31266 Final: 23115 Economics-for-business-high-distinction-notes

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ultramarineminnow313

15 May 2018

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23115–Economicsfor

Business



Lecture1–Introduction

 Economicsisthesocialsciencethatstudieshowsocietymanagesitsscarceresources.

Soitstudiesthechoicesthatindividuals,firmsandgovernmentmakeastheycopewith

scarcity(allocationofresources)andtheincentivesthatinfluencethosechoices.

Scarcitymeansthatsocietyhaslimitedresourcesandtherefore,cannotproduceallthe

goodsandservicespeoplewishtohave.

 Microeconomicsfocusesonindividualagentsintheeconomy…

 Howhouseholds+firmsmakedecisionsandhowtheyinteract.

 Aimstounderstandhowscarceresourcesareallocatedamongalternativeuses,theroleof

prices&marketsandhoweconomicpolicycanleadtobetteroutcomesforsociety.

 Macroeconomicslooksattheeconomyasawhole…

 Focusesoneconomy‐widephenomenalikeeconomicgrowth,unemploymentandinflation.

‐ THETENLESSONSFROMECONOMICS(CHAPTER1)

LESSON1:PEOPLEFACETRADE‐OFFS

 Becauseofscarceresources,makingdecisionsrequirestradingoffonegoalforanother.

Anexampleisthetrade‐offbetweenefficiency(gettingthelargestoutputfromavailable

resources)andequity(distributingoutputfairlyamongmembersofsocietytoincrease

overallwell‐beinginsociety).I.e.thesizeoftheeconomicpieandhowthepieisdivided.

Often,whengovernmentpoliciesarebeingdesigned,thesetwogoalsconflict.The

progressiveincometaxsystem(orwelfaresystemsingeneral)hasthebenefitofgreater

equitybutreducesefficiencysincethereislessincentive/rewardforworkingharder.

LESSON2:THECOSTOFSOMETHINGISWHATYOUGIVEUPTOGETIT

 Ineconomics,thecostofsomethingiswhatyougiveuptogetit,notjustintermsof

monetarycostsbutallopportunitycosts.

 Theopportunitycostofanitemisthevalueofwhatyougiveuptoobtainthatitem–in

short,thevalueofthealternativeforgone.

LESSON3:RATIONALPEOPLETHINKATTHEMARGIN

 Rationalpeoplechoosethebestoptionfromavailablealternativesbycomparingcostsand

benefitsatthemargin.

Forexample–Supposethatflyinga200‐seatplanefromBrisbanetoPerthcoststheairline

$100,000,anaveragecostof$500perseat.Theplaneisminutesfromdeparture,thereare

severalvacantseatsandapersoniswillingtopay$300foraseat.

Shouldtheairlineselltheseatfor$300?Yes–aslongasthemarginalbenefit(therevenue

fromanextraseatsold,here$300)exceedsthemarginalcost(thecostofprovidingtheseat

tooneadditionalpassenger,herecloseto$0),sellingtheticketisprofitable.

 Marginalchangereferstoasmallincrementaladjustmenttoaplanofaction.

 Rationalpeoplecomparethemarginalcostofadecisionwithitsmarginalbenefit.

LESSON4:PEOPLERESPONDTOINCENTIVES

 Anincentiveisa‘reward’or‘punishment’thatinducesapersontoact(ornottoact)ina

certainway.

Rewards+punishmentsassociatedwithagivendecisionaffectthebenefitsandcostsofthat

decision.E.g.supposenewlawintroducedwherebydrinkdrivingleadstoalifesentence…

 Sincerationalpeoplemakedecisionsconsideringcosts/benefits,theyrespondtoincentives.

 Governmentpoliciesconsistbylargeofasetofincentivestoencourageordiscourage

certainbehaviours(orproduction).

o Forexample–taxonalcoholorcigarettes,theEmissionsTradingSchemeortheCarbonTax.

