History of economic thought What is economic thinking about Petr Wawrosz
History of economic thoughtWhat is economic thinking about
Petr Wawrosz
The term „economy“ or „economics“
Term „economy“ or „economics“
• Word „economy“ comes from Greek word „oikonomos“
• Oikonomos = one who manages a household.• What does have the household and economics
common?
Household faces decision
• - which members of the household do which task and what each member gets in return.
• Examples (economic question that a household faces):- Who cooks dinner?- Who does the laundry?- Who gets the extra dessert at dinner?- Who gets to choose what TV show to watch?
• Household must allocate its scare resources among its various member, taking into account each member´s abilities, efforts and desires.
Society faces decision too
• Society must decide what jobs will be done and who will do them.
• Economic question the society faces:What goods will be produced?How the goods will be produced?Who will receive the produced goods?
• Economic as the science gives answer how the different society solves above mentioned problems and what solutions are better.
What is economic about
One of the definitions
• A person, household, some group (e.g. of food gatherers or animals hunters), society have to decide:- how to allocate scare resources to produces useful goods (goods satisfying human needs).
• Economics is the science which studies human behavior as the relationship between ends and scare means which have alternative uses (Lionel Robbins, 1932).
Microeconomics and macroeconomics
• Micro = the branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly defined units , such as individual household or business firm.
• Macro = the branch of economics that focuses on how human behavior affects outcomes in highly aggregated markets, such as the market for labor or consumers products.
Individual and collective choice
• Economics is about individual choice.• People often group to form collective
organizations.• Individual choices still underlie and direct the
decision made within organization.
Scarcity
• Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.
• Scarcity does not mean poverty!Scarcity – objective concept. Poverty subjective concept.
• Scarcity leads to competitive behavior!
• Scarcity is „beyond“ basic economic questions!
Trade-offs
• People face trade-offs (as the consequence of the scarcity):- for what production the scare resources should be used- how the scare resources should be use (in which technology)- who should use scare goods.
• Trade-off between efficiency and equity.
Efficiency versus equity
• Efficiency =person (society) gets the maximum benefits from scare resources (and use minimum amount of resources).
• „The size of the pie“
• Equity = benefits are distributed fairly among society´s member.
• „How the pie is divided“
Positive versus normative economics
• Positive economics: what is among economic relationships.
• Normative economics: what ought to (should) be.
• Normative economic views very often influence our attitude toward positive economic analysis.
Pareto-efficiency
• there is no way of improving the situation of one person, without making that of another person worse
• Example: Edgeworth´s box, PPF
Opportunity cost (OPC)
• OPC = whatever must be given up to obtain some actions.
• When we decide how to use:- some scare resources or good we must take into account the utility (profit) from its alternative use.
Some principles that is economics based on
People are rational
• An economic subjects - systematically and purposefully do their best they can to achieve his/her objectives- uses all available information- weighs benefits and costs of each action
Rational people think at the margin
• Marginal change = small incremental adjustment to a plan of action
• Rational subject compares marginal benefits and marginal costs (benefits and costs of additional activity).
• Marginal benefit depends on amount of units that is available (water-diamond paradox)
People respond to incentives
• Incentives = something that induce a person to act
• Examples: price, norms, law, behavior of other people
• Change of incentives generate direct as well as indirect effects.
• Example: G. Depardieu and his choice to give up French citizenship.
Direct versus indirect effects
• Direct = visible, primary effects.• Indirect = invisible, secondary effects
• Frederic Bastiat: „That Which Is Seen and That Which Is Unseen“Parable of the broken window(http://en.wikisource.org/wiki/That_Which_Is_Seen,_and_That_Which_Is_Not_Seen)
• See http://www.youtube.com/watch?v=gG3AKoL0vEs
Trade can make everyone better one
• Absolute advantage• Comparative advantage• Marginal rate of substitution.
Country´s standard of living depends on its ability to produce goods
• Productivity = amount of goods produced from one unit of resources.
• If a society wants to be wealthy in long-run it must increase its productivity.
The value of goods is subjective.
• Peoples, preferences differ.• Example: the indifferent curve of gourmand and the
indifferent curve of person preferring clothes (or the indifferent curve of skinflint and the indifferent curve of spendthrift person).
• The good has no objective value!
• Economics does not place any inherent moral judgment on value on one personal person´s preference over another´s – in economics all individual preferences are counted equally.
The middleman as a cost reducer
• Middleman = a person who buys and sells goods or arranges trade.
• Middleman reduces transaction costs.• Example: car dealer, a grocer, a stockbroker, a
realtor, a merchant
• Transaction cost = cost connecting with finding part of contract, make a deal, solving problems of contract (including enforcement of fulfillment).
