Economi

cs
Introduction

Dr.Cansu Unver-Erbas

1
Part I: About the
module

2
(PROVISIONAL) TEACHING SCHEDULE
Week Slot 1 Slot 2
1 Chap 1: Introduction
2 Chap 2: Demand and Supply
3 Chap 3: Market Equilibrium Practice session 1: Quiz
4 Chap 4: Elasticity
5 Chap 5: Background to Supply
6 Chap 5: Background to Practice session 2: Quiz
Supply
7 Chap 6: Market Efficiency Chap 7: Externalities
8 Chap 8: Public Goods
9 Chap 9: Market Power
10 Practice session 3: Quiz Q&A session
3
TEACHING

 Lectures: there will be 9 chapters to cover

 Slides and handouts:

 PowerPoint slides will be used
 Handouts will be emailed before lectures
 Activities:
 You may be asked to partake in “quick exercises” & quick
discussions
 Please take with you a paper and pencil at every lecture

4
 TEACHING
 Practice sessions:

 Multiple choice questions:

 You will have some time to answer the questions during the session
 I will then go through the answers with you
 We will be using Socrative:
 https://b.socrative.com/login/student/
 The “room” number is CANSU171
 Official app is available on Android, iOS, iPadOS and the webpage
shown above

5
 ASSESSMENT & FEEDBACK
 Assessment:
 The module is 100% by exam

 Feedback:
 Practices sessions & workshops
 Q&A session (week 10)
 Before session: Students send questions by email to the lecturer (at least 48
hours before the start of the session).
 During session: Discussion of students’ questions.
This means that the content of the Q&A sessions is
determined by the students.
 Generic written feedback on examinations
 Quick exercises & questions during lectures
 Dialogue between students & lecturer during lectures and workshops
6
CONTACT DETAILS

If you have a question about the course: please contact me at

[email protected] and/or [email protected] (subject to change)

7
 AIM OF THIS MODULE
The aim of this module is to practically demonstrate the concepts of economics
with applications

Content:

 the allocation of resources (Chap1 – Part 2)

 the role of demand and supply in markets (Chap 2 and 3)

 the sensitivity of demand to price and income (Chap 4)

 the supply & role of costs (Chap 5)

 understanding why markets might at times fail to work to the benefit of

society in practice (Chap 6, 7, 8 and 9)

8
 READING
Prerequisites:
LIST
No pre-requisites in economics.
Basic maths (e.g.: draw simple graphs, calculate %).

Recommended books:
 Sloman, J., Wride, A. and Garratt, D. (2018), Economics, 10th Edition,
Pearson
 Lipsey, R. and Chrystal, A. (2020), Economics, 14th Edition, Oxford.
 Mankiw, G. and Taylor, M. (2020), Economics, 5th Edition,
Cengage
Learning.

These are designed as introductory economics texts, so will contain

material that is not applicable to this module. But they are good at defining
key economic concepts. Other editions of these books are also available and
would be equally as good. 9
Part II:
Economics

10
AIM OF THIS PART
In this lecture, we will learn about: ECONOMICS

Following the lecture, you should be able to

1. understand what Economics is about
2. understand some basic economic principles

11
READING MATERIAL

Mankiw, G. and Taylor, M. (2017). Microeconomics. Cengage Learning.

→ Chapter 1: Ten principles of economics (only p. 1-8)

12
 ECONOMICS
 The word economy comes from the Greek word “oikos nomos” which means
“one who manages a household.”

 Economies are similar to households.

 Households must make decisions:
 who cooks dinner
 who chooses the TV program
 how much to spend on leisure
 Societies must make decisions:
 how many farmers /engineers do we need
 who should become a farmer/engineer
 How much resources to allocate to the sports and leisure sectors

13
ECONOMICS

Unlimited needs/desires Scarce resources

Unlimited needs/desi

choose 14
 ECONOMICS
 Like households, societies need to manage their scarce resources:
Examples of resources: land, labour (e.g., employees
such as the
players and accountants), capital (e.g., provision of a stadium and facilities).

