TEN PRINCIPLES OF ECONOMICS

1. Have limited resources – scarcity and unlimited needs

- Input: land, labor, machinery, technology => limited
2030: land is extremely limited
Labor: VN has limited skill labor
Moving agriculture to industry (VN)
Dealing with scarce resources
- Output = products, customers => unlimited
Always want more output => that’s problems
- Outcome: the impact of way we change the life – can be positive or negative
30 years ago: people die because the lack of food
2. Shortage
- The war between Russia and Ukraine
- All the countries in Africa (Black Country) have lack of food
 Need to make decision
- If we want something, we need to give up something that we also like
- Full of trade – offs
- Efficiency: maximin the output by minimized the input
Why so many souvenirs comes to VN? – cheap labors market => less cost
Apple make a lot of profits – the most profitable company in the world
 That’s chances
 Be efficient – my jobs
- Want efficiency – need to give up equality and => that’s trade – offs
- Equality: everyone similar in the society
- Taxes: few the gap between efficiency and equality – transfer tool
Vanuatu
BVI (British Virgin Island): paradise tax for VNese – don’t tax income – paradise for the rich
- Efficiency and quality: cannot qualify which is more important
3. Opportunity cost
- What will you have done with your best choice
- You give up all to your best choice
Study at FTU university, give up so many things
4. Market (solution 1)
- The place where buyers and sellers meet each other – no government
- Adam Smith: invisible hand - let buyers and sellers decide what is the best for them
- Prices: the best element
- Invisible hand: buyers and sellers are not enemies. Do not cheat your customers. Seft interest
- Self – love: satisfy the customers – we don’t intend to be rich, we intend to satisfy the customers.
But some people forget that. For example, we make banh mi
- We start from the bottom to satisfy the customers. Try to start your business from there
5. The “Man of System” – State (solution 2)
- Someone of the top will decide what we need to follow, what to do
- We don’t follow the market => more dangerous
Example: Chianese government believe that they can control the COVID 19
- Human beings are not like chess pieces
- VN is the mixed economy: states are everywhere but still have market
- Entrepreneurs
- Do not be a robber, try to understand the need of customers and satisfy them
Uber, Grab, Lyft – example of market solution – good example of invisible hand
Uber cannot compete with Grab in VN
- Trust: the main key
eBay: the best example of invisible hand – founded in 1995 – use to know the price – 190 millions
active buyers
- Sefl-regulated: we don’t need the government, let the market do
- Don’t be naive, nothing is free. Anything can use to make money
- Facebook, Google, Tik Tok,... become prosumer because at the same time producers and
consumers – provide your detail for advertisement
6. Demand (buyers)
- Buyers: quantity demand of any good are willing and able to purchase before the demand is
forecast – ex ante (before)
- Law of demand: when the price go up, the quantity is demand and vice versa
- Demand go down: 3 reasons:
 Substitute (example: buy more Pepsi => Coca-Cola price down) - substitution
 Income: fixed (price up – feel poor – consume less or vice versa)
 Satisfaction
- Quantity demanded: not the demand, born of the curve
- “Other things”: only study the relationship between quantity and quantity demanded
- When we change something,
- Change in demand vs Change in quantity demanded:

Change in demand Change in quantity demanded

The curve go up and the curve go down On the curve
Less attractive – price down
Something on demand change The price change
The curve shift to the right The curve shift to the left
 We should follow curve – no need to worry
 The price is what you expect to pay
- Willingness: what you want before you go to the shop
- Demand goes down, supply goes up
7. Supply (producers)
- We want to make profit (total revenue – total cost) – maximize profit
- Revenue: (price multiply quantities or output – cost input)
- Shareholder risk: one way to make profit – say thank you for someone put the risk on you
- Show a good supplier willing and able to supply at different prices
- Total revenue: prices go up, quantity goes up => increase total revenue – higher price means
higher revenue we want
When the price of oil too cheap, so low ($2) in Saudi Arabia…
 - To make profit: maximize revenue and minimize the cost.
Exercise: Choosing something interesting for you to share the news about that. Try to apply
what we study to the news about economics & business.

