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Economics 1000 Overview C. L. Mattoli Information Information Lecturer: Craig Mattoli Email: clm@clmattioli.com Phone (text messages only) 136 3241 0877; include your name and course in message. Office hours: by appointment. Temporarily located in room 221. Don’t be shy. Ask Questions of your Instructor, not your classmates. No one cares as much as he does! Sometimes, I talk fast, use words that you might not know, and write abbreviations on the board. Again, if you don’t understand my written or spoken word, ask. It’s ok! Introduction to the coursework What is economics? Economics is the study of choice in the allocation of scarce resources. It is divided into macroeconomics, the big picture, and microeconomics, the small picture, which all mixes together to make the big picture. The analysis in this course will be mathematical and logical/verbal. Logical argument Much of the assessment in this course will be verbal backed up by mathematical. In argument, you start out with a question and perhaps some details to define the situation. For example, there is a dead dog. The question is why or how did he die? In order to answer that question, you might want to know where he was found and if there are any injuries on him before you begin to try to figure out how he died. Thus, there is a certain procedure to answering questions in a logical manner, which begins with asking yourself questions, gathering all of the data that you have to begin with, organizing the data, and then proceeding to try to answer as much of the question that you can with the information that you have. The Scientific Method of analysis Economics uses the scientific method. The scientific method involves: 1) observing a system, 2) postulating a theory to explain the workings of the system, 3) collecting appropriate data, and 4) testing the theory against the data to see how well data fits theory, then, 5) going back to see how the theory might be revised to better fit observation. In economics it becomes: 1) identify a problem, 2) make a simplified model, and 3) test it. Mathematical methods Mathematical methods will include arithmetic, algebra and graphical analysis. Equations, relate one variable, called the dependent variable, plotted on the vertical axis in a graph, to other variables, the independent variables. For example, S = supply = AxP = A x Price, relates the supply of something to the price. 1. We say that it is a positive relationship because S increases with increasing P, i.e., supply will increase with increasing price. That is how we describe the information in an equation, in words. 2. To graph the equation, we need sets of values for the two variables, like (S,P) = (0.5,1), (1,2),(2,4), and (3,6). We show how to do that in the next slide. Graphing pairs of numbers Given the information for supply, S, and price, P, from the preceding page, (S,P) = (0.5,1), (1,2),(2,4), and (3,6). we graph them as follows: S 3 2 1 0.5 0 1 2 3 4 5 6 P Rate of change: variation of one variable with another We will also look at changes in one variable due to changes in another. This is known as rate of change, or variation. For a straight line graph, this change is the slope of the line, given by slope = rise/run = (S2 – S1)/(P2 – P1) = ΔS/ΔP, where Δ is a shorthand notation for change. For the example from the previous page S ΔS/ΔP= (2 – 1)/(4 – 2) 3 = 1/2 2 1 0.5 0 1 2 3 4 5 6 P Other types of change The slope can also be found in the equation of the line. The general equation of a line is S = aP + b where a and b are constants. Then, applying our definition of slope to the equation without even using numbers, we have slope = rise/run = ΔS/ΔP = (S2 – S1)/(P2 – P1) = (aP2 + b – (aP1 + b))/(P2 – P1) = a(P2 – P1)/(P2 – P1) = a. As an exercise pick numbers for a and b, draw the graph and see for yourself. It will turn out that b is where the line intersects the S-axis. Another type of change that we look at in economics is percentage change. That is simply given by: Percentage change of S = ΔS/S1= (S2 – S1)/S1 Percentage change will be involved in the definition of the economic concept of elasticity. Required in the course Take data from tables and turn it into graphs. Identify and interpret patterns in economic data in graphs and tables. Explain and use key economic concepts Explain and apply theory of competitive markets Discuss selected instruments of economic policy. Discuss and apply economic theories and indicators. Discuss problems faced by real-world economic managers. Tests and assignment Each week there will be problem sets that you will be required to hand in. Then, we will go over problems in the tutorial. Workshops will go over concepts and you will do in-class problems to practice. There will be an on-line mid-term exam with multiple choice on April 27. On May 18, an extended-answer assignment is due, answering 3 questions, using logic, economics, and mathematical methods. See: Intro book The final exam will contain multiple choice, short answer and long answer problems. The course in overview Introduction to Economics We start out talking about the basics of what economics seeks to do and to describe. Economics analyzes the allocation of the resources of a society or nation. A nation has limited labor, production facilities, and technology to produce things for it’s members. Thus, choices must be made about the mix of products that will be produced. There will be opportunity costs from choosing one over another. In the end, we will find the production possibilities of the economy. Models and analysis We will look at construction of simple models of economic variables in terms of other variables. We will look at equations, graphical and tabular analysis of data to