because resources are
scarce (limited). Compared to needs and
wishes.
• Economics: is the study of how society

manages its scarce resources.
5
II. PENSAR COMO UN ECONOMISTA
(C2, 21‐37)
6
ROLE OF THEORIES AND MODELS
7
Economic theory is developed from basic

assumptions, applying models and logic.
Economic theories are used to explain, based
on these fundamental assumptions, the
observed economic facts, and to make
predictions.
8
Basic assumptions in economics are for

instance: cost-benefit analysis; the invisible
hand; economic agents are rational;
methodological individualism
9
(Economic) models are simplified

representations of reality. They must
represent the facts faithfully, but in a
simplified way.
10
Models are used to:

(i) show relationships between variables;
(ii) explain the behavior of markets and
economies;
(iii) design policies that improve the
economy.
11
Models in economics: the circular Flow diagram
12
Circular Flow diagram: a simplified visual model
of the economy to include only two types of
decision makers – households and firms that
shows how money and production inputs and
outputs flow through markets among
households and firms
13
14
• Microeconomics: study of the way in which

families and companies make decisions and
the way in which they interact in each
market
• Macroeconomics: study of the phenomena

that affect the economy as a whole
(inflation, unemployment, economic
growth, devaluations, ...) 15
Positive and Normative Propositions
Positive statements are descriptive. They
make a claim about how the world is.
Positive statements have the property that
the claims in them can be tested and
confirmed, refuted or shown to not be
provable either way.
16
Positive and Normative Propositions
Normative statements are prescriptive.
They make a claim about how the world
ought to be.
Normative statements have the property
that they include opinion; it is not possible
to test opinions and confirm or reject them
17
(C1, pp. 5‐16)
18
• How people make decisions
• How people interact
• How the economy as a whole works
19
How people make choices

/1/ People face trade‐offs
20
Society faces another trade‐off:

‐ Efficiency, society extracts as much as posible from
the available (scarce) resources; and
‐ Equity, the benefits of those resources are
distributed fairly among the society’s members.
21

/2/ The cost of something is what you give up to get
it
Comparing the costs and benefits of the
different options
The opportunity cost
22

/3/ Rational people think at the margin
23

/4/ People respond to incentives
• Incentive: is something that induces people
to act, such as the perspective of a
punishment or a reward.
24
CASE STUDY.
An increase in fuel prices between 2005 and 2008
Small cars and motorcycles are purchased
Bicycles are purchased (and repaired)
Public transportation use increases
Demand for housing increases (close to public
transportation services)
Fuel consumption decreases (km)
The purchase of non‐efficient vehicles decreases
25
How people interact

/5/ Trade can make everyone better off
26
How people interact

/6/ Markets are usually a good way to organize
economic activity
27
• Adam Smith, “An Inquiry into the Nature and

Causes of the Wealth of Nations”, 1776
• The invisible hand: metaphor to explain the
functioning of markets and pricing through
the free play of supply and demand.
28
How people interact

/7/ Governments can sometimes improve
market outcomes
The government must

 Ensure compliance with regulations.
 Maintain key institutions for a market economy.
29
Although the invisible hand often leads markets to

allocate resources efficiently, that is not always the
case.
Market failure: situation in which the market on its
own fails to produce an efficient allocation of
resources.
 The instability of economic cycles.
 The externality.
 Market power.
 Unequal income distribution.
30
How the economy as a whole works

/8/ An economy’s standard of living depends on
its ability to produce goods and services.
31

/9/ Prices rise when the government prints too
much money
Inflation: a monetary phenomenon. An increase

in the overall level of prices in the economy.
32

/10/ Society faces a short‐run trade‐off between
inflation and unemployment.
If the economy is doing well, prices and
employment go up (unemployment goes
down).Phillips curve
33
The Neoclassical model is the dominant one in
economic science in the capitalist democracies,
developed and transferred in their universities.
It is not the only existing model. Knowing other
proposals helps to understand the axioms,
ontology, assump ons, own values o n which the
Neoclassical model is based.
34
www.exploring‐economics.org
35
FUNDAMENTOS DE ECONOMIA PPE
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
Thank you for your attention
66

Topic 1 ECO

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Topic 1 ECO

Uploaded by

Copyright:

Available Formats

FUNDAMENTALS

• Scarcity: the management of society’s

• Economics: is the study of how society

Economic theory is developed from basic

Basic assumptions in economics are for

(Economic) models are simplified

Models are used to:

Models in economics: the circular Flow diagram

• Microeconomics: study of the way in which

• Macroeconomics: study of the phenomena

How people make choices

Society faces another trade‐off:

How people make choices

How people make choices

How people make choices

How people interact

How people interact

• Adam Smith, “An Inquiry into the Nature and

How people interact

The government must

Although the invisible hand often leads markets to

How the economy as a whole works

How the economy as a whole works

Inflation: a monetary phenomenon. An increase

How the economy as a whole works

Thank you for your attention

You might also like