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Basic terminology to understand business economics, Lecture notes of Business Economics

Introduction to business economics

Typology: Lecture notes

2018/2019

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Business Economics
Module:1
Ch-1: Ten Principles of Economics
Ch-2: Thinking Like an Economist
Ch-3: Interdependence and the Gains from Trade
Source: Principles of Economics by N. Gregory Mankiw (7ed)
Thota Nagaraju Business Economics:Ten Principles of Economics 1
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Business Economics

Module:

Ch-1: Ten Principles of Economics

Ch-2: Thinking Like an Economist

Ch-3: Interdependence and the Gains from Trade

Source: Principles of Economics by N. Gregory Mankiw (7ed)

1

Ten Principles of Economics

 Economy – “oikonomos” (Greek)

 “One who manages a household”

 Household - many decisions

 Allocate scarce resources

 Ability, effort, and desire

 Society - many decisions

 Allocate resources

 Allocate output

 Resources are scarce

 Scarcity

 The limited nature of society’s resources

 Economics

 Study of how society manages its scarce resources

 Economists study:

 How people make decisions

 How people interact with one another

 Analyze forces and trends that affect the economy as a whole

How People Make Decisions

Principle 1: People face trade-offs

Making decisions

 Trade off one goal against another

 Student – time

 Parents – income

 Society

  • National defense vs. consumer goods
  • (^) Clean environment vs. high level of income
  • (^) Efficiency vs. equality
Efficiency

 Society getting the most it can from its scarce resources

 Size of the economic pie

Equality

 Distributing economic prosperity uniformly among the members of society

 How the pie is divided into individual slices

How People Make Decisions

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

People face trade-offs

 Make decisions

  • (^) Compare cost with benefits of alternatives

Opportunity cost

 Whatever must be given up to obtain one item

How People Make Decisions

Principle 4: People respond to incentives

Incentive

 Something that induces a person to act

 Higher price

  • (^) Buyers - consume less
  • (^) Sellers - produce more

 Public policy

  • (^) Change costs or benefits
  • (^) Change people’s behavior

How People Interact

Principle 5: Trade can make everyone better off

Trade

 Allows each person to specialize in the activities he or she does best

 Enjoy a greater variety of goods and services at lower cost

How People Interact

Principle 7: Governments can sometimes improve market outcomes

We need government

 Enforce rules and maintain institutions

  • (^) Enforce property rights

 Promote efficiency

  • (^) Avoid market failure

 Promote equality

  • (^) Avoid disparities in economic well-being

How People Interact

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

Large differences in living standards

 Among countries

 Over time

Explanation: differences in productivity

How the Economy as a Whole Works

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

Phillips Curve

Chapter-2: Thinking Like an Economist

Chapter-2: Thinking Like an Economist

Source: Principles of Economics by N. Gregory Mankiw (7ed)

The Economist as a Scientist

Economic models

 Diagrams & equations

 Omit many details

 Allow us to see what’s truly important

 Built with assumptions

 Simplify reality to improve our understanding of it

The Economist as a Scientist

Which would you prefer if you want to find your way to the Curlew parking lot?

The Economist as a Scientist

Markets for goods and services

 Firms – sellers

 Households – buyers

Markets for inputs

 Firms – buyers

 Households – sellers

The Economist as a Scientist

Production possibilities frontier

A graph

Combinations of output that the

economy can possibly produce

Given the available

 Factors of production

 Production technology