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23115–EconomicsforBusiness

‐ THINKINGLIKEANECONOMIST(CHAPTER2)

THEECONOMISTASASCIENTIST

 Economicsisasocial‘science’sinceitmakesuseofthescientificmethod.

Interplaybetweentheoryandobservationalsooccursinthefieldofeconomics.

 Itdevelopstheoriesandcollects&analysesdatatoevaluate/testthetheories.

 Drasticpricerisesineconomy theorymightassertthathighinflationarisesfromprinting

toomuchmoney totesttheory,economistcollects+analysesdataonprice/moneyfrom

manycountries theorymightbevalidornotvalid furtherobservations.

Economistsfaceanobstacleintestingeconomictheoriesbecauseitisdifficulttouse

experimentstoanalysesocial/economicphenomena.

 Physiciststesttheoriesinalaboratorywheretheycanrunrepeated/controlledexperiments.

Economistscanoftenrelyonlyonobservationstheworldhappenstogivethem…

 Naturalexperimentsofferedbyhistoryareasourceofinfo(e.g.apoliticaleventortheGFC).

ASSUMPTIONSandECONOMICMODELS

 Assumptionsareemployedtomaketheworldeasiertounderstand.

Theartinscientificthinkingisdecidingwhichassumptionstomake.

 Assumptionsaregoodiftheysimplifytheproblemathandwithoutsubstantiallyaffecting

theanswer.

 Economistsusedifferentassumptionstoanswerdifferentquestions.

o E.g.theymightusedifferentassumptionswhenstudyingshorttermandlongtermeffectsof

achangeintheAustraliandollarontheBOGSofaneconomy(J‐Curve).

 Amodelisasimplifiedrepresentationofrealityintendedtofacilitatetheunderstandingofa

complexproblem.

o Modelsarebuiltonassumptionsandareoftencomposedofdiagramsorequations.

ANEXAMPLEOFAMODEL–THECIRCULARFLOWOFINCOME

 Thecircularflowdiagramisavisualmodeloftheeconomythatshowshowdollarsflow

throughmarketsamonghouseholdsandfirms.

o Inthe4sectormodel,weconsiderhouseholds,firms,governmentandoverseas.

o Leakagesaresavings,taxationandimportswhileinjectionsareinvestment,government

spendingandexports.Wheneconomyisinequilibrium,S+T+M=I+G+X.

ANEXAMPLEOFAMODEL–THEPPF

 ProductionPossibilityFrontier(PPF)isagraphshowingthecombinationsofoutputthatan

economycanpossiblyproducegiventheavailablefactorsofproductionandtheavailable

productiontechnology.

 ConceptsillustratedbythePPFinclude:

 Efficiency/productivity,trade‐offs,opportunitycostsandeconomicgrowth(intermsofAS).

 TheeconomycanproduceatanypointonorinsidethePPFbutnotapointoutside(thisis

notfeasiblesinceresourcesarescarce).Anoutcomeissaidtobeefficientiftheeconomyis

gettingallitcanfromthescarceresourcesithasavailable.

 Pointson(ratherthaninside)thePPFrepresentefficientlevelsofproduction.

 OutwardshiftinthePPFmayrepresentincreasedproductivity(e.g.Duetonewtechnology).

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23115–EconomicsforBusiness

THEECONOMISTASAPOLICYADVISOR

 Positivestatements(descriptive)areclaimsthatattempttodescribetheworldasitis.

 Normativestatements(prescriptive)areclaimsthatattempttoprescribehowtheworld

shouldbe.

 Whenyouheareconomistsmakingnormativestatements,youknowtheyhavecrossedthe

linefromscientisttopolicymaker.

ECONOMISTSINGOVERNMENT

 Serveasadvisorsinthepolicymakingprocessinallbranchesofgovernment+independent

agencies.Examplesincludetreasury,theRBA,andtheOECD.

