Economics 101: Understanding the Basics of Economics and Gains from Trade - Prof. Poitiers, Ejercicios de Administración de Empresas

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I. Economic Activity

Introduction to Economics Niclas Frederic Poitiers Group A6 BAM Degree September 14, 2017

Willem van de Velde de Jonge – Zeegezicht

Outline

1. Economics as Social Science
2. The Circular Flow Diagram
3. The Production Possibility Frontier
4. Economic Growth
5. Gains from Trade

Introduction to Economics I. Economic Activity

Outline

1. Economics as Social Science
2. The Circular Flow Diagram
3. The Production Possibility Frontier
4. Economic Growth
5. Gains from Trade

Introduction to Economics I. Economic Activity

What is Economics?

Economy

The economy is the system used for coordinating society’s productive activities. The three main economic problems are

• What goods and services should be produced?
• (^) How should these goods and services be produced?
• Who should get the goods and services that have been produced?

Introduction to Economics I. Economic Activity

What is Economics?

(LSE library)

“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”

- Lionel Robbins (1935)

Hence: Without scarcity and alternative uses, there is no economic problem.

Introduction to Economics I. Economic Activity

Models

Model

A model is a simplified representation of a real situation - used to better understand real-life situations.

Models are used in economics to

• study eects in a simplified economy.
• (^) make policy recommendations.
• simulate an economy on a computer. Models allow us to identify the eects of individual parameters by using the ceteris paribus (“other things equal”) assumption.

(LSE library)

Introduction to Economics I. Economic Activity

Positive & Normative Statements

Positive Statements

A positive (descriptive) statement in economics describes the way the economy works, based on empirical evidence. They can be either right or wrong.

• Statement of fact
• (^) ‘what is’

Normative Statemnts

A normative statement expresses a value judgment about the desirability of a economic situation or policy.

• Statement of opinion
• (^) ‘what ought to be’

Introduction to Economics I. Economic Activity

Production Function

The production function describes the (maximal) economic output Y as a mathematical function of inputs. It is generally of the following form

Y = f ( K , L, N,... )

The main economic inputs are

• (^) K : Captial
• L : Labour
• (^) N : Natural resources (Land) Inputs to the production function are also called production factors.

Introduction to Economics I. Economic Activity

Ecacy vs. Eciency

Ecacy

Ecacy (or eectiveness) is the capacity to produce an eect. It is the ability of an intervention/action/product to produce a desired eect.

Eciency

Eciency (economic eciency) refers to the use of resources so as to maximise the eect (production of goods and services) while minimising the recurses used.

Introduction to Economics I. Economic Activity

Pareto Eciency

Pareto Eciency

Pareto eciency is the a state in which it is impossible to improve the outcome in one respect without worsen it in another.

An example for Pareto eciency is the distribution of a finite amount of one good between two individuals. If all of the good is distributed between the two, it is impossible to give more of the good to one of them without taking anything away from the other.

Introduction to Economics I. Economic Activity

The Circular Flow Diagram

The circular-flow diagram is a model that represents the transactions in an economy by flows between households and firms.

• (^) A household is a person or a group of people that share their income. They own the production factors (capital, labour & land) and sell them to firms.
• (^) A firm is an organisation that produces goods and services using production function and sale them to the households. There exist two separate markets, the market for goods & services and the market for factors.

Introduction to Economics I. Economic Activity

The circular flow diagram

Household

Market for G. & S. Market for Factors

Firms

Money

Factors

Money

Factors

Money

Goods & Services

Money

Goods & Services

Introduction to Economics I. Economic Activity

Opportunity Cost

The real cost of an item is its opportunity cost: what you must give up in order to get it.

• Opportunity cost is about what you have to forgo to obtain your choice.
• Also defined as the value of the next best alternative. Opportunity costs are crucial to understanding individual choice.

Example

The opportunity cost of attending college is high: it’s the cost of tuition and housing plus the forgone salary you could have earned.

Introduction to Economics I. Economic Activity

The Production Possibility Frontier

The Production Possibility Frontier (PPF)

• (^) illustrates trade-os facing an economy that produces only two goods.
• (^) shows the maximum quantity of one good that can be produced for any given production of the other
• (^) improves our understanding of trade-os by considering a simplified economy that produces only two goods by showing this trade-o graphically.

Introduction to Economics I. Economic Activity