ELASTICITY AND ITS APPLICATION ( give the

number to understand how much is the product )

1. Elasticity of demand - consumers
- Is a numerical measure of the responsiveness of Qd or Qs to one of its determinants.
- Price sensitive
- The tool to add you the decision may I change the price or not
- 2 methods:
 Standard method of computing the percentage change (give different answers) – never
use standard method because elasticity is changing
 Midpoint method: the average between the start & end value.
(always give the same number)
- Price elasticity:
 Price elasticity is higher when close substitutes are available because it give me the same
level of satisfaction
- If the good is narrowly (brand) => many substitutes
If the good is broadly (water) => less substitutes
 Higer for narrowly defined goods than broadly defined ones.
- Insulin is necessity
Cruise is a luxury
 Higher for luxuries and necessities
- Short run: not change behavior
Long run: change
 Higer in the long run than the short run
 Conclusion: The price elasticity of demand depends on:
 The extent to which close substitutes are available
 Whether the good is a necessity or a luxury
 How broadly or narrowly the good is defined
 The time horizon: elasticity is higher in the long run than the short run.
- Perfectly inelastic demand:
 Quantity change by 0% while price down 10%
- Inelastic demand:
 I don’t change my behavior
 Price down 10%, quantity rises less than 10%
- Unit elastic demand:
 Price down 10% and the quantity rises 10%
- Elastic demand:
 Price down by 10%, quantity rise more than 10%
- Perfectly elastic demand:
  You cannot change the price, if you change, you lose all your customers
 The price is fixed => change => lose
 Price cannot change, quantity change by any %
Price taker: no one can fix the price
2. Elasticity of supply – producers
- A supply curve is said to be elastic when an increase in price increases the quantity supplied a lot
(and vice versa)
- When the same increase in price increases the quantity supplied, just a little, then the supply
curve is said to be inelastic
- The more elastic, the more we change (and vice versa)
- 4 elements:
 Change pre – unit cost with increased production:
 If increase production required much higher costs, then supply will be inelastic –
expensive and difficult elastic
 If production can increase with constant costs then the supply curve will be
elastic – cheap and easy elastic
 Time horizon:
 Influences the elasticity of supply for a good
 Following the price increase, producers can expand output only using their
current capacity => inelastic – in the short term
 Over time, however, producers can expand their capacity => elastic – in the long
term
 Share of Market for Inputs:
 For a good depends in whether it is a small or big demander in its input markets
i.e. the industry’s share of the demand for its input
 Money is not input. Money is the cost of input
 Elastic: the industry is a small demander in its input markets because supply can
be expanded without causing a big increase in the demand for the industry’s
inputs.
 Inelastic: the industry is a big demander in its input markets.
 Geographic scope:
 Determines the elasticity of supply for a good
 The narrower the scope of the market of a good, the more elastic its supply
 The wider the scope of the market of a good, the less elastic its supply
 3. Income elasticity demand
- Income: salaries, interests, profit, rent, capital gain, refund, grant, royalties (you invent
something new, and someone use your inventions)
- We compare the changing in income
- Normal goods (vice versa)
- Inferior goods: when income increase, not use to many/much times
- Substitutes: cost-price elasticity > 0
- Complements: (vice versa) 2 goods must be used together
- Profit is really important:
 make balances. If we don’t make profit, we will not survive and be disappeared
 for investors
 dividends: part of the profits that we give to shareholders because they take the risk to the
business. If the risk is higher => disappeared

 Midterm: about the news, no multiple choices, no exercises

THE COST OF PRODUCTION

- Increasing return: double the number of staff, and the number of products output are more than
double
- Constant return: increased labors in the same way of the output (equal)
- Marginal product = MP = change in total product / change in resources:
1. Short term vs long term
Short term Long term
- At least one resource (inputs – - Time period in which all resources
land, labor, machineries) is fixed (land, labors, machineries) are
- Example: open a restaurant, variable/changeable
cautious – decide to lease just 6 - When all inputs are variable
month
 - Economics need time period
- Depends on yourself
- Example: Black Friday
 Remember what is the Black Friday (in different countries) – definition, repeat
 Understand (why): explain, summarize (on text book)
 Apply in VN, your life: implement, solve the theories, date figure, number (before 1990s
and đổi mới)
 Analyze in VN: analyze, research advantages and disadvantages
 Evaluate: convince, criticize
 Create: propose, create
- Example: VAT (value added tax)
 Value added: output – input
 More value, more taxes. The water is the same, but if you drink in 5 stars hotel, there’s
much more expensive
 Government want to sensitive citizens
2. Accounting and economic costs
- Accounting: out – of – pocket, or explicit costs
- Opportunity costs: the highest-valued foregone alternative when any choice is made – economic
costs
- Sunk cost: I pay something and I never see this money anytime
 The money we will never and never be refund. Example: institution fee
Accounting costs Economic costs
- Accounting cost: explicit cost - Economic cost: both the explicit and
- Total profit = total revenue – explicit implicit costs
cost - Total profit = explicit costs - implicit
costs

