Introduction of

economics
Nguyn Vit Hng
pf_viethung@yahoo.com
Cell phone: 0913.326.631

What is economics?
Society and Scarce Resources:
The management of societys resources is
important because resources are scarce.
Scarcity. . . means that society has limited
resources and therefore cannot produce all the
goods and services people wish to have.

Economics is the study of how society

manages its scarce resources.
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Three key Economic questions

What products do we produce?

If the government rebuilds the sidewalk in Hanoi,
it has fewer resources to care for the poor.

How do we produce the products?

Labor-intensive or capital-intensive industries

Who consumes the products?

Decide how to distribute the products of society

factors of production

Natural resources

Labor

Physical capital

Human capital

Technology

Entrepreneurship
Efforts to coordinate factors of production to produce
and sell products
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Macroeconomics vs.
microeconomics

Macroeconomics is the

Microeconomics is the

study of the nations

study of the choices

economy as a whole;

made by households,

it focuses on the

firms, and government

issues of inflation,

and how these choices

unemployment, and

affect the markets for

economic growth

goods and services.

Macroeconomics

Microeconomics
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Positive & Normative

analysis

Positive analysis
predicts the
consequences of

Normative

alternative actions

analysis answers

by answering the

the question What

question What is?

ought to be?

or What will be?

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Comparing positive and

normative Questions

If the government
increases the minimum
wages, how many workers
will lose their jobs?
How does a college
education affect a
persons productivity and
earnings?
How do consumers
respond to a cut in
income taxes?

Positive questions

Should the
government increase
the minimum wage?
Should the
government subsidize
a college education?
Should the
government cut taxes
to stimulate the
economy?

Normative questions
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Economic models

An economic model is a simplified

representation of an economic environment,
with all but the essential features of the
environment eliminated.

It is an abstraction from reality that enables

us to focus our attention on what really
matters.

Figure 1: Supply & Demand Model

Price A
D

Supply

Consumer
surplus
Equilibrium
price

E
Producer
surplus

Demand

C
0

Equilibrium

Quantity

FIGURE 2 THE CIRCULAR FLOW

MARKETS
FOR
GOODS AND SERVICES
Firms sell
Goods
Households buy
and services
sold
Revenue

Wages, rent,
and profit

Goods and
services
bought

HOUSEHOLDS
Buy and consume
goods and services
Own and sell factors
of production

FIRMS
Produce and sell
goods and services
Hire and use factors
of production

Factors of
production

Spending

Labor, land,
MARKETS
and capital
FOR
FACTORS OF PRODUCTION
Households sell
Firms buy

Income
= Flow of inputs
and outputs
= Flow of dollars
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The economy way of

thinking
1.
.

Use assumptions to simplify and focus

attention on what really matters
The lesson is that we must think carefully
about whether a simplifying assumption is
truly harmless.

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Key principles of
economics
1.
2.
3.
4.
5.
6.

Principle of opportunity cost

Real-nominal principle
Marginal principle
Principle of diminishing returns
Rational people respond to incentives
Principle of voluntary exchange

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Opportunity cost

Opportunity cost is what you sacrifice to get

something
Example: A student spends total of $40,000 for
tuition and books. Instead of going to college, he
could have worked as a bank clerk for $20,000
per year and earned $80,000 over four years.
What is the total opportunity cost of this students
college degree?

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FIGURE 3 THE PRODUCTION POSSIBILITIES FRONTIER

Quantity of
Computers
Produced

3,000

D
C

2,200
2,000

A
Production
possibilities
frontier

1,000

300

600 700

1,000

Quantity of
Cars Produced

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Real-nominal principle

The nominal value of an amount of money is its face

value.
The nominal tuition fee is $4,000 per year
The money wage is 5 million VND

The real value of an amount of money is measured

in terms of the quantity of goods the money can buy.
The real value of tuition fee would fall as the prices of other
goods and services increase, even though the nominal
tuition fee stayed the same

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Marginal principle

The marginal principle is based on a

comparison of the marginal benefits and
marginal costs of a particular activity.
The marginal benefit of an activity is the
additional benefit resulting from a small increase
in the activity.
The marginal cost of an activity is the additional
cost resulting from a small increase in the activity
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Marginal principle

People make decisions by comparing costs

and benefits at the margin
No of
products

Total
costs

Total
benefits

Marginal
cost

Marginal
benefit

10

20

10

20

22

36

12

16

36

50

14

14

52

62

16

12

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Marginal principle
. 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!

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Figure 4: The marginal principle

$
A
D
Marginal cost

Diminishing
marginal benefit
E

Marginal benefit
B

increasing
marginal cost

C
0

Quantity
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Principle of diminishing returns

Suppose output is produced with two or

more inputs, and we increase one input
while holding the other input. Beyond some
point called the point of diminishing
returns output will increase at a
decreasing rate.

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Principle of diminishing returns

Bags of
nitrogen
fertilizer

Bushels of
Marginal
corn per acre returns

85

85

120

35

135

15

144

147

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People respond to
incentives

How does law of fastening seat-belt when

driving affect the number of deaths due to
car accidents?

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Principle of Voluntary exchange

People act in their own self-interest, therefore,

they wont exchange one thing for another unless
the trade makes them better off.
Trade allows people to specialize in what they do best, so
you can enjoy a better standard of livings than producing
everything themselves, or self-sufficiency.

Market is usually a good way to organize

the economy
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Market failure and role of

government

Market failure happens when a market doesnt

generate the most efficient outcome, then
government interventions can be expected to
improve the efficiency of market outcomes.
Externalities
Public goods
Imperfect information
Imperfect competition
Uncertainty

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Market failure and role of

government

Externalities
The effects of