ME - Week 1

Session 1

WHAT ARE WE GOING TO DISCUSS TODAY?

• Overview of the course

• Ten principles of economics

• Definition of microeconomics

• Concept of opportunity costs and trade-offs

• Introduction to marginal thinking

• Explanation of sunk costs

ABOUT THE COURSE

• Schedule:

  • 1st Group: Mondays and Wednesdays from 8.00 AM to 9.15 AM

  • 2nd Group: Mondays and Wednesdays from 9.30 AM to 10.45 AM

• Location: Room 2.05 (AAU)

• Contact Information: michael.fanta@vertoeducation.org

• Consultation Hours: Monday from 10.45 AM to 1.00 PM

COURSE MATERIALS

• Required Videos: Available on the Marginal Revolution University website through Canvas

• Recommended Readings:

  • Cowen, T. and Tabarrok, A. (2024). Modern Principles of Economics, 3rd edition, Worth Publishers. ISBN: 9781429278393

  • Mankiw, G. and Taylor, M. (2024). Microeconomics, 10th Edition, Cengage Learning, Inc. ISBN: 978-0-357-72286-2, eTextbook.

GRADING AND PARTICIPATION

• Participation:

  • Active participation in class problem-solving and discussions is encouraged.

  • Participation accounts for 6% of the final grade.

• Short Tests:

  • Total of 10 short tests based on topics from previous weeks.

  • Duration: 10 to 15 minutes per test.

  • Each test accounts for 4% (Total: 40% of final grade).

• Group Presentations:

  • Two group presentations (10-15 minutes each) scheduled in week 7 and week 13.

  • Topics and team composition assigned during the semester.

  • Each presentation worth 5% (Total: 10% of final grade).

• Reflection Papers:

  • Four reflection papers based on experiential learning sessions.

  • Each paper accounts for 1% (Total: 4% of final grade).

• Exams:

  • Mid-term Exam: 75 minutes, 20 questions, covering all previous topics (20% of final grade).

  • Final Exam: 75 minutes, 25 questions covering the whole semester (25% of final grade).

EXPERIENTIAL LEARNING SESSIONS

• Week 3: Financial Markets and Personal Investments

• Week 6: Excursion during Innovation Week.

• Week 10: Behavioral Economics

• Week 11: Economics of Defense Industry

• Key Individuals:

  • Pavel Peterka, Ph.D. (XTB Trading)

  • Vojtěch Zíka, Ph.D. (University of New York in Prague)

  • Ing. Ondřej Vanáč (LPP Holding)

WHAT IS ECONOMICS?

• Definition: Economics is the study of how society manages its scarce resources.

  • Focus: How individuals, businesses, and governments allocate limited resources to satisfy needs and wants.

TEN PRINCIPLES OF ECONOMICS

HOW PEOPLE MAKE DECISIONS

1. People face trade-offs:

   • Achieving one goal often requires giving up another (e.g., spending money on a vacation vs. saving for a future expense).

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

   • Known as 'opportunity cost' (e.g., attending class means sacrificing time for other activities).

3. Rational people think at the margin:

   • Decisions compare marginal benefits and marginal costs (e.g., studying more hours if the benefits outweigh the costs).

4. People respond to incentives:

   • Incentives motivate behavior (e.g., discounts increase purchases; higher taxes may decrease spending).

HOW PEOPLE INTERACT WITH EACH OTHER

5. Trade can make everyone better off:

   • Specialization and exchange improve efficiency and outcomes.

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

   • Market economies are driven by decentralized decisions guided by prices from voluntary exchanges.

7. Governments can sometimes improve market outcomes:

   • Government intervention can correct market failures (e.g., pollution as an externality).

HOW THE ECONOMY AS A WHOLE FUNCTIONS

8. A country's standard of living depends on its ability to produce goods and services:

   • Higher productivity leads to increased goods, services, wages, and living standards.

9. Prices rise when the government prints too much money:

   • Inflation is caused by an excess of money relative to goods and services.

10. Society faces a short-run trade-off between inflation and unemployment:

    • The Phillips Curve illustrates the trade-off; balancing these objectives is crucial for policymakers.

WHAT IS MICROECONOMICS?

• Definition: Microeconomics is the study of individual choices and market interactions.

  • Focus on households and firms and resource allocation.

  • Key areas include prices, incentives, efficiency, and market outcomes.

OPPORTUNITY COSTS & TRADE-OFFS

• Opportunity Cost Definition: The value of the next best alternative given up when making a decision.

  • Every choice involves a trade-off (e.g., going to class vs. working or socializing).

MARGINAL THINKING

• Concept: Decisions made at the margin refer to evaluating “a little bit more or less.”

  • Example: Studying for an exam involves comparing marginal benefits (improved grade) with marginal costs (lost sleep or time).

SUNK COSTS

• Definition: A sunk cost is a cost that has already been incurred and cannot be recovered.

  • Sunk costs should not influence future decision-making (e.g., selling jeans at a loss if they won’t sell at original price).

KEY TAKE-AWAYS

• Scarcity necessitates choices.

• Good Decision-Making Principles:

  • Consider opportunity costs and think at the margin.

  • Ignore sunk costs and focus on future options.

• Economics as a Tool:

  • Economics serves as a framework for improving decision-making in both personal and business contexts.