- Example: a farmer
 He earns $60 profit
 But he forgets the opportunity costs
 Spend 24 hours for farming - $5 per hour => $120
 Profit = $0 – he losing all profit
 Better for him: join the burger
 Conclusion: never forget opportunity costs when make decisions
3. Fixed costs and Variable costs
- Fixed cost:
 Will be unchanging no matter how much output is produced. If you produce 1,2, or 0 =>
still pay the same amount of money.
 Overhead costs
 The more I produce, the best
- Variable cost:
 Increase as the output increases. I recruit more staff => pay money for all of them
  Decrease as the output decreases.
 The more I produce, the worst
- Example: puppies
 Fixed resource:
 1 male: $350
 1 female: the demand for the female is higher => price is higher: $400
 Vet care (for adults): $300
 Food (for adults): $300
 Registration: $100
 Kennel space (for adults): free
 Advertising: $50
 Variable resources:
 Food for puppies
 Vet care for puppies
 Kennel space for puppies
 Overhead costs: $1500
 1 puppy = $1500 of fixed cost per puppy
2 puppies = $750 of fixed cost per puppy
 The cost per puppy – that is, the average fixed cost – get more and more attractive
 The more puppies I produce, the more profit my business get.
 They rapidly increase with the number of puppies – variable costs
- Your best quantity will be in the middle.
- The Average cost is the “U curve”
- When you small, fixed cost is kill you, and vice versa
4. Law of Diminishing Return
- Law of Diminishing Return: The more I recruit, the less and less I produce because the input is
fixed.
5. Costs curves (practice a lots by yourself)
- The price and the quantity is opposite
- TVC: Total variable cost
- TFC: Total fixed cost, never changed
 My total cost (TC) is always total variable cost - total fixed cost
- TC: can be calculated by adding TFC and TVC
- AFC:
 Average fixed costs
TFC
 AFC=
Q
- AVC:
 Average variable costs, if I buy quantity
TVC
 AVC=
Q
- ATC:
 Average total costs, if I buy quantity
 TC
 ATC=
Q
Or AFC+AVC
Multiply by quantity – the red area
- MC: Marginal cost (the last one)
▲TVC
 MC= ; ▲TVC (TVC1 – TVC2), ▲Q (Q2 - Q1)
▲Q
▲TC
 Or MC= ;▲TC (TC – TC1), ▲Q (Q2 - Q1)
2
▲Q
 change in total cost for a business as a result of a one-unit change in output
 High marginal costs
6. Why the marginal cost curve intersects our average cost curve
at their minimum?
- Law of Diminishing Return explain the shape marginal cost – “J curve”
- “U curve average”: saw video about puppies
- The best for you is pay attention to average & marginal grade. If your marginal is less than your
average, your average will decrease – always decrease
 Conclusion: When your marginal is lower than your average, your average will
decrease – always decrease, and vice versa. They intersect at the minimum of average.

MARKET STRUCTURE (industry is the sum of markets)

(Why we need market because: market is the solution of problems – limited inputs to satisfy
unlimited wants)

1. Perfect competition
- Large number of sellers, buyers
- Homogeneous: the products are the same
- No brand, all the products are the same, no difference. Example: water is water,……
- Free entry, free exist, easy entry, easy exist
- You are price taker: cannot fixed the price. No firms control the price. In the long-term, the
economic profit will be zero
 So small
 Everyone else produces
 No brand
 The price is not fixed by the firm, the price is fixed by market
- No market power
- They all same in the small quantity
- Perfect information: both buyers and sellers have the same information
- No advertisement
- Always 2 diagrams: market and firm.
- Perfectly elastic: demand curve from earlier this semester
- Solution: increase quantity because the price is fixed
- Example: Form Zero to Q1, we loss profits (TC > TR). And the same with from Q2 to
About Q1 to Q2,
- Q*: the maximum point, slope is equal to 0
 To
- MR = MC => rules for all market structures, no matter what the market structures
 If MR > MC: that’s great. Should increase the output until MR = MC
 If MR < MC: that’s bad – more being added to cost than to revenue, profits are falling.
Should decrease output until MR = MC
- In the long run, a perfectly competitive firm’s profits are ALWAYS equal to zero
 Conclusion: Only decided by quantity which will help you maximize the profits
2. Monopoly (one seller –“ mono”)
- One producer, unique product
- No one can enter the market, no free entry
- Price marker: Monopolist has complicated control over the price
- Complicated market power
- Everywhere in VN – socialist country
- Sell and buy in big quantities
- Patents: nobody can copy
- Key resources: oil, water, …
- Exist because
- High cost: monopoly suffer from
- Natural monopoly: one company,
- Only 1 diagram: the firm is the industry
- Follow the law of demand: “price goes up, quantity demand goes down, and vice versa” – price
maker can changing
- Total revenue (TR): PxQ
- The big different: MR < P (always) - follow the law of demand
- “J curve”, ‘Q*: MR = MC’, P*:
- Total revenue is green, total cost is red, profit is blue
- Sometime, some monopoly lose money if the cost is too high => that market disappeared =>
there is no industry anymore. Example: radio, train, opera, …
3. Oligopoly vs. monopolistic competition

