Semester 1

INTRODUCTION TO ECONOMICS
Prof. Martin Gramont Manzo
magramont@monaco.edu

class of September 13th

Economics→ social science (about people= constant change + constant interactions + not
directly observable + time lags (eg. monetary policy taking a long time to work) + no
constant causation)
↳ about the allocation of scarce resources (in nite wants and needs, but nite resources).
Studies human action/behaviour.

HARD TO COME TO AN AGREEMENT WHEN IT COMES TO ECONOMICS

→WHY?
- method
- time
- values (they can change but they shape the way you think; they’re hard to discuss (kind of
like religion)) → they’re underneath the economic thought

scarcity: we don’t have everything all the time

↳central to economics (wouldn’t exist if there wasn’t scarcity)
↳creates trade-off (we gotta give something in order to get something back)→ creates
opportunity cost (best alternative option forgone= ECONOMIC COST OF CHOICE)
↳ if the opportunity cost is high, the option you picked is probably the wrong one

class of September 20th

PRESENTATION → Economic development

↳ broader than economic growth (not only about increase in GDP)
↳ development involves many more variables. about wellness, quality, pollution
↳ standards of living, poverty, inequality, sustainability
↳ modernization, westernization, industrialization

Economic space → could be a country, a union, a region

↳ inside we have economic agents (families/households + businesses + governments)
- H and B pay taxes to the government (H and B are “private sector”)
- taxes are the government’s income with which they provide services to H and B. It’s a
cycle
- subsidies are a help to H and B. They reduce production costs. AGAIN coming from
taxes

MICROECONOMICS → studies a portion of the economy. It studies relationships

between agents.
MACROECONOMICS → studies the economy as a whole (entire economic space).
Government is the only agent with power over all the others, but still macro is not the study
of governments.
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Factors of production → (k, l, nnrr, mgt)

Capital → physical stuff you need to work (eg. laptop, building)
Labour → people working for you
Management
Natural resources

Types of goods (includes services)

- economic vs. free → free is abundant (not scarce) vs. economic is scarce + no monetary
values (no price) vs. economic has a price
- consumption vs. capital → capital is not going to satisfy directly a human need. consumption
has a direct level of satisfaction while capital is used in the long term. We can see capital as
a kind of investment (what will bring you satisfaction later)
- private vs. public → private goods are excludable and rivalrous (create competition) either I
drink the water or you do. Private goods have ownership. Public goods have no ownership and
no competition (eg. public lighting).

COMPARATIVE ADVANTAGE VS. ABSOLUTE ADVANTAGE

Comparative advantage → when you produce at a lower opportunity cost than your
competitors
Absolute advantage → when you can produce the exact same amount as your competitor by
using fewer resources than the competitor. In the end, they have the same amount but one
gave up more than the other. OR producing more using the same resources than the other

Market → is a social cooperation tool. Any place where two or more agents engage in
economic interaction
↳ when you prohibit a market, a black market with higher prices will arise
2 types of markets:
• perfect competition → typically basic commodities (eg. grains). Lots of markets selling
homogeneous products
• not competition → monopoly, oligopoly

DEMAND
Demand → willingness and ability to purchase g/s at a certain price and time
Quantity demanded → amount of g/s that consumers are willing and able to purchase at a
given price at a given time
Law of demand → Inverse relation. When price increases, qtyD decreases; when price
decreases, qtyD increases. (CETERIS PARIBUS → ALL THINGS REMAIN
CONSTANT)

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D(x)= f (Px; taste; substitutes; complementary goods; income…)

CHANGE IN DEMAND → we talk about change in demand when factors other than price
change (taste, income, price of related g/s…). On the graph, we’d see a shift of the demand
curve.
CHANGE IN QTY DEMANDED → we talk about change in quantity demanded only
when we talk about price changes. On the graph, we move ON the demand curve, we don’t
shift it.

substitution effect → if price falls, consumers will replace higher-priced goods with cheaper
ones
income effect → a change in income level will cause a change in quantity demanded

SUPPLY
Supply → the willingness and ability of producers to produce something at a certain price
and time.
Quantity supplied → amount that producers are willing and able to produce at a certain
price at a certain time.
Law of supply → Direct relationship. When price increases, qtyS increases too.

CHANGE IN SUPPLY → we talk about change in supply when factors other than price
change (cost of FOP, taxes, weather, change in technology…). On the graph, we’d see a shift
in the supply curve.

CHANGE IN QTY SUPPLIED → we talk about change in quantity supplied only when
we talk about price changes. On the graph, we move ON the supply curve, we don’t shift it.

