IQRA Micro Lec 1(Introduction & Graphs) 18-9-10
Transcript of IQRA Micro Lec 1(Introduction & Graphs) 18-9-10
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Course Objectives
The objectives of this course are to provide
students with a basic understanding of the
economic theory and analytical tools thatcan be used in decision-making problems.
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Course Outline
Introduction to Basic Concepts of Economics
Demand, Supply and Market Equilibrium,
Comparative Static Analysis
Elasticity ofDemand and Supply and its Application
Theory of Consumer Behavior
Production and Economics of the Firm
Short Run & Long Run Cost Analysis
Market Structure: Perfect Competition, Monopoly
Monopolistic Competition & Oligopoly National Income Accounting
Aggregate Demand, Supply and Equilibrium
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Course Books
Recommended Book1. Pindyck, R. S., Rubinfeld, D. L. and
Mehta, P. L. (2008). Microeconomics.
6th Edition. Pearson Prentice Hall.
Reference Books
1. Mankiw, N. G. (2010). Macroeconomics. 7th
Edition, Worth Publishers
2.P
arkin M. (2003). Microeconomics. 6th Edition.Addison Wesley.
3. Samuelson P. A. and Nordhaus, W. D. (2005).
Economics. McGraw Hill.
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Learning Strategies
In addition to in-class quizzes and homework assignments,
each student will undertake a project. They will be required
to present the results of their analyses in the class and
submit it in the form of a term paper. Grading plan will beas follows:
Mid-Term Exam 30 Marks
Final Term Exam 50 MarksTerm Paper & Presentation 20 Marks
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Your Input
Any questions so far?
Any comments?
Short introduction of participants
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Human Nature and Reality
People have unlimited wants. People have limited resources to acquire the
things they want.
Scarcity. . . means that society has limited
resources and therefore cannot produce all the
goods and services people wish to have.
As a result, they must make choices.
Choices involve pursuing some things while
forgoing others.
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Definition of Economics
Economics is the study of how scarce resourcesare allocated among unlimited wants.
Microeconomics focuses on the individual parts ofthe economy.
How households and firms make decisions andhow they interact in specific markets.
Macroeconomics looks at the economy as a whole. How the markets, as a whole, interact at the
national level.
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Two Roles of Economists
When they are trying to explain theworld, they are scientists.
When they are trying to change theworld, they are policymakers.
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Coordination Problem
An economic system has to solve threecoordination problems:
What to produce?
How to produce?
For whom to produce?
Every decision has an opportunity cost thecost in foregone opportunities.
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Opportunity Cost
Opportunity cost: the value of the
highest-valued alternative that must be
forgone when a choice is made. It is the evaluation of a trade-off.
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What to Produce?
Anything with a price on it is called aneconomic goodthese include goods andservices.
A free good is a good for which there isno price.
An economic bad is anything you want toget rid of (pollution, disease, garbage)
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How to Produce?
Resources are the elements needed toproduce goods. Resources are also called
factors ofproduction
inputs
They are:
Land (includes natural resources)
Labor(physical and intellectual services of people) Capital (plant, machinery, equipment used in
production)
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For Whom to Produce?Who gets the goods and services that are produced
depends on the incomes that people earn.
Producers
of GoodsResource
Suppliers
land
labor
capital
rent
wages
interest
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The Circular-FlowDiagram
FirmsHouseholds
Market for
Factors
of Production
Market for
Goods
and Services
SpendingRevenue
Wages, rent,
and interest
Income
Goods &Services sold
Goods &Servicesbought
Labor, land,and capital
Inputs forproduction
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Graphing Data
A graph reveals a causal
relationship between two
variables.
The vertical line is the y-axis.
Independent variable.
The horizontal line is thex-axis.
Dependent variable.
How do we show a negative
and a positive relationship
between variables?
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Graphing Data
Economists use three types of graphs to
reveal relationships between variables.
They are:
Time-series graphs
Cross-section graphs
Scatter diagrams
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Time-series Graph:
Real wages in London, 1500-1800
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4
5
6
7
8
9
0
500 550 600 650 700 750 800
Year
Source: RC Allen (2001), The Great Divergence
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Cross-section Graph:Real wages across Europe in 1750
Source: RC Allen (2001), The Great Divergence
0
1
2
3
4
5
67
8
9
10
A e da London an Va en a V enna K a o
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Panel Data Graph:Real wages across Europe, 1500-1800
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4
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8
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1500 1550 1600 1650 1700 1750 1800
Amsterdam London Vienna Krakow Milan Valencia
Source: RC Allen (2001), The Great Divergence
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A scatter diagram can describe the relationshipbetween advertising expenditures and sales.
1
1
Adverti i Expenditure
Sa
les
Excel scatter diagram
Advertising Expenditure
Sales
Advert Sales1 30
3 40
5 40
4 50
2 35
5 50
3 35
2 25
Scatter Diagrams
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Graphs Used in Economics
We can plot graphs for the variables:
- that move in the same direction.- that move in opposite direction.
- that have a maximum or minimum.
- that are unrelated.
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Two Simple Rules
for Movements vs. Shifts
Rule One
When an independent variable changes andthat variable does not appear on the graph,the curve on the graph will shift.
Rule Two
When an independent variable changes anddoes appear on the graph, a movement alongthe existing curve will occur. The curve willnot shift.
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Typical Patterns
Positive linear relationship Negative linear relationshipNo relationship
Negative nonlinear relationship
This is a possible relationship,
but,doesnt the nextone appearto fit the data better?
Nonlinear (concave) relationship
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Production Possibilities Curve
The production possibilities curve shows
the maximum quantity of goods and
services that can be produced when theexisting resources are used fully and
efficiently.
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Production Possibilities
Underutilized
(Inefficient)
Nondefense Goods
B1
F1C1
D1
Only nondefensegoods produced
E1
Only defensegoods produced
A1
EfficientCombinations
Defense Goods
Impossible
200
175
150
125
100
75
0
7525 50
G1
100 125
Defense
Non-defense
A1 200 0
B1 175 75
C1 130 125
D1 70 150
E1 0 160
F1 130 25
G1 200 75
150
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Growth
The PPC moves outward (growth occurs)as the result of:
Increased resources
Larger labor force
Change in labor force participation Chance in labor-leisure decision
Improved technology (innovation)
Expansion of capital stock
An improvement in the rules (laws, institutions,and policies) of the economy
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A Shift of the PPC
Nondefense Goods
B1
C1
D1
E1
A1Defense Goods
200
175
150
125
100
75
0
7525 50
B2
100 125 150
225A2
C2
D2
E2
F2
Defense Non-defense
A2 225 0
B2 200 75
C2 175 120
D2 130 150
E2 70 160
F2 0 165