Economic Principles for Noneconomists

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Economic Principles for Non-economists
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What is economics?

• Def 1 Focus on goods and services
• Def 2 Focus on scarcity
• Economics is the study of how society decides
  what, how and for whom it produces
• Scarcity Opportunity cost
• Research strategies
• investigate properties of (mathematical) models
• models as approximations, models as points of
  reference
• investigate empirical relations with statistical
  methods
• laboratory experiments

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Some distinctions

• Positive - prescriptive - normative
• Microeconomics - macroeconomics

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Economic systems

• Traditional divison
• market economies vs planned economics
• More modern approach How should decisions rights
  be allocated?
• What should be the specific role of the
  government, e.g.
• define and protect property rights
• take steps that make the market work well, e.g.
• anti-trustlegislation
• insider trading etc
• handle market failures externalities, public
  goods, increasing returns to scale
• income distribution policy
• macroeconomic policies

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The basic competitive model (1)

• Consumers maximising utility
• Utility derived from preferences, described by
  preference order, indifference curves or utility
  function?
• Assume diminishing marginal utility and
  non-satiation
• Constrained maximisation budget line
• The last crown spent on each good should give the
  same utility marginal utility of good equal to
  price.
• Marginal rate of substituion should equal the
  quota of prices
• Can derive individual and market demand curve
• Consumer surplus
• Difference between maximum willingness to pay and
  price paid

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The basic competitive model (2)

• Firms maximising profits
• Given technology and factor prices
• Produce as long as prices higher than marginal
  cost
• cost of increasing production with one unit
• Employ persons as long as marginal revenue
  product higher than wage
• The individual firms supply at price p
• The profit maximising volume at that price
• as long as cover average cost....
• The market supply
• Short run the sum of the individual firms supply
• Long run entry and exit on the market
• Producer surplus
• Difference between price and marginal cost

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The basic competitive model (3)

• Market clearing prices on all markets
• Assumes many firms and homogenous products
• Can be used to analyse probable effects of
  changes
• how will supply and demand curves shift
• New models derived by changing some of the
  assumptions, e.g.
• monopoly models
• models with price rigidities