 Economistsalsoworkintheprivatesector–financialinstitutions,industriesandNGOs.

WHYECONOMISTSDISAGREE?

 Therearetwobasicreasonsforthedisagreementbetweeneconomists:

Maydisagreeaboutthevalidityofalternativepositivetheoriesabouthowtheworldworks.

Theymayhavedifferentvaluesand,therefore,differentnormativeviewsaboutwhatpolicy

shouldtrytoaccomplish.

 DIFFERENCESINSCIENTIFICJUDGEMENT–Economicsisayoungscience,andthereisstill

muchtobelearned.Economistssometimesdisagreebecausetheyhavedifferenthunches

aboutthevalidityofalternativetheoriesoraboutthesizeofimportantparameters.

 DIFFERENCESINVALUES–Economistscangiveconflictingadviceduetodifferingvalues.

 PERCEPTIONVERSUSREALITY–Duetotheabove2factors,somedisagreementamong

economistsisinevitable.Yetoneshouldnotoverstatetheamountofdisagreementsincein

manycases,economistsdoofferaunitedview.

*Lecture 1 may not be assessed

‐

 Thetheoryofsupplyanddemandconsidershowbuyersandsellersbehaveandhowthey

interactwithoneanother.

 Itillustrateshowtheinteractionbetweenbuyersandsellersdeterminesthequantityofeach

goodorserviceproducedandthepriceatwhichitissoldinamarketeconomy.

 Amarketisagroupofbuyersandsellersofaparticulargoodorservice.

 Acompetitivemarketisamarketinwhichtherearemanybuyersandmanysellerssothat

eachhasanegligibleimpactonthemarketprice.

Thismeansthatthesmallertheabilityofeachbuyerorsellertoaffectthemarketprice,the

morecompetitivethemarket.

 Throughoutthissubject,weassumethatmarketsareperfectlycompetitive(PC).

Perfectlycompetitivemarketsaredefinedby2primarycharacteristics–(1)thegoodsbeing

offeredforsaleareallthesame(homogenous)and(2)thebuyersandsellersareso

numerousthatnosinglebuyerorsellercaninfluencethemarketprice.

Sincebuyers/sellersinPCmarketsmustacceptthemarketprice,theyare‘pricetakers’.

 Agriculturalmarketisexampleinwhichassumptionofperfectcompetitionappliesperfectly.

 Somemarketshaveonlyonesellerandthissellersetstheprice–knownasamonopoly.

 Somemarketsfallbetweentheextremesofperfectcompetitionandmonopoly.

Onesuchmarket,calledanoligopoly,hasafewsellersthatdonotalwayscompete

aggressively.Airlineroutesareanexample–e.g.considerarouteservicedbyonly2carriers.

Anothertypeofmarketismonopolisticallycompetitive; itcontainsmanysellers,each

offeringaslightlydifferentproduct.Becausetheproductsarenotexactlythesame,each

sellerhassomeabilitytosetthepriceforitsownproduct.Anexampleisthesoftware

industry.Manywordprocessingprogramscompetewithoneanotherforusers,butevery

programisdifferentfromeveryotherandhasitsownprice.

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Document Summary

The ten lessons from economics (chapter 1) Lesson 2: the cost of something is what you give up to get it. Lesson 3: rational people think at the margin. Government policies consist by large of a set of incentives to encourage or discourage certain behaviours (or production): for example tax on alcohol or cigarettes, the emissions trading scheme or the carbon tax. (cid:884)(cid:885)(cid:883)(cid:883)(cid:887) economics for business (cid:46)(cid:74)(cid:68)(cid:83)(cid:80)(cid:70)(cid:68)(cid:80)(cid:79)(cid:80)(cid:78)(cid:74)(cid:68)(cid:84)(cid:1) Drastic price rises in economy theory might assert that high inflation arises from printing too much money to test theory, economist collects + analyses data on price/money from many countries theory might be valid or not valid further observations. An example of a model the circular flow of income. An example of a model the ppf: in the 4 sector model, we consider households, firms, government and overseas, leakages are savings, taxation and imports while injections are investment, government spending and exports. Page (cid:884) (cid:884)(cid:885)(cid:883)(cid:883)(cid:887) economics for business should be.

