CHAPTER 1: 10 PRINCIPLES OF ECONOMIES 1. What Economics is all about? - Fundamental economic problem: The resources are scarce - Scarcity: the limited nature of society’s resources When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing scarcity - Economics: the study of how society manages its scarce resources 2. How people make decisions: a) Principle 1: People Face Tradeoffs - All decisions involve tradeoffs - Society faces an important tradeoff: Efficiency: when society gets the most from its scarce resources Equality: when prosperity is distributed uniformly among society’s members Tradeoff: to achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie” Ex: Tax dollars paid by wealthy Americans and then distributed to those less fortunate may improve equality but lower the return to hard work and therefore reduce the level of output produced by our resources Recognizing that tradeoffs exist does not indicate what decisions should or will be made b) Principle 2: The cost of something is what you give up to get it - Making decisions requires comparing the costs and benefits of alternative choice - The opportunity cost of any item is whatever must be given up to obtain it It is the relevant cost for decision making Ex: Học phí đang sử dụng có thể đem gửi ngân hàng để lấy lãi Chi phí hiện Học phí đang sử dụng, tiếp tục sử dụng Sau này đi làm lương cao Chi phí ẩn c) Principle 3: Rational people think at the margin - Economists generally assume that people are rational - Rational people: systematically and purposefully do the best they can to achieve their objectives Ex 1: Consumers want to purchase the goods and services that allow them the greatest level of satisfaction given their incomes and the prices they face Ex 2: Firm managers want to produce the level of output that maximises the profits the firms earn - Many decisions in life involve incremental decisions: Make decisions by evaluating costs and benefits of marginal changes – small incremental adjustments to an existing plan Rational decision maker take action only if: Marginal benefits > Marginal costs Ex 1: Suppose that flying a 200 – seat plane across the country costs the airline $100,000, which means that the average cost of each seat is $500.
Suppose that the plane is minutes from departure and a passenger is willing to pay $300 for a seat. Should the airline sell the seat for $300? Of course it should. In this case, the marginal cost of an additional passenger is very small Ex 2: Why is water so cheap while diamonds are expensive? The marginal benefit of a good depends on how many units a person already has. Because water is plentiful, the marginal benefit of an additional cup is small.
Because diamonds are rare, the marginal benefit of an extra diamond is high d) Principle 4: People respond to incentives - Incentive: something that induces a person to act, the prospect of a reward or punishment Ex: When gas prices rise, consumers buy more hubrid cars and fewer gas guzzling SUVs When cigarette taxes increase, teen smoking falls - Because rational people make decisions by weighing costs and benefits, their decisions may change in response to incentives: When the price of a good rises, consumers will buy less of it because its cost has risen When the price of a good rises, producers will allocate more resources to the production of the good because the benefit from producing the good has risen. - Many public policies change the costs and benefits that people face. Sometimes policymakers fail to understand how policies alter incentives and behaviour and a policy may lead to unintended consequences. How people interact: a) Principle 5: Trade can make everyone better off - Rather than being self – sufficient, people can specialize in producing 1 good or service and exchange it for other goods - Countries also benefit from trade & specialization: Get a better price abroad for goods they produce Buy other goods more cheaply from abroad than could be produced at home b) Principle 6: Markets are usually a good way to organise economic activity - Market: a group of buyers and sellers (need not be in a single location) - “Organize economic activity” means determining: What goods to produce How to produce them How much of each to produce Who gets them - A market economy allocates resources through the decentralized decisions of many households and firms as they interact in markets for goods and services - Famous insight by Adam Smith in The Wealth of Nations (1776): Each of these households and firms acts as if “led by an invisible hand” to promote general economic well – being - The invisible hand works through the price system: The interaction of buyers and sellers determines prices Each price reflects the good’s value to buyers and the cost of producing the good Although individuals are motivated by self – interest, an invisible hand guides this self – interest into promoting society’s economic well – being - When a government interferes in a market and prevents price from adjusting, household and firm decisions become distorted - Centrally planned economies failed because they did not allow the market to work c) Principle 7: Governments can sometimes improve economic outcomes - The invisible hand will only work if the government enforces property rights Important role for governments Property rights: the ability of an individual to own and exercise control over scarce resources (with police, courts) Ví dụ: sở y tế đã can thiệp để “bình ổn giá thị trường” tại các nhà thuốc trong đợt covid 19 People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen - There are 2 broad reasons for the government to interfere with the economy: The promotion of efficiency and equality - Government policy can be most useful wen there is market failure: Market failure: when the market fails to allocate society’s resources efficiently Causes: Externalities: when the production or consumption of a good affects bystanders (pollution) Market power: a single buyer or seller has substantial influence on market price (monopoly) In such cases, public policy may promote efficiency Government may alter market outcome to promote equity (but not always) - If the market’s distribution of economic well – being is not desirable, tax or welfare policies can change how the economic “pie” is divided 4.