The importance of property rights
• Property rights• 1. the right to exclusive use the property (the
owner has sole possession control and use of the property, including the right to exclude others).
• 2. legal protections against invasion from other individual who would seek to use or abuse the property without owner´s permission
• 3. the right to transfer, sell, exchange or mortgage (lend) the property
The importance of property rights
• Private owners can gain by employing their ownerships (resources) in ways that are beneficial to others and they bear the opportunity cost of ignoring the wishes of others.
• Private owners have a strong incentive to care for and properly manage what they own: otherwise they lose the value of their property.
The importance of property rights
• Private owners have an incentive to conserve their property for the future, particularly if the property is expected to increase in value.
• Private owners have an incentive to lower the chance that their property will cause damage to the property of others.
Some mistakes in economic thinking
Ceteris paribus condition
• Ceteris paribus = other thing constant
• Economics very often supposes ceteris paribus condition, however in dynamic world many thing can happen and things can change.
Good intentions do not guarantee desirable outcomes
• Intentions have direct and indirect effects.
Association is not causation
• Two effects occurred in same time can be independent.
• Situation when effect A precedes effect B does not necessarily mean that effect A causes effect B.
The fallacy of composition
• The fallacy of composition: what is true for one might not be true for all.
• Example: - elasticity of individual and market demand or supply curve- Prisoner´s dilemma (arms race, duopoly race)
Prisoner´s dilemma
Centrally planned economies versus Market economies
Main economic questions
• What goods will be produced?How the goods will be produced?Who will receive the produced goods?
• The questions can be solved through the market (market economy) or through government (centrally planned, planned economy).
Centrally planned economies versus Market economies
• There are generally 2 basic system how on the society level the economic questions are solved:- centrally planned economy- market economy
• Text na centrally and market economy
Centrally planned economy
• the government (or some other authority) decides what will be produced (the set of the goods, the amount of the specific goods), how a good will be produced (which factors will be used), which people will have rights to buy a good (and in which amount, rationing).
Centrally planned economy
• Difficulties:• see:
http://www.slideshare.net/Geckos/difficulties-with-centrall-planned-economies-presentation
Market economy
• rely primarily on privately owned firms to produce goods and how to produce them.
• Markets determine who receives the produced goods.
• Firms must produces goods meeting the wants of consumers (characteristics of a good, its price …)
Market economy
• Market are usually a good way to organize economic activity.
• However: market failures- public goods, free rider, externalities, lack of competition, information asymmetry, weak side of the contract, protections of property rights and voluntary contracts
• Some of the problems can be solved by market no necessarily by government!
Government
• Government can sometimes improve market outcomes.
• Allocation• Redistribution• Legislation and regulation• Macroeconomics outcome
The differences and similarities between governments and markets
• Competitive behavior is present in both the market and public sector!(Similarity).
• What does e.g. politics or public-sector employees compete for?
• Elective offices, Taxpayer dollars, higher authority (power)
The differences and similarities between governments and markets
• Both sectors face opportunity costs and trade-offs.(Similarity)
• Resources the government uses for one purpose have alternative uses, in and out of government!
The differences and similarities between governments and markets
• Private-sector action is based on mutual agreement, public-sector action is based on majority rule!(Difference).
• The minority must accept majority decision.• The majority decision can be inefficient.• Bus-stop example.
The differences and similarities between governments and markets
• When collective decision are made, voters must choose among candidates who represent a bundle of position on issue.(Difference).
• Average elected representative is asked to vote on roughly 1000 different issues during one year (in the USA).
The differences and similarities between governments and markets
• Public-sector organization can break the individual consumption-payment link.(Difference)
• Sometimes people receive very large benefits from the government even though they do not pay any money.
• On the contrary individuals can be required to pay dearly for a government program though they derive any benefits.
The differences and similarities between governments and markets
• Income and influence are distributed differently in the each sector.(Difference)
• Market: people who supply more highly valued good have larger income.
• Government: one vote rule. However people who have more money, persuasive skills, organizational abilities can receive more benefits from the political arena.
Different opinions on market and government
• „Fight of the century“ (Keynes versus Hayek).• See
http://www.youtube.com/watch?v=GTQnarzmTOc
Some names
Some names
• Frederic Bastiat (1801 – 1850)• Francis Edgeworth (1845 – 1926)• Vilfredo Pareto (1848 – 1923)• John Maynard Keynes (1883 – 1946)• Lionel Robbins (1898 – 1984)• Friedrich August Hayek (1899 – 1992)• Paul Samuelson (1915 - 2009)• James Buchanan (1919 – 2013)