 Resources are used to produce goods and services, consumed by people.

 But there is a tension between:

 People’s / societies’ desire for goods and services which is unlimited
 The available resources (land, labour, capital) which are limited

 Society will never have enough resources to produce the goods and services
that will satisfy the needs of all its citizens. (= Scarcity)

 Given the scarcity of the resources, it is important to manage them well and
make the right decisions.
15
ECONOMICS

Economics = the study of how society manages its scarce resources

to fulfil the unlimited needs

Resources Needs

Choices have to be made

16
 ECONOMICS
 Two main subfields:
 Microeconomics: the study of how consumers and firms make decisions
and how they interact in specific markets (+ impact of governments on
their choices and interaction).

 Macroeconomics: the study of the effect on the aggregate economy of

choices made by individuals, firms and government.

Examples of Microeconomics:
 How consumers decide on the quantity of video games to buy,
depending on the price of the video games, the price of substitute
goods, and their income.

 What will be the effect of a rise of rugby season tickets on consumption

by fans?
17
SOME IMPORTANT PRINCIPLES OF
ECONOMICS
How people make decisions:

1 People face trade-offs.

2 The cost of something is what you give up to get it.

3 Rational people think at the margin.

4 People respond to incentives.

How people interact with each other:

5 Trade can make everyone better off.

6 Markets are usually a good way to organize economic activity.

7 Governments can sometimes improve economic outcomes.

18
HOW PEOPLE MAKE
DECISIONS

19
PRINCIPLE #1: PEOPLE FACE TRADE-OFFS

To get one thing we like, we usually have to give up another thing that we like,
or:
“There is no such thing as a free lunch”

Examples:
 Time spent studying Leisure Market versus watching a movie
 Buying board games versus food

20
PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT

Because people face trade-offs and make choices, they must compare the costs
and benefits of each action. Sometimes the cost of an action is not as obvious as
it might appear.

Opportunity cost: the highest-valued alternative that must be given up

to
obtain something.
Note:
 Good decision when value of the choice > opportunity cost
 Opportunity cost = explicit cost + implicit cost

Example 1: decide between going to the cinema or not.

 Benefits: relax, spend time with friends …
 Costs: price of the tickets, time not spent on studying Leisure Market …

21
PRINCIPLE #2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO GET IT

Example 2: societies have to decide how to spent their resources.

 They can employed them to make a variety of goods and services, including
leisure market goods and services. They can also used them to produce
education, healthcare, housing ….

 However, resources are scarce/limited and so producing more leisure goods

& services means we have to sacrifice non-leisure goods.

 We can depict this trade-off on a production possibility frontier (PPF)

 It shows us the maximum level of output we can produce of both goods
when we employ all our labour resources in different combinations.
 It tells us the trade-offs involved: if we wish to produce more leisure
goods, we must move labour from the non-Leisure sector and therefore
less non-Leisure goods are produced
 It shows us that societies have choices to make on how to use scarce
resources
22
PRINCIPLE #2: THE COST OF SOMETHING IS
WHAT YOU GIVE UP TO GET IT
You decide you want to increase leisure output from 260 to 280 units, an
increase of 20. This means the output of other goods must fall from 160 to 100.
The economy/society shifts from point A to point B

Leisure goods &

services

Production possibility
frontier (PPF)

23
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN

Rationality:

 In economics, we study the behaviour of consumers and producers.

 We usually assume that consumers and producers behave rationally.

 Rational behaviour refers to a decision-making process that is based on

making choices that produce the best outcomes for themselves.

Note: Rationality has its boundaries.

24
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN

Thinking at the margin:

 Marginal changes: small incremental adjustments to a plan of action.

 In many situations, decision makers will make the best decision by thinking
at the margin (= “edge”).

 A rational decision maker takes an action if the marginal benefit of the action
exceeds its marginal cost.