How the economy works as a whole works: a) Principle 8: A country’s standard of living depends on its ability to produce goods & services - Huge variation in living standards across countries and overtime: Average income in rich countries is more than 10 times average income in poor countries The US standard of living today is about 8 times larger than 100 years ago Changes in living standards over time are also great - The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor input - Productivity depends on the equipment, skills, and technology available to workers. Other factors (labor unions, competition from abroad) have far less impact on living standards. Thus, policymakers must understand the impact of any policy on our ability to produce goods and services b) Principle 9: Prices rise when the government prints too much money - Inflation: increases in the general level of prices in the economy - In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall - The faster the government creates money, the greater the inflation rate/ When the government creates a large amount of money, the value of money falls, leading to price increases c) Principle 10: Society faces a short – run tradeoff between inflation and unemployment - In the short – run (1 – 2 years), many economic policies push inflation and unemployment in opposite directions - Other factors can make this tradeoff more or less favorable, but the tradeoff is always present - Most economists believe that the short – run effect of a monetary injection is lower unemployment and higher prices: An increase in the amount of money in the economy stimulates spending and thus the demand of the quantity of goods and services sold in the economy. The increase in the number of goods and services sold will cause firms to hire additional workers An increase in the demand for goods and services leads to raise prices over time Some economists question whether this relationship still exists? - The short – run tradeoff between inflation and unemployment plays a key role in the analysis of the business cycle Business cycle: fluctuations in economic activity, such as employment and production - Policymakers can exploit this trade-off by using various policy instruments, but the extent and desirability of these interventions is a subject of continuing debate CHAPTER 2: THINKING LIKE AN ECONOMIST - Economists play 2 roles: Scientists – try to explain the world, and Policy advisors – try to improve it I.
The Economist as Scientist: 1. Economist follow the Scientific Method: - The Scientific Method: the dispassionate development and testing of theories about how the world works - Data can be collected and analysed to evaluate theories - Using data to evaluate theories is more difficult in economics than in physical sceince because economists are unable to generate their own data and must make do with whatever data are available Thus, economists pay close attention to the natural experiments offered by history - For example: an economist researcher has a research topic about management/ marketing. They have to find out the determinants of purchasing intention for organic foods Key concepts Research unit: individual (gen Z) Research scope: HCM city Research objective: Find out determinants of purchasing intetion for organic foods Therefore, they have to find and read the Theory of Planned Behavior (TPB) and then read the Articles to develop the Hypotheses base on the Assumptions (biến X1) Price (biến X2) Quality (biến X3) Environmental awareness (biến X4) Green promotion (biến X5) Healthy awareness Purchasing intention (biến Y) Conceptual framework/ model - Data collection: Questionaires Survey > 350 (số lượng gen Z) Sau khi có dữ liệu, dùng dụng cụ để phân tích dữ liệu data analysis có kết quả Fingdings Applications (áp dụng cho doanh nghiệp), policy markers (người làm về chính sách) And then, test the hypotheses 2. Assumptions make the World easier to understand: - Assumptions simplify the complex world, make it easier to understand - For example, to undertand international trade, it may be helpful to start out assuming that there are only 2 countries in the world producing only 2 goods.
Once we understand how trade would work between these 2 countries, we can extend our analysis to a greater number of countries and goods - 1 important role of a scientist is to understand which assumptions one should make - Economists often use assumptions that are somewhat unrealistic but will have small effects on the actual outcome of the answer 3. Economists use economic models to explain the World around us: - Most economic models are composed of diagrams and equations - The goal of a model is to simplify reality in order to increase our understanding.