MARKET EQUILIBRIUM
↳ occurs when the quantity demanded is equal to the quantity supplied. There is no
shortage and no surplus → D=S

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market disequilibrium:
I. excess demand (shortage)→ when at a given price (below market equilibrium price), the
quantity demanded is higher than the quantity supplied
II. excess supply (surplus)→ when at a given price (above market equilibrium price), the
quantity supplied is higher than the quantity demanded

ELASTICITY
elasticity of demand: level of responsiveness of qtyD to a change in price
calculated by → PED (price elasticity of demand) = % change in qtyD /% change in price
symbol for change = delta ∂ or ∆

price elastic demand → PED>1

price inelastic demand→ PED<1
price unitary elastic→ PED= 1

DEPENDS ON:
- level of necessity
- proportion of income
- time
- closeness to substitutes
elasticity of income: level of responsiveness to qtyS to a change in income
calculated by: →PES (income elasticity of demand) = % change in qtyD / % change in Y
(income)
symbol for change = delta ∂ or ∆

income elastic demand → PES >1

income inelastic demand →PES <1

MACROECONOMICS (economy as a whole)

- MACRO GOALS :
• increase in GDP
• price stability π= in ation (with a line above it - means constant)
• low U (unemployment)
• stability of economic cycle

Governments try to achieve these goals by using two types of policies → scal and
monetary (macro policies). Designed by the public sector, not the government (like not the
president, not Meloni, she can’t as she doesn’t have the knowledge)

- MACRO POLICIES:
• MONETARY (by central bank: independent from the government) → about monetary supply
(liquidity) increasing (expansionary) or decreasing (contractionary)
- expansionary (increases aggregate demand) → Ms goes up and IR(interest
rates=price of money) goes down
- contractionary (decreases aggregate demand) → Ms goes down and IR goes up
• FISCAL (by government) → about government spending and taxes.

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- expansionary (increases aggregate demand)→ G goes up (more money circulating)
or T goes down (increased disposable income)
- contractionary (decreases aggregate demand) → G goes down or T goes up

MACRO GOALS
1) ECONOMIC GROWTH (rise in GDP)
GDP → value of all nal output of goods and services produced in a year
↳ gross domestic product (geographically based) → Yn=ADn= Qn (n=national)
↳ C + I + G + (X-M) X-M is called external balance
c= consumption of families (depends on disposable income= income you have left after paying
taxes, what you can actually spend)
i= investment of business
g= government spending
x= export
m= import
GNP → gross national product (considers country's factor incomes irrespective of location)
Real GDP → accounts for in ation. takes account of uctuation in prices that affect the
value of nominal output. Adjusted for in ation using GDP de ator and a base year (decided
every 10 years eg, 1980, 1990, 2000, 2010)
Nominal GDP → measures national output using current market prices (monetary value)
↳GDP at the time of measurement

Economic growth → It is about productivity (in the long run)

↳rise in GDP
2 models:
1) Solow model (1956) → physical capital (K), human capital (HC), immigration (N)
2) Romer model → human capital (HC)

Productivity →

macropatologies:
in ation
unemployment
stagnation → negative economic growth
stag ation → in ation + stagnation

3) LOW INFLATION
in ation → sustained increase in the general level of prices
↳always and everywhere a monetary phenomenon (monetarism)
economy divided in 2:
real market → where real production takes place, real wealth creation in a given economy
(absorption, demand)
monetary market → printing money, liquidity injected into the system (emission, supply)
equation of exchange: (not really an equation, but rather an identity)
Ms = Px x Qn

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If money gets injected (Ms) into the economy, the economy won’t be able to absorb it.
Ms>Md. It’s like having surplus of money and this raises Px thereby creating in ation. This
in ation will decrease the purchasing power of money (the same amount of $ won’t buy the
same amount of g/s).

4) LOW UNEMPLOYMENT
unemployment → people willing and able to get a job, but don’t have one. They are
currently looking for a job.

2 types:
- frictional → normal unemployment, it means the economy is alive. It’s the situation in
which you are between two jobs. You quit one and it takes 5 months to get another job.
You have been unemployed for 5 months.
- structural → not normal. It is a mismatch between supply and demand in the labour
market. Rigidities → caused by the government; prevents markets from getting back to
equilibrium.

market of labour:
supply → households
demand → employers
price of labour → wage
minimum wage → above market equilibrium. Creates oversupply/mismatch (caused by
governments imposing minimum wage →rigidity)

5) STABILITY OF ECONOMIC CYCLES

MONETARY ECONOMICS
nancial system → reallocates money to the supply (savings: money not consumed) to the
demand (investments). Links present with past.
Divided in two:
- nancial markets (direct allocation) → market of bonds, stocks, derivatives
- nancial intermediaries (no direct allocation) → The bank or other institutions makes the
allocation with your money
interest rates: opportunity cost of money. Price variable of intertemporal adjustment
between S and D. The higher IR, the less suitable business we have. Price of time

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