Monopolistic competition Oligopoly (few – “oli”)

- Large number of sellers
- Easy entry and exist
- Different with 1: the products are
different within a market
 Small about of market power
- Small of sellers, few brands
- Don’t compete, they collude (collab,
they agree about the price)
- Example: air plane has “sky team” –
“star alliance” – “one world”
- Non-price competition
 Large about of market power
 4. Monopsony
- “Mono” – one, “sony” – buyer
- Market with one buyer. Example: army (only them can buy gun), police, etc.
- Minimize the cost for company
- “Procurement”: the one to purchase the input for the company
5. How to maximize profit
- MR = addition to total revenue / addition to output (▲)
- MR = P* (perfect competition only) – equilibrium price – because the price taker
- Marginal cost are the same “J curve”
- “U curve”: where the marginal cost cross the average
- When your marginal is higher, should choose, and vice versa
- MR = MC => the quantity maximize profits
 Total revenue = price* = d
 Total cost
- Compare: blue box = green box – red box.

INTRODUCTION TO PRICE
DISCRIMINATION (Different people pay different price)
- We sell the same product to different groups of customers at different prices.
- If you want to make profit, ………………………
- Try to create inelastic demand for your customers. Example: go to Starbuck, search Google,

TAXES (second solution to solve problem) – government uses them

1. Tax:
- Direct, income, on profit – depend on individual
 If your income is very low => no need to pay tax (zero tax)
 Progressive: “the more I earn, the more tax I pay”
 Maximum tax income in VN: 35%
 Other countries: Regressive: “the more I earn, the less tax I pay” – only poor people
pay taxes => totally opposite VN => paradise for the rich
 BVI: “British Virgin Island” – only accept very very very wealthy people – VNese can
avoid pay taxes
 Proportion: everyone pay the same
 Lump son: fixed amount
- Indirect –VAT (8% in VN): tax on price, excise: tax on quantity – wonderful tax for government
because people do not know that they pay this everyday
- Inheritance taxes: when you die, your assets will be transferred to your children, but they must
pay high taxes for those
2. Why we tax:
- To raise revenue for public project
- We want to change the behaviors of the people
- Stabilize the economy: government reduce the tax in COVID-19
- Reduce the gap between the rich and the poor
4. Who pay the taxes
- The more elastic side of the market will pay a smaller share of a tax (small burden) – can change
your behavior – not pay the taxes
- The less elastic (more elastic) side of the market will pay a greater share of a tax (greater burden)
– vice versa
 Always see the elasticity first
- Price paid by buyers
Price received by sellers
 Shop collect the tax from buyers
 When the Demand is more elastic than Supply, Demanders pay a Smaller Share of the tax
and Sellers Pay a Larger Share of the Tax
 When the Supply is more elastic than Demand, Buyers pay more the tax
“Use the concept of elasticity”
5. Elasticity = Escape
- The more elastic you demand, the more you avoid the tax
- Give me the same level of taxes
- Elastic supply means that the resources used to produce the taxed good can be moved to other
industries so they can escape the tax
- Government calculate taxes for every products. If the demand and supply is inelastic, there will
be taxed
6. Deadweight loss & tax revenue
- Consumer surplus (CS) = maximum willingness to buy - price
Maximum price I intend to buy before go to the shop
- A tax generates revenue and creates a deadweight loss
- Producer surplus (PR) = price - minimum willingness to sell
- The point that cross supply and demand is the maximum
 Efficiency when we maximize the supply and demand
- We consume less at higher prices => new – reduce consumer surplus
 The tax reduce consumer and producer surplus smaller and smaller
 Tax revenue collected by government – can cover only one part
- Deadweight loss: the part of consumer and producer surplus that no one can catch - the lost for
society are the warn – born by the tax
 The value of the trips not made because of the tax
 The value of the trades not made because of the tax
 Larger the more elastic the demand curve, because if the demand is inelastic, a tax
will not deter many trades
7. Subsidies
- Negative tax, governments give money for consumers or producers
- Who gets the subsidy does not depend on receives the check from the government
- Who benefits from the subsidy does depend on the relative elasticities of demand and supply
- Subsidies must be paid for by taxpayers and they create inefficient increases in trade (deadweight
loss)
State own enterprise (SOE) create subsidies
- A subsidy drives a wedge between the price received by sellers and the price paid by the buyers
 Both buyers and sellers feel great
- Subsidy create costs to the government
- Costs of the subsidy = the subsidy wedge (blue area in diagram)
- The cost to the supplier goes up, the value of quantity goes down
 Deadweight loss – society cannot cover (grey area in diagram)
- When demand is more elastic than supply, suppliers bear more of the burden of a tax and
receive more of the benefit of a subsidy.