examine economic relationships. This will require logic, thinking and verbal analysis of problems, which will be important for your work in this course. Supply, demand, and international trading We will learn about the basic concepts of supply and demand, and how prices and other market and non-market forces will help determine some of the allocation problem. International trade will also come into the picture, early, because, some things that a nation cannot or will not produce itself can be gotten from other nations. Some nations will find it to their advantage to produce more of a good or service than they need and will sell it to other nations. We will discuss the concepts of comparative and absolute advantage. Costs, Profits and Production Supply will depend on price, and there will be price elasticity of both supply and demand. In the end, prices will affect profits of the producers. On the microeconomic level a firm that produces goods and services will have to worry about prices, costs, and profits. Opportunity costs will enter into the discussion even for a single firm because it must decide how best to use its resources. Then, there will be real costs, which will be subtracted from revenues (units sold x price) to get profits. We will look at fixed and variable costs in the short- run and the long-run. What will be important will be marginal analysis Competition In reality, there are different types of market structures. In a monopoly, there is only one supplier, and he can set his own price. In oligopolies, there are only a few suppliers, and not much competition. In this course, we shall only study the case of perfectly competitive markets in which no firm can be a price setter. Price will be determined in the market. The Macroeconomic view We look at the broad measures of the economy of nations, like national production. We will look at other gross variables, like consumption, savings, investment, and net exports. Then, we look at economic growth, inflation, and unemployment, and how things change over the business cycle. We examine goals of macroeconomic policy. Macro modeling We shall look at classical approach and Keynesian macroeconomic theory. We will study aggregate supply, demand and macroeconomic equilibrium. Then, we look at what leads to shifts, including the affects of changes in other variables. The monetary and financial system As we move towards the close of the course, we look at the underlying system of an economy, the monetary and financial system. Money is important to the modern economic system. It facilitates buying and selling of goods, services, and businesses. Money is a means of putting a number to the value of things. Since money is just paper, it is important to keep track of how much money is printed up. Money supply and demand People and businesses need money for their transactions, and they might keep extra money for other reasons. Thus, there is a basic demand side for paper money. Money supply is defined by a number of different measures. Some people do not use all of their money for consumption and have some extra around. Some people want to spend more than they earn. Thus, there will be a market for money. Interest rates are the “prices” money determined by supply and demand for the extra money that savers keep and over spenders need. Monetary Policy Since nations print money, they have to manage the supply. However, the supply will affect interest rates and interest rates will affect the state of the economy. In addition, the supply of money will affect general prices and inflation, and thus, again, the overall economy. The Money System The Reserve Bank of Australia (RBA) issues money: it is a liability of the bank, much like paper issued by corporations, bonds, but it is backed by the government. Under the umbrella of the RBA is the banking system. Banks hold a special position in the financial system. Banks maintain Exchange Settlement Accounts (ESA’s) at the RBA through which most of the money in the financial system flows to settle transactions among participants in the economy. Banks can create money. The RBA also uses the banking system to manage money supply. Financial Markets The other part of the system is financial intermediation and financial markets. These are places that money is allocated over time with the inclusion of the concept of risk. Financial markets include stock & bond markets, the markets for foreign exchange, the futures markets, and options markets. Monetary Policy Since governments print money, they have to have some sort of policy about managing the supply of money that they print. Both price inflation of goods and services and interest rates are affected by the supply of money. Inflation is also part of interest rates. Demand for money affects interest rate rates, and loans can create money supply. The way governments have executed monetary policy has changed dramatically over the past several decades. The basic goals of monetary policy are a stable financial system, underlying a stable economy with reasonable price inflation. Fiscal Policy Fiscal policy is the government's use of spending and taxes to affect the nation’s output, employment, and prices. Part of policy is to try to smooth out business cycles, the overall cycle of increasing and decreasing output, especially to counter recessions, the downturns in activity. Other issues might be to encourage savings. Problems can arise, however, from budget deficits, Classes Lecture: Tuesday 4-6:00 Workshop: Wednesday 4-5:00 Tutorials: Monday 2-4; 7-9; Tuesday 8-10; 10-12; Choices Please at the end of class come up to sign up for a tutorial. Each one will be limited to a total of 25 people, first come, first serve. End There will be no workshop or tutorials this week.