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stock. The investors’ letter urged Apple to offer tools to prevent smartphone addiction and to
provide more parental options for monitoring children’s smartphone usage. The iOS operating
system for Apple smartphones and tablets already has limited parental controls for restricting
Examiners: Dr. Emmanuel Awuni and Dr. Acheampong Owusu Page 2 of 4
apps, features such as location sharing, and access to certain types of content. The investors
felt Apple needs to do more—for example, enable parents to specify the age of the user of the
phone during setup, establish limits on screen time, select hours of the day the phone can be
used, and block social media services.
The average American teenager who uses a smartphone receives his or her first phone at age
10 and spends over 4.5 hours a day on it (excluding texting and talking). Seventy-eight percent
of teens check their phones at least hourly and 50 percent report feeling “addicted” to their
phones. The investors’ letter cited a number of studies on the negative effects of heavy
smartphone and social media use on the mental and physical health of children whose brains
are still developing. These range from distractions in the classroom to a higher risk of suicide
and depression. A recent survey of over 2,300 teachers by them Center on Media and Child
Health and the University of Alberta found that 67 percent of the teachers reported that the
number of students who are negatively distracted by digital technologies in the classroom is
growing. Seventy-five percent of these teachers think students’ ability to focus on educational
tasks has decreased. Research by psychology professor Jean Twenge of San Diego State
University found that U.S. teenagers who spend 3 hours a day or more on electronic devices
are 35 percent more likely, and those who spend 5 hours, or more are 71 percent more likely,
to have a risk factor for suicide than those who spend less than 1 hour. This research also
showed that eighth-graders who are heavy users of social media have a 27 percent higher risk
of depression. Those who spend more than the average time playing sports, hanging out with
friends in person, or doing homework have a significantly lower risk. Additionally, teens who
spend 5 or more hours a day on electronic devices are 51 percent more likely to get less than 7
hours of sleep per night (versus the recommended 9).
Nicholas Carr, who has studied the impact of technology on business and culture, shares these
concerns. He has been highly critical of the Internet’s effect on cognition, and these cognitive
effects extend to smartphone use. Carr worries that excessive use of mobile devices diminishes
the capacity for concentration and contemplation. Carr recognizes that smartphones provide
many useful functions in a very handy form. However, this extraordinary usefulness gives them
too much influence on our attention, thinking, and behaviour. Smartphones shape our thoughts
in deep and complicated ways, and their effects persist even when we aren’t using the devices.
Research suggests that the intellect weakens as the brain grows dependent on the technology.
Carr points to the work of Adrian Ward, a cognitive psychologist and marketing professor at
the University of Texas at Austin, who for a decade has been studying how smartphones and
the Internet affect people’s thoughts and judgment. Ward has observed that using a smartphone,
or even hearing one ring or vibrate, produces distractions that make it harder to concentrate on
a difficult problem or job. Divided attention impedes reasoning and performance.
A study published in Applied Cognitive Psychology in April 2017 examined how smartphones
affected learning in a lecture class with 160 students at the University of Arkansas at
Monticello. It found that students who didn’t bring their phones to the classroom scored a full
letter-grade higher on a test of the material presented than those who brought their phones. It
didn’t matter whether students who brought their phones used them or not. A study of 91 U.K.
secondary schools, published in 2016 in the journal Labour Economics, found that when
schools ban smartphones, students’ examination scores go up substantially, and the weakest
students benefit the most. Carr also observes that using smartphones extensively can be
detrimental to social skills and relationships. Connecting with “friends” electronically via
smartphones is not a substitute for genuine person-to-person relationships and face-to-face
conversations.

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