150626_uwin-pie01-s34

Bachelor in Economics (S.E): Manajemen

Course : Pengantar Ilmu Ekonomi (1506PIE01)

online.uwin.ac.id

Session Topic : Principles of Economics

Course: Pengantar Ilmu Ekonomi

By Tovan Krisdianto, S.E., M.M.

UWIN eLearning Program

Lecturer Profile

Tovan Krisdianto, S.E., M.M.

Co-Founder CFO

PT. Haruka Edukasi Utama

Experience: 2015 - Present UWIN Lecturer, Univ. Wiraswasta Indonesia 2012 - Present Chief Financial Controller (CFO), PT. Haruka Edukasi Utama 2013 - 2014 BINUS Lecturer, Univ. Bina Nusantara 2012 - 2012 Financial Controller, PT. Microsoft Indonesia 2009 - 2011 Chief Financial Controller (CFO), PT. Trouw Nutrition Indonesia (Nutreco Asia Pacific) 2007 - 2009 Global Commercial and Transition Director, Schlumberger Dubai 1999 - 2007 Controller, Schlumberger Indonesia 1996 - 1999 Auditor, KPMG

Education :S1 Parahyangan Catholic Univ., Bandung SE, Major in Accounting

S2 Prasetiya Mulya Business School, Jakarta MM, Major in Finance

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Content

Part 1 Understanding of Economics Science

Part 2 10 Principles of Economics

Part 3 Economics as Social Science

Part1: Understanding of Economics Science


Economy: Definition

Economy

Defn: The word economy comes from a Greek word for one

who manages a household.

A household & an economy face many decisions:

Who will work? What goods and how many of them should be produced? What resources should be used in production? At what price should the goods be sold?


Economy: Society, Scarcity, Choices & Opportunity

Society & Scarce Resources:

a. The management of societys resources is important because

resources are scarce.

b. Scarcity means that,

society has limited resources & therefore cannot produce all the goods and services people wish to

have.

>Choices

Due to limited sources you need to make choices.

>Opportunity Cost

For every choices there is an opportunity.


Economics: Definition

Economics

Defn: The study of how society manages its scarce resources.

Economists Study

How people,

a. make decisions.

b. interact with each other.

c. The forces & trends that affect the economy as a whole.

Part2: 10 Principles of Economics


10 Principles of Economics: Group

10 Principles of Economics grouped in 3 categories

How,

a. People Make

Decisions

b. People Interact

c. The Economy as

a Whole Works


10 Principles of Economics: Decisions, Interact & Works

>How People Make Decisions

1. People face tradeoffs.

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

3. Rational people think at the margin.

4. People respond to incentives.

>How People Interact

5. Trade can make everyone better off.

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

7. Governments can sometimes improve economic outcomes.

>How the Economy as a Whole Works

8. The standard of living depends on a countrys production.

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

10. Society faces a short-run tradeoff between inflation & unemployment.


10 Principles of Economics: How People Make Decisions

1. People face tradeoffs

To get one thing, we usually have to give up another thing.

Guns v. butter Food v. clothing Leisure time v. work Efficiency v. equity

Making decisions requires trading off one goal against another.

There is no such

thing as a free

lunch!


10 Principles of Economics: How People Make Decisions (Cont.)

Efficiency v. Equity

Efficiency means,Society gets the most that it can from its scarce resources.

Equity means,The benefits of those resources are distributed fairly among the members of

society.

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

Decisions require comparing costs & benefits of alternatives.Whether to,

a. go to college or to work?

b. study or go out on a date?

c. go to class or sleep in?

The opportunity cost of an item is what you give up to obtain that item.


10 Principles of Economics: How People Make Decisions (Cont.)

3. Rational people think at the margin

Marginal changes are small, incremental adjustments to an existing plan of

action.

People make decisions by comparing costs & benefits at the margin

4. People respond to incentives

Marginal changes in costs or benefits motivate people to respond.

The decision to choose one alternative over another occurs when that alternatives marginal

benefits exceed its marginal costs!

Example: LA Laker basketball star Kobe Bryant

chose to skip college & go straight to

the NBA from high school when offered

a $10 million contract.


10 Principles of Economics: How People Interact

5. Trade can make everyone better of

People gain from their ability to trade with one another. Competition results in gains from trading. Trade allows people to specialize in what they do best.

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

In a market economy,

Households decide what to buy & who to work for. Firms decide who to hire & what to produce.

Adam Smith made the observation that households & firms interacting in

markets act as if guided by an invisible hand.

a. Because households & firms,

look at prices when deciding what to buy & sell, they unknowingly take into account the social costs of their actions.


10 Principles of Economics: How People Interact (Cont.)

b. As a result,

prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole.

Adam Smith

Scottish moral philosopher Pioneer of political economy Key Scottish Enlightenment

7. Governments can sometimes

improve market outcomes

When the market fails (breaks down) government can intervene

to promote efficiency & equity.

Market failure occurs when the market fails to allocate

resources efficiently.


10 Principles of Economics: How People Interact (Cont.)

Market failure may be caused by,

an externality, which is the impact of one person or firms actions on the well-being of a bystander.

market power, which is the ability of a single person or firm to unduly influence market prices.

8. The Standard of Living Depends on a Countrys

Production. Standard of living may be measured in

different ways: By comparing,

a. personal incomes.

b. the total market value of a nations production.

Standard of living in 2015:

US $ 37,206 p.a Singapore $ 24,622 p.a China $ 1.449 p.a Indonesia $ 910 p.a

WHY?

PRODUCTIVITY!


10 Principles of Economics: How the Economy as a Whole Works (Cont.)

Almost all variations in living standards are explained by differences in countries productivities.

Productivity is the amount of goods & services produced from each hour of a workers time.

Higher productivity = Higher standard of living

9. Prices rise when the government prints too much money

Inflation is an increase in the overall level of prices in the economy. One cause of inflation is the growth in the quantity of money. When the government creates large quantities of money, the value of the

money falls.


10 Principles of Economics: How the Economy as a Whole Works (Cont.)

10. Society Faces a Short-run Tradeoff Between Inflation & Unemployment

The Phillips Curve illustrates the tradeoff between inflation & unemployment:

Inflation Unemployment

Its a short-run tradeoff!

AWH Phillips

LSE Economics Professor

Part3: Economics as Social Science


Economics: Terminology > Economics as Social Science

Every field of study has its own terminology

Mathematics Psychology

torts

Lawvenues

Opportunity

Cost ElasticitySupply

ConsumerSurplus

Comparative AdvantageDeadweight

Loss

Demand

Economics

cognitive

ego

iddissonanceaxioms

integralsvector spaces

promissoryestoppel


Economics: Scientist & Trains you to

Economics trains you to

1. Think in terms of alternatives.

2. Evaluate the cost of individual & social choices.

3. Examine & understand how certain events & issues are

related.

The Economist as a Scientist

The economic way of thinking,

Involves thinking analytically & objectively. Makes use of the scientific method.


Economics: Method & The Role

The Scientific Method

Uses abstract models to help explain how a complex, real world operates.

Develops theories, collects, & analyzes data to prove the theories.

Observation, Theory & More Observation!

The Role of Assumptions

Economists make assumptions in order to make the world easier to understand.

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

Economists use different assumptions to answer different questions.


Economics: Way of Thinking & Model

The Economic Way of Thinking

Includes developing abstract models from theories & the analysis of the models.

Uses 2 approaches:a. Descriptive (reporting facts)

b. Analytical (abstract reasoning)

Economic Models

Economists use models to simplify reality in order to improve our understanding of the world

2 of the most basic economic models include:a. The Circular Flow Model

b. The Production Possibilities Frontier


Economics: The Circular Flow Model

The circular flow model

Defn: A simple way to visually show the economic transactions that occur

between households & firms in the economy.

The Circular Flow Diagram

Wages, rent

& profit

HouseholdsFirms

Market for

Goods &

Services

Market for

Factors of

Production

Revenue Spending

Income

Labor, land &

capital

Inputs for

production

Goods &

Services sold

Goods &

Services bought


Economics: The Circular Flow Diagram

1. Firms

Produce & sell goods & services Hire & use factors of production

2. Households

Buy & consume goods & services Own & sell factors of production

Markets for,

3. Goods & Services

Firm sell Households buy

4. Factors of Production

Households sell Firms buy

5. Factors of Production

Input used to produce goods & service

Land, labor & capital


Economics: The Production Possibilities Frontier

The production possibilities frontier. Defn:

A graph showing the various combinations of output that the economy can possibly produce given the available factors of production &

technology.

3,000

0 1,000

2,000

1,000

300

A

B

2,200

600 700

C

D

Quantity of

Cars Produced

Quantity of Computers

Produced


Economics: The Production Possibilities Frontier (Cont.)

Quantity of

Cars Produced

Quantity of

Computers

Produced

3,000

1,000

2,000

2,200A

600 7003000 1,000

B

C

D

Productionpossibilitiesfrontier


Economics: Concepts

Concepts Illustrated by the

Production Possibilities Frontier

1. Efficiency

2. Tradeoffs

3. Opportunity Cost

4. Economic Growth


Economics: The Production Possibilities Frontier

Quantity of

Cars Produced

Quantity of

Computers

Produced

4,000

3,000

2,000A

0 1,000

E2,100

700 750

An outward shiftin the productionPossibilities frontier


Economics: Microeconomics, Macroeconomics & 2 Roles

The production possibilities frontier

Microeconomics focuses on the individual parts of the economy.

How households & firms make decisions & how they interact in specific markets

Macroeconomics looks at the economy as a whole.

How the markets, as a whole, interact at the national level.

2 Roles of Economists

When they are trying to,

1. explain the world, they are scientists.

2. change the world, they are policymakers.


Economics: Positive & Normative

>Positive versus Normative Analysis

Positive statements

Defn: Statements that describe the world as it is. Called descriptive analysis

Normative statements

Defn: Statements about how the world should be. Called prescriptive analysis

>Positive or Normative Statements

1. An increase in the minimum wage will cause a decrease in employment

among the least-skilled.

2. The income gains from a higher minimum wage are worth more than any

slight reductions in employment.


Reference

1. Mankiw (2004) The Market Forces of Supply and

Demand. Web: mankiw.swlearning.com.


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