Examples: - buy another pint of beer

- watching a TV show for another hour
- airlines and standby passengers

25
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN

Thinking at the margin:

Example: Airlines and standby passengers

200 seat plan: flight cost = €100 000

So average cost (AC) = €500

1 empty seat
Someone is willing to pay €300

Should the airline company accept this?

26
PRINCIPLE #3: RATIONAL PEOPLE THINK AT THE MARGIN

Thinking at the margin:

Example: Airlines and standby passengers

200 seat plan: flight cost = €100 000

So average cost (AC) = €500

1 empty seat
Someone is willing to pay €300

Should the airline company accept this?

YES! Don’t look at AC but at marginal cost (MC) = extra cost to take 1 extra
passenger and compare it with marginal revenue (MR) = extra benefit from
taking this extra passenger = €300
MC < MR !
27
PRINCIPLE #4: PEOPLE RESPOND TO INCENTIVES

People make decisions by comparing costs and benefits → behaviour may

change when costs and/or benefits change.

Example 1: change in price → change in buying behaviour

Example 2: changing in grading scheme → change in class attendance

Example 3: change in seat belts regulation → change in driving behaviour.

28
HOW PEOPLE INTERACT WITH
EACH OTHER

29
PRINCIPLE #5: TRADE CAN MAKE EVERYONE
BETTER-OFF
 Trade is not like a sports competition where 1 side wins and the other side loses

 Trade allows each person to specialize in the activities he/she does best.

 By trading with others, we can buy a greater variety of goods and services at
lower costs.
 What would be my standard of living if I had to produce everything I
consume?
 Countries that trade with other countries enjoy higher standards of living.

30
PRINCIPLE #6: MARKETS ARE USUALLY A
GOOD WAY TO ORGANIZE ECONOMIC
ACTIVITY
•A market economy is an economy that allocates resources through the
decentralized decisions of many firms and households as they interact in
markets for goods and services:

 Households decide what to buy and who to work for.

 Firms decide who to hire and what to produce.

31
PRINCIPLE #6: MARKETS ARE USUALLY A GOOD WAY TO
ORGANIZE
ECONOMIC ACTIVITY

Adam Smith made the observation that households and firms interacting in markets act as
if guided by an “invisible hand.”

 Because households and firms look at prices when deciding what to buy and
sell, they (unknowingly) take into account the social costs of their actions.

 As a result, prices guide decision makers to reach outcomes that tend to maximize the
welfare of society as a whole.

32
PRINCIPLE #7: GOVERNMENTS CAN
SOMETIMES IMPROVE MARKET OUTCOMES

•…But markets do not always lead to an optimal allocation of resources.

•Two important reasons for the government to interfere with the
economy:
→ the promotion of efficiency and equity.
•Efficiency means society gets the most that it can from its scarce
resources.
•Equity means the benefits of those resources are distributed fairly
among the members of society.

33
PRINCIPLE #7: GOVERNMENTS CAN SOMETIMES
IMPROVE MARKET OUTCOMES

•Efficiency
•Market failure occurs when the market fails to allocate resources
efficiently - it may be caused by:
 an externality, which is the impact of one person or firm’s actions
on the well-being of a bystander
 Market power, what is the ability of a single person or firm to
unduly influence market prices

34
PRINCIPLE #7: GOVERNMENTS CAN
SOMETIME IMPROVE MARKET OUTCOMES

Equity

The invisible hand is even less able to ensure a fair distribution of economic
prosperity

 A goal of many government interventions is to achieve a more equitable

distribution of economic well-being
 E.g., income tax

35
 SUMMARY
 When individuals make decisions, they face trade-offs among alternative
goals.

 The cost of any action is measured in terms of foregone opportunities.

 Rational people make decisions by comparing marginal costs and marginal

benefits.

 People change their behaviour in response to the incentives they face.

 Trade can be mutually beneficial.

 Markets are usually a good way of coordinating trade among people.

 Government can potentially improve market outcomes if there is

some
market failure or if the market outcome is inequitable.
36