INTRODUCTION OF

ECONOMICS
Nguyễn Việt Hưng
pfviethung@gmail.com
Cell phone: 0868.071180
WHAT IS ECONOMICS

 Maslow’s
pyramid of
Demand
 Wants is
considered to
be
unlimited!!!

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WHAT IS ECONOMICS
 Factors of production
 Natural resources: renrewable and non-
renewable
 Labor: physical and mental effort people use
 Physical capital: stock of equipment, machines,
structures and infrastructures
 Human capital: knowledge and skills acquired
through education and experience
 Entrepreneurship: effort to coordinate the
factors of production above
 Factors of production are limited!!!

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WHAT IS ECONOMICS?
Society and Scarce Resources:
 The management of society’s resources is
important because resources are scarce.
 Scarcity. . . means that society has limited
resources and therefore cannot produce all the
goods and services people wish to have.

 Economics is the study of how society manages

its scarce resources.
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HISTORY OF ECONOMICS
 Adam Smith (1776) – The Wealth of Nations
 Self-interest

 Invisible-hand and role of free market

 Limited government interventions
 Classical thought

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HISTORY OF ECONOMICS
 Great Depression (1929-1933)
 John Maynard Keynes (1936) – The general
theory of employment, interest, and money
 Sticky price and non-competitive market
 The importance of demand side
 Government role

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MACROECONOMICS VS.
MICROECONOMICS
 Macroeconomics is the  Microeconomics is the
study of the nation’s study of the choices
economy as a whole; it made by households,
focuses on the issues of firms, and government
inflation, and how these choices
unemployment, business affect the markets for
cycle, and economic
goods and services.
growth

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POSITIVE & NORMATIVE ANALYSIS
 Positive analysis  Normative analysis
predicts the answers the question
consequences of “What ought to be?”
alternative actions by
answering the
question “What is?” or
“What will be?”

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COMPARING POSITIVE AND
NORMATIVE QUESTIONS
 If the government  Should the
increases the minimum government increase
wages, how many the minimum wage?
workers will lose their
jobs?  Should the
 How does a college government subsidize
education affect a a college education?
person’s productivity and  Should the
earnings? government cut taxes
 How do consumers to stimulate the
respond to a cut in economy?
income taxes?
Positive questions Normative questions

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THE ECONOMY WAY OF
THINKING
1. Use assumptions to simplify and focus
attention on what really matters
 The lesson is that we must think carefully
about whether a simplifying assumption is
truly harmless.

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KEY PRINCIPLES OF ECONOMICS
1. Principle of opportunity cost

2. Real-nominal principle

3. Marginal principle
 Increasing marginal cost
 Decreasing marginal utility

4. Rational people respond to incentives

5. Principle of voluntary exchange

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OPPORTUNITY COST
 Opportunity cost is what you sacrifice to get
something
 Example: A student spends total of $40,000 for
tuition and books. Instead of going to college, he
could have worked as a bank clerk for $20,000
per year and earned $80,000 over four years.
What is the total opportunity cost of this
student’s college degree?

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REAL-NOMINAL PRINCIPLE
 The nominal value of an amount of money is its face
value.
 The nominal tuition fee is $2,000 per year
 The money wage is $500 monthly

 The real value of an amount of money is measured in

terms of the quantity of goods the money can buy.
 The real value of tuition fee would fall as the prices of
other goods and services increase, even though the
nominal tuition fee stayed the same

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MARGINAL PRINCIPLE
 The marginal principle is based on a
comparison of the marginal benefits and
marginal costs of a particular activity.
 The marginal benefit of an activity is the additional
benefit resulting from a small increase in the
activity.
 The marginal cost of an activity is the additional
cost resulting from a small increase in the activity

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Figure 4: The marginal principle
$
A

D
Marginal cost
Diminishing marginal
benefit

increasing marginal
Marginal benefit cost
B

C
0 1 2 3 Quantity

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PEOPLE RESPOND TO
INCENTIVES
 How does law of fastening seat-belt when
driving affect the number of deaths due to
car accidents?

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PRINCIPLE OF VOLUNTARY
EXCHANGE
 People act in their own self-interest, therefore,
they won’t exchange one thing for another
unless the trade makes them better off.
 Trade allows people to specialize in what they do best,
so you can enjoy a better standard of livings than
producing everything themselves, or self-sufficiency.

 Market is usually a good way to organize

the economy

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MARKET FAILURE AND ROLE OF
GOVERNMENT
 Market failure happens when a market doesn’t
generate the most efficient outcome, then
government interventions can be expected to
improve the efficiency of market outcomes.
 Externalities

 Public goods
 Imperfect information
 Imperfect competition
 Uncertainty

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MARKET FAILURE AND ROLE OF
GOVERNMENT
 Externalities
 The effects of a decision on a third party that are
not taken into account by the decision maker
 They can be classified into either positive or
negative one.
 Government can use direct regulation, incentive
policies such as tax or subsidy, or voluntary
solutions to achieve the socially desirable
outcomes.
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MARKET FAILURE AND ROLE OF
GOVERNMENT
 Public goods
A good that is nonexclusive (no one can be excluded
from its benefits) and nonrival (consumption by one
does not preclude consumption by others).
 Public goods could not be provided by the private
business which only pays attention to its self-interest
 Government generally provides goods with significant
public aspects to them.

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MARKET FAILURE AND ROLE OF
GOVERNMENT
 Imperfect information
 People could not gather enough information to
make informed decisions about how much to
produce or consume most efficiently.
 Government can disseminate information and
promote informed choices.

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MARKET FAILURE AND ROLE OF
GOVERNMENT
 Imperfect competition
 Some markets are dominated by a few large
firms, and the lack of competition leads to high
prices and small quantities, which can be
considered as social inefficiency.
 Government can foster competition to achieve
socially optimal output.

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MARKET FAILURE AND ROLE OF
GOVERNMENT
 A lot of risks and unfair allocations exist in the
real life which are not considered by markets
 Poor child has no education and continues with a life of
misery.
 Natural disasters or human accidents
 Unemployment due to recession

 Government can reduce economic uncertainty by

providing the poor with a “social safety net”,
implementing stabilization policies.
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