Lecture 1 Introduction & Basics of Economics Given to the Given to the EMBA 8400 Class EMBA 8400 Class March 19, 2010 March 19, 2010 Dr. Rajeev Dhawan Dr. Rajeev Dhawan Director Director
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Lecture 1 Introduction & Basics of Economics Given to the EMBA 8400 Class March 19, 2010 Dr. Rajeev Dhawan Director.
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Slide 1
Lecture 1 Introduction & Basics of Economics Given to the
EMBA 8400 Class March 19, 2010 Dr. Rajeev Dhawan Director
Slide 2
Course Objective & Teaching Philosophy Practical Course to
Comprehend the Economic Environment so that Managers can make their
Decisions Philosophy is that Micro Sectors Add Up to a Macro
Environment Optimal Blend of Economics and Real World
Experience/Common Sense Train You to Critically Evaluate and
Interpret Business Press Writings
Slide 3
Course Layout Week 1 Basic Economic Concepts and Microeconomics
I Week 2 Microeconomics II and Basics Macroeconomics I Week 3
Macroeconomics II
Slide 4
Grading Policy TWO RULES: No Early or Makeup Exams All Exams
are Open Book 20% Quiz #1 (30 minutes) 30% Quiz #2 (45 minutes) 50%
Final Comprehensive Exam (2 hours)
What is Economics? Economics is the study of how we use our
scarce productive resources for consumption, now or in future. Paul
Samuelson Resources are scarce: Society has limited resources and
therefore cannot produce all the goods and services people wish to
have Example: clean air & water Scarcity is not poverty
Slide 8
Basic Questions What to produce in what quantity? How to
produce them? When and where to produce? For whom? Who makes
economic decisions and by what process?
Slide 9
Basic Concepts Opportunity Cost: Things are Scarce Next Best
Alternative Ex: Party on Friday night vs. study for exams Cost of
Time Ex: 1 hour wait time at the dentist
Slide 10
Basic Concepts Marginal Concept: At the Margin Utility: Level
of Satisfaction (here, drunkenness)
Slide 11
Basic Concepts Sunk/Fixed Costs: Expenditures Made that Cannot
be Recovered Example: You bought a computer laptop for $1500 A
newer, upgraded model costs $1200 The dealer will accept a trade in
+ $400 What do you do?
Slide 12
Winnick s Voyage to the Bottom of the Sea WSJ; by Andy Kessler
First Mover, FCC regulated + fixed costs Regulated utility Price
protection You can t lose Traffic / use was of low economic value
or cashless Global Crossing couldn't cut prices without running the
risk of either failing to cover its debt or being unable to raise
more capital Accounting Tricks .
Slide 13
10 Principles of Economics 1.People face tradeoffs : No such
thing as free lunch Give up one thing to get another Opportunity
Cost (OC) 2.Everything has an OC whatever must be given up to get
that item 3.People make decisions at the margins increments matter
4.People respond to incentives e.g. cigarette laws, communism
5.Free Trade is good (for everybody)
Slide 14
10 Principles of Economics 6.Markets organize economic activity
- Adam Smith Invisible Hand 7.Governments can sometimes improve
market outcome 8.A countrys standard of living depends upon its
production power (productivity) 9.Prices rise when government
prints too much money 10.Phillips curve short run tradeoff between
inflation and unemployment
Slide 15
Branches of Economics Micro: The Study of One Entity (firm,
business, people) Macro: The Study of a Collection of Things
(national, aggregate)
Slide 16
How are Theories Developed? Decision-Makers Firms, governments
Markets Place where exchange takes place
Slide 17
Winnicks Voyage to the Bottom of the Sea by Andy Kessler (p.14)
First Mover, FCC regulated + fixed costs Regulated utility Price
protection You cant lose Traffic / use was of low economic value or
cashless Global Crossing couldn't cut prices without running the
risk of either failing to cover its debt or being unable to raise
more capital Accounting Tricks.
Slide 18
Chapter 2 Production
Slide 19
What is production? The activity by which we convert inputs
(labor, land & capital) into goods and services What limits
production? Inputs (resources) Technology Government
interference
Slide 20
Circular Flow Diagram Spending Goods and services bought Goods
and services sold Labor, land, and capital Income = Flow of inputs
and outputs = Flow of dollars Factors of production Wages, rent,
and profit FIRMS Produce and sell goods and services Hire and use
factors of production Buy and consume goods and services Own and
sell factors of production HOUSEHOLDS Households sell Firms buy
MARKETS FOR FACTORS OF PRODUCTION Firms sell Households buy MARKETS
FOR GOODS AND SERVICES Circular Flow Diagram Revenue = Flow of
inputs and outputs = Flow of dollars
Slide 21
Production Possibilities Frontier Definition: the amount of
goods a firm or society can produce given a fixed amount of land,
labor and other inputs.
