ECON11-100 Principles of Economics

Robert Wrathall bills

For further information about this course

please see the subject outline on iLearn.

Assessment
1. Cengage online quiz: week 3 HW1 (10%),
2. Cengage online quizzes: week 8, week 10 and week 12 (20%)
3. Mid-Semester Exam: Week 6 (Day and Time TBA) 30%
4. Final Exam: 40%
 WHAT IS CENGAGE APLIA?

APLIA is an online quiz tool (offered through the Cengage link) which gives you interactive problem sets. You may benefit from interactive Data-View, Distribution Tools and Graph
Assignments. APLIA also gives you immediate and extensive feedback to help you understand the process and logic behind the correct answer.
 Tutorials
• Tutorials start this week (Week 1).
• The tutorial questions will be available from
iLearn by the end of the previous week.
• The tutorial questions will apply principles and
concepts developed in lectures.
• You will get the greatest benefit from the
tutorials if you attempt to answer the tutorial
questions before your tutorial.
• Unlike exams, there are no penalties for being
wrong in tutorials.
 Tutorials are important
• The tutors will keep a record of tutorial
attendance
• The tutorials will encourage you to be an
ACTIVE LEARNER.
• If there are things about a topic that you do
not understand, following the associated
lecture and tutorial, please see your tutor (or
me) in office hours (or make an appointment).
 ECON11-100 Principles of Economics
Week 1
Case Study: Choosing when the stork comes
• Introduction
• Chapters 1 and 2
• Text: Principles of Microeconomics (8th (or 7th edition) by
Gans, King, Byford and Mankiw.
 Economics
Microeconomics- individual markets, individual decision Macroeconomics- economic aggregates (inflation,
making (The core of the economics discipline) unemployment
Macro vs Micro Economics

 Microeconomics is the study of

individual units that make up the
economy
 Macroeconomics is the overall
aspects and workings of an
economy

For example: When one firm

outsources it IT department to a
foreign country to lower costs we have
a micro issue. However if many firms
within a country do the same thing
and create higher unemployment we
now have a macro issue.
• The focus(predominately)in this course is on
partial equilibrium analysis.
• This refers to simply being concerned with
equilibrium in the market we are looking at,
and treating the things determined outside
this market (such as income and the prices of
related goods) as being ‘givens’ (exogenous
variables).
• General equilibrium analysis involves
considering the interactions of multiple
markets.
 Markets
Microeconomics provides insights into
individual markets and the behaviour
of individual decision makers.
Markets come……
Alone Markets go steve teeth

• Invented in 1958 by Arthur

“Spud” Melin
• 50,000 produced every day
(40 million sold)
• Inducted into the National
Toy Hall of Fame in New
York in 1999
• Sold (Wham-O) for $12
million dollars in 1982 ($37
million in today’s dollars).
Markets interrelate (280% boost in sales)
Alone Markets find a need and fill it
teeth
steve
 Economics is decision making
(Economics is the study of how people allocate limited resources to satisfy their unlimited wants)
 Scarcity
(Scarcity refers to limited nature of society’s resources, given society’s unlimited wants and needs)
Economic Problem
 Economics
(Economics is the study of how people allocate limited resources to satisfy their unlimited wants)

• Deciding what is produced – i.e. allocating land,

workers (labour), buildings and machines (capital) to
productive activities
• Deciding how things are produced (choices depend
on technology)
• Deciding who gets the outputs - allocating outputs
to households/individuals
• All societies face the issue of allocating scarce
resources – can be done in different ways.
Example- Who gets to see Tay Tay ?
 Lesson 1:
People face trade-offs
(No such thing as a free lunch
Efficiency vs Equity Trade
off (exam question)
Efficiency means society gets
the most that it can from its
scarce resources – generally
requires incentives that
reward individuals according
to their contributions

Equity means the benefits of

those resources are
distributed ‘fairly’ among the
members of society –
generally implies individual
rewards are not linked only to
contributions
Lesson 2:
The cost of something is what you
give up to get it

The opportunity cost of an item is

what you give up to obtain that
item – the ‘best foregone
alternative’.
Example How Much Our Pets Cost In A Lifetime
 Opportunity cost
(The highest-valued alternative that must be sacrificed in order to get something else)
 Lesson 3:
Rational people think
at the margin
(evaluate whether the benefit of one more unit of something is
greater than it cost)

• donut

• Many (but not all) decision

problems can be addressed
using marginal analysis.
Marginal Analysis
You make a trade-off
when you compare the
costs with the benefits of
doing something.
Decisions whether to do a
bit more or a bit less of an
activity are marginal
decisions. The study of
such decisions is known
as marginal analysis.
 Lesson 4:
People respond to incentives
 Responding to incentives
People usually respond to incentives, exploiting opportunities to make themselves
better off
 Lesson 5:
Trade can make everyone better off
(Gains from trade via specialisation can lead to more output)
 Lesson 6:
Markets are usually a good way to organise
economic activity
(A market economy allocates resources through dencentralised decision making)
 Lesson 7:
Governments can sometimes improve market outcomes
(when markets don’t achieve efficiency, government intervention can improve society’s
welfare)
 Lesson 7:
Governments can sometimes
improve market outcomes car

• Market failure occurs when the market

fails to allocate resources efficiently.
• When the market fails we have a rationale
for government intervention.
• Of course, it is possible that the
government intervention actually makes
things worse.
 Lesson 7:
Governments can sometimes improve market outcomes outdoor

• Market failure may be caused by:

– An externality, which is the impact of one
person or firm’s actions on the wellbeing of a
bystander.
– Market power, which is the ability of a single
person or firm to have a substantial influence
on market prices.
 Lesson 7:
Governments can sometimes improve market outcomes.
Market failure may be caused by:

An externality, which is the impact Market power, which is the ability of a

single person or firm to have a substantial
of one person or firm’s actions on
influence on market prices.
the wellbeing of a bystander.
 Macroeconomic Lessons
• Lesson 8: The standard of living
depends on a country’s productive
ability
• Lesson 9: Prices rise when the
Government prints too much money
• Lesson 10: Society faces a short-
term trade-off between inflation and
unemployment
Thinking Like an Economist kvsh
 Thinking like an economist
• Economics trains you to …
– Think in terms of alternatives.
– Evaluate the cost and benefit of individual and
social choices.
– Examine and understand how certain events and
issues are related.
• The economic way of thinking …
– involves thinking analytically and objectively
– makes use of the scientific method
 Economic Models
(A model is a simplified representation of reality that is used to better understand real life situations)
Economic models
Models are important because their
simplicity allows economists to focus
on the effects of only one change at a
time.
That is, allow economists to hold
everything constant (ceteris paribus)
and study how one change effects the
overall economic activity.
 The production possibility frontier
Illustrates the trade-offs facing an economy that produces only 2 goods.

Quantity of
computers
produced

3,000 D

C
2,200
2,000 A
Production
possibilities
frontier
1,000 B

0 300 600 700 1,000 Quantity of

cars produced
Copyright©2003 Southwestern/Thomson Learning
Positive versus normative analysis
 Positive versus normative analysis
• Positive statements are ‘if this, then that will
occur’ statements, where we are not saying
whether ‘that occurring’ is good or bad.
• Normative statements are ‘should’
statements.
 Positive versus normative analysis
1. How much revenue will the tolls on the highways yield next
year?
2. How much would that revenue increase if the toll were
raised from $1 to $1.50.
3. Should the toll be raised, bearing in mind that a toll increase
will reduce traffic and air pollution near the road but will
impose some financial hardship on frequent commuters?
 Summary
What is economics?
It is the study of how we
allocate our limited resources
to satisfy our unlimited wants
So how we as individuals and
as a society male decisions
about how to use these scarce
resources is the basic question
economists seek to answer.
Foundations of Economics
• Incentives matter because they
help explain how decisions are
made
• Trade-offs exist
• Decisions create an opportunity
cost
• Marginal thinking involves
weighing the extra benefits
against the extra costs
• Trade creates value –mutual
transactions
 For The Exam
• Economic problem
• Opportunity cost
• Efficiency vs equity trade-off
• Marginal thinking for decision making
• Market failure-externalities and market power
• Production possibility model
• Role of assumptions
• Normative and positive statements