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Economists in business usually act to perform one or more of three functions. These are (list):
1. figure out how to MAXIMISE THE RETURNS of the organization or ourselves within our constraints
2. figure out how to MINIMISE THE HARM that others can do to us
3. help us reshape the way things are done so that BETTER OUTCOMES RESULT
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The main observation of economics is the problem of scarcity. Scarcity is best described as:
Insufficiency. There are infinite needs and wants and only finite resources.
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What are the two main economic questions?
What is the best way to use scarce resources? - Nominative Questions
How economic principles are being used at the moment? - Positive Analysis (looking at what we are doing, and how we can do it better/achieve more economic outcomes)
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Describe the economic concept of Homo Economicus-
Economists believe it is essential to not underestimate the degree to which nearly all economic agents will act to increase their material welfare. Thus the behavioral model of Homo Economicus, where someone rationally maximises their own material welfare. Thus economics was defined early as the science of human behavior resulting from wealth maximization, by John Stuart Mill (1844) and Stanley Jevons (1872).
As mentioned, the IMMUTABILITY of material motivations cannot be cast aside in economic behavioral analysis. While, in times of crisis, people may forgo material wants in place of ideological philosophies alone, economists believe this is not a sustainable motivation.
Thus, the homo economicus enables us to predict behavior by using it as a model.
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Who is said to be the father of economics?
Adam Smith (1776)
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What words are missing from this sentence:
Economics is ___________, it is about achieving the ____________ __________ by using people selfishness as a motive.
Idealistic
Common Good
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Optimal Policy?
the situation where the aggregate welfare of the state is maximised given that individuals are driven mostly by material motives
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Complete the sentence:
__________ between people has public benefits, even though the underlying motive of each participant is __________.
This is a major economic principle of __________ __________ (1774)
- Competition
- Selfish
- Adam Smith
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The Invisible Hand?
The invisible hand of the market is the tendency of prices to move toward a situation where noones situation/position can be improved by further undercutting.
It is a lot about private vices producing social outcomes.
'it is not from the benevolence of the butcher, the brewer or the baker, that we receive our dinner, but from their regard to their own interest' - Adam Smith (1774)
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Functioning Markets are a requirement for competition. Competition works when Markets function around 3 key concepts discussed, these are:
- there are MANY SELLERS
- buyers and sellers are INFORMED
- neither buyers nor sellers coordinate OR COLLUDE to defraud others
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A result of the Invisible Hand of the market is Specialisation.
Specialisation results when prices are ________ and the market then becomes more _________ and people do what they do relatively ________.
stable, efficient, best
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Benevolent Rule Setters- The 'King' is seen as interested in the common good and also as non partisan.
In economics, if these 'kings' are not interested in the common good:
state capture, state failure or corruption results.
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Equilibrium is attributed to:
Leon Walras (1874)
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An economic system is said to be in equilibrium when:
- it is not possible to improve on anyones outcome by changing their behavior.
- all opportunities for gain are exhausted
- every one CAN do what he or she wants to get the market to equilibrium
- everybody has as much information as possible
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The market is always moving towards the most 'efficient' point of:
equilibrium
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Economic Rationality is:
that homo economicus is a fairly good calculator
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increasing the money supply without increasing without producing more goods means more money per good which is?
inflation
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Creative Destruction?
a continuous stream of shocks and discoveries (e.g. technological innovations) constantly creates new opportunities and closes down old ways of doing things.
The 3 Austrians (1930's-1980's)
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Definition for Goods and Services:
- Goods: can be physically shown to others
- Services: intangibles
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What are 4 reasons that needs and wants are unlimited?
- 1. Goods wear out and need to be replaced - perishable
- 2. New or improved products come out- superceeded
- 3. People get fed up with what they already own- redundancy
- 4 The more you have the more you want
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Types of Resources:
- Land:All Natural Resuorces i.e. Rent
- Labour:The physical and mental work of ppl i.e. Wages
- Capital:All human-made tools and machines i.e. Interest
- Entrepreneurship:All managers and organisations i.e. Profit
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What is a free good?
- a good without price
- an ECONOMIC GOOD is a product or commodity in LIMITED SUPPLY
- CAPITAL GOODS are a COST or an INVESTMENT
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besides consumption, we use resources two ways. these are:
- production transforming the combination of inputs into something consumable
- as a transfer
a change in ownership of a resource or good
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what can we say about opportunity cost?
- it is a lot about choice, we forgo one thing for the choice of another
- opportunity cost principle states the cost or value of a good is that of the NEXT BEST alternative
- set of possible choices is the opportunity set
- TRADE OFFS are where we exchange one good for another as we cannot have both
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what do we learn from the principle of opportunity cost?
- one cannot have everything
- one cannot avoid tough choices
- time is a resource with opportunity cost- to wait is a cost
- There is not necessarily a best decision, sometimes only one that is worse
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QUALY's make problems comparable.
QUALITY ADJUSTED LIFE YEARS
One QUALY is:?
- another year of life of an average quality of an average person
- not ecstatically happy or desperately unhappy year
- a year of average happiness and good health
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definitions: average tax?
total tax bill less pre tax revenue
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definitions: marginal tax?
is the percentage of the last revenue dollar that gets paid in tax- tax rate at the last $ earned
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EMTR- Effective Marginal Tax Rate: definition?
- the percentage of the last dollar earned in pre tax revenue that is paid in tax or reduces welfare (side) payments
- part of the 'extra' $ that does not end up in my pocket
- N.B. POVERTY TRAP-
where a low skilled persons material welfare is reduced when they earn more money in the formal economy(usually due to phase in limits with welfare)
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Progressive Tax- increases with pre tax revenue
A regressive tax- __________ with pre tax revenue
decreases
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Defined contribution pension scheme:
the sum at the end is determined by how much you put in/contribute
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Defined Benefit Pension System: ?
the sum you get at the end is defined by an administrative rule, not by your contributions
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