Slide 22
Production Possibilities Frontier b d. a c 4,000 E Quantity of
Beer Produced 2,000 700 2,100 750 3,000 1,000 Quantity of Pretzels
Produced A 1,000 300 B 0 D 2,200 600 C Production possibilities
frontier
Slide 23
Production Function I Y (Production) = F (Inputs) Marginal
Product (MP) = Output / Input Y = I Marginal Product: it is the
increase in output that arises from an additional unit of
input.
Slide 24
Production Function II Y = I 2 Marginal Product (MP) = Output /
Input
Slide 25
Production Function III Y = I Marginal Product (MP) = Output /
Input
Slide 26
Returns to Scale Returns to Scale: the property of the
production function that when you double your inputs, your output
either doubles, more than doubles, or less than doubles. DRS CRS
IRS MP IRS MP DRS Y=F Y=F 2 Y = F
Slide 27
Chapter 4 Demand & Supply
Slide 28
Some Basic Definitions Market: a group of buyers and sellers of
a particular good or service E.g. Warren Buffet has been buying up
junk bonds E.g. Bars, parties informal market Stock market
organized market
Slide 29
Example of Supply & Demand Hong Kong chicken flu scare?
Price of chicken Mad cow disease in US? Price of beef Oprah bad
mouths beef? Price of beef Amarillo farmers sue her. SARS? (Macro
issue)
Slide 30
Demand Quantity demanded (Q): the amount of a good that buyers
are willing and able to purchase at a given price (P). Pints of
Beer P Q D $10.000 7.001 5.003 4.006 2.0011 0.0019
Slide 31
Graph Results Demand curve/schedule is downward sloping and
shows the relationship between price of a good and the quantity
demanded Why downward sloping? Law of demand: Ceteris Paribus (all
other things being equal) the quantity demanded falls when price
rises
Slide 32
Other Determinants of Demand Income (I) : I , D Normal Goods:
car, Ferrari I , D Inferior goods: bus rides, potatoes Price of
related goods Substitutes (inversely correlated) Compliments
(directly correlated)
Slide 33
Other Determinants of Demand Tastes taken as above You get old
and prefer Lincoln Town cars to sports cars Expectations about
future Income potential with EMBA degree Loss of jobs, layoffs
prospects Market Demand More players Increase in demand Buy IPOs in
90s
Slide 34
Shifts in Demand Curve Variables that shift the demand
curve:
Slide 35
Shifts in the Demand Curve Price of Beer Quantity of Beer
Increase in demand Decrease in demand Demand curve,D 3 Demand
curve,D 1 Demand curve,D 2 0
Slide 36
Supply Quantity supplied (Q): the amount of a good that sellers
are willing and able to sell at a given price (P). Pints of Beer P
Q S $10.0012 7.007 5.004 4.003 2.001 0.000
Slide 37
Supply Supply graph for another bar Pints of Beer P Q S $10.008
7.005 5.004 4.003 2.001 0.000
Slide 38
Determinants of Supply Your own Price Input Prices Cost of
bottle of beer: labor, capital, rent Technology Smoking laws
separation of smoking & drinking Expectations Future
outlook
Slide 39
Shifts in The Supply Curve Variables that shift the supply
curve:
Slide 40
Shifts In Supply Curve Price of Beer Quantity of Beer 0
Increase in supply Decrease in supply Supply curve,S 3 curve,
Supply S 1 curve,S 2
Slide 41
Equilibrium Equilibrium: the price where quantity supplied is
equal to quantity demanded Equilibrium 6
Slide 42
Markets Not In Equilibrium Price of Beer 0 Supply Demand Excess
Supply Quantity demanded Quantity supplied Surplus Quantity of Beer
2 $6.50 10 4.00 6
Slide 43
Markets Not In Equilibrium Price of 0 Supply Demand Excess
Demand Quantity of Beer 0 Quantity supplied Quantity demanded 2.50
10 $4.00 6 2 Shortage
Slide 44
Changes in Equilibrium Decide whether the event shifts the
supply or demand curve (or both). Decide whether the curve(s)
shift(s) to the left or to the right. Use the supply-and-demand
diagram to see how the shift affects equilibrium price and
quantity.
Slide 45
Changes in Equilibrium Price of Beer 0 Pints of Beer Suppl y
Initial equilibrium An increase in wealth increases demand for beer
0 Demand New equilibrium Initial equilibrium S1S1 S2S2 An increase
in the price of hops reduces the supply of beer 4.00 6 $6.50 2 D 1
Price of Beer D 2 Pints of Beer 4.00 6 New equilibrium $6.50
10
Slide 46
S2S2 S1S1 One bar closes New Equilibrium 4 $5.00
Slide 47
Chapter 6 Controls on Prices
Slide 48
Price Ceiling (e.g. rent control) A legal maximum on the price
at which a good can be sold. If the price ceiling is set below the
equilibrium price, it leads to a shortage. Price Floor (e.g.
minimum wage) A legal minimum on the price at which a good can be
sold. If the price ceiling is set above the equilibrium price, it
leads to a surplus.