Session 2

    AGENDA FOR THE DAY

• Demand Curve

• Supply Curve

• Market Equilibrium

• Surplus and Shortage

• Examples

DEMAND

DEMAND CURVE

• Definition: The demand curve illustrates how much of a good people are willing to buy at different prices.

• Law of Demand:

  • If the price (P) decreases ($P <br>ightarrow$), the quantity demanded (Qd) increases ($Qd <br>ightarrow$).

  • Example: During Black Friday, lower prices lead to an increase in purchases of goods.

VISUAL REPRESENTATION OF DEMAND CURVE

• Typical representation with Price (P) on the vertical axis and Quantity (Q) on the horizontal axis.

EXAMPLE I: DEMAND CURVE FOR PENCILS

• Table of Prices (per 100 pencils) and Corresponding Quantity Demanded (in hundreds of pencils) is provided:

  • Price: $5 => Quantity Demanded: 60 (hundreds)

  • Price: $15 => Quantity Demanded: 45 (hundreds)

  • Price: $25 => Quantity Demanded: 35 (hundreds)

  • Price: $35 => Quantity Demanded: 20 (hundreds)

• Task: Draw the demand curve for the data provided.

• 
  

EXAMPLE II: DEMAND CURVE FOR OIL

• Price table includes:

  • Price: $10 => Quantity Demanded: 55

  • Price: $15 => Quantity Demanded: 45

  • Price: $25 => Quantity Demanded: 30

  • Price: $30 => Quantity Demanded: 15

• Task: Fill in the table with quantity demanded for given prices.

• If the price was $45, quantity demanded = 0 (indicating no demand at that price).</p></li></ul><h3 id="b8e51923-cb28-4ca7-ba0d-3f7e10b01dc8" data-toc-id="b8e51923-cb28-4ca7-ba0d-3f7e10b01dc8" collapsed="false" seolevelmigrated="true">SUPPLY</h3><h4 id="f3a073d0-15de-4cd1-aacf-d14ac9777dea" data-toc-id="f3a073d0-15de-4cd1-aacf-d14ac9777dea" collapsed="false" seolevelmigrated="true">SUPPLY CURVE</h4><ul><li><p>Definition: The supply curve shows how much firms are willing to produce at different prices.</p></li><li><p>Law of Supply:</p><ul><li><p>If the Price (P) increases ($P
  ightarrow$), the quantity supplied (Qs) also increases ($Qs
  ightarrow$).

• Example: Oil extraction costs vary across regions:

• Cheap oil: Saudi Arabia

• Medium-cost: Alaska

• Expensive oil: Deep-water rigs

EXAMPLE III: SUPPLY CURVE FOR OIL

• Price table of Quantity Supplied:

  • Price: $15 => Quantity Supplied: 10

  • Price: $20 => Quantity Supplied: 20

  • Price: $30 => Quantity Supplied: 40

  • Price: $40 => Quantity Supplied: 50

• If the price per barrel is $12, the quantity supplied will be 0.

MARKET EQUILIBRIUM, SHORTAGE, AND SURPLUS

MARKET EQUILIBRIUM

• Definition: The equilibrium price is where quantity demanded (Qd) equals quantity supplied (Qs).

• Results in no surplus or shortage, indicating that the market is “in balance.”

EXAMPLE IV: BREAD MARKET

• Price table for Quantity Supplied and Quantity Demanded:

  • Price of a loaf:

  • $0.50 => Quantity Supplied: 10, Quantity Demanded: 75

  • $1 => Quantity Supplied: 20, Quantity Demanded: 55

  • $2 => Quantity Supplied: 35, Quantity Demanded: 35 (equilibrium point)

  • $3 => Quantity Supplied: 50, Quantity Demanded: 25

  • $5 => Quantity Supplied: 60, Quantity Demanded: 10

• Task: Draw the supply and demand curves; identify equilibrium price and quantity.

QUESTIONS RELATED TO DEMAND AND SUPPLY

• a) When the price of a good increases, quantity demanded

  • Answers: decreases, increases, stays the same.

• b) When will people search harder for substitutes for oil?

  • Options include: when the price of oil is low, high, or that no incentive exists.

• Correct Understanding: Higher price leads to stronger incentives to search for alternatives.

SURPLUS AND SHORTAGE

WHEN MARKET PRICE IS ABOVE EQUILIBRIUM PRICE

• Graphical representation shows the excess of supply over demand, leading to a surplus.

  • Price decreases back to equilibrium due to sellers reducing prices to sell excess inventory.

WHEN MARKET PRICE IS BELOW EQUILIBRIUM PRICE

• The opposite scenario leading to shortages, graphically represented.

  • Price increases to reach equilibrium due to increased demand.

ADDITIONAL QUESTIONS

• e) If the market price is above equilibrium, this creates: a shortage, surplus (Qs > Qd), neither.

• f) When the price is above equilibrium, sellers tend to push the price down to sell their excess goods.

• g) Jon's competition on eBay for a graphic novel includes other bidders, indicating the competitive nature of the market.

• h) In a labor market, the competition affecting wages includes other translators willing to work, creating downward pressure on wages.

KEY TAKE-AWAYS

• Demand curves typically slope downward, while supply curves slope upward.

• Market equilibrium occurs when supply meets demand, balancing prices.

• Surpluses exert downward pressure on prices while shortages exert upward pressure.

• Markets efficiently allocate goods to those willing to pay the highest, while ensuring that the lowest-cost sellers can sell their goods