lecture recording on 18 January 2025 at 11.12.17 AM

Introduction to Economic Phenomena

• Economists play dual roles: explaining phenomena and advising policy.

• The objective nature of economists: seeking to explain without bias.

• Use of the scientific method: developing theories, collecting data, and refining those theories continuously.

Assumptions in Economic Modeling

• The use of models simplifies complex realities (e.g., maps vs. real geography).

• Assumptions help create clear analytical frameworks for understanding economic behavior.

Model 1: Circular Flow Model

• Represents economic interactions between firms (producers) and households (consumers).

• Two primary markets:

  • Goods and Services Market: Households buy products from firms.

  • Factors of Production Market: Households provide labor to firms.

• Flow of money (green arrows) indicates revenue and wages; flow of goods (red arrows) shows physical products.

Model 2: Production Possibilities Frontier (PPF)

• Shows trade-offs in production given limited resources.

• Assumption of two goods (e.g., airplanes and soybeans).

• Illustrates maximum outputs with available factors of production (labor, land, technology).

• Opportunity Cost: The cost of what is forgone when increasing production of one good over another.

• Marginal decisions based on efficiency defined along the PPF.

Model 3: Demand and Supply Model

• Demand: Relationship between price and quantity demanded, typically inversely related.

  • Changes in demand due to factors such as income, number of buyers, consumer preferences, and related goods (substitutes vs. complements).

• Supply: Quantity sellers are willing to sell at various prices, generally positively related to price.

• Market equilibrium occurs where quantity supplied equals quantity demanded.

Key Economic Concepts

Positive vs. Normative Statements

• Positive statements: can be tested and validated (e.g., minimum wage laws causing unemployment).

• Normative statements: opinions based on value judgments (e.g., government should raise minimum wage).

Trade and Specialization

• Trade increases efficiency and potentially overall wealth of society based on comparative advantage (producing at the lowest opportunity cost).

Economic Indicators

Gross Domestic Product (GDP)

• Measures overall economic production as the market value of all final goods and services produced within a country in a given period.

• Different approaches to measuring GDP: income vs. expenditure methods.

  • Consumption: Largest component of GDP, includes household spending.

  • Investment: Spending on capital goods and new housing.

  • Government Purchases: Does not include transfer payments but covers all government spending on goods and services.

  • Net Exports: Exports minus imports, showing international trade impact.

Unemployment Rate

• Measurement of unemployment based on proportion of unemployed workers actively seeking work in the labor force.

• Various demographic disparities in unemployment rates (age, education, race).

Inflation Rate

• Inflation measured by the Consumer Price Index (CPI): percentage changes in a basket of consumer goods.

• Other measures include the GDP deflator and the Personal Consumption Expenditure (PCE) index.

• Inflation impacts purchasing power and overall economic stability.

Financial Markets and the Federal Reserve

• Financial markets facilitate the connection between savers (suppliers of funds) and borrowers (demanders of funds).

• Role of the Federal Reserve: regulate banking and control money supply through monetary policy.

• Interest rates (price of loanable funds) are influenced by actions of the Federal Reserve, affecting overall investment and growth.

Production Decisions

• Short-run focused on variable labor while capital (fixed inputs) remains constant.

• Total Cost: Fixed costs (constants) plus variable costs (changing with output).

• Average Cost and Marginal Cost: Average cost shows per unit cost; marginal cost indicates the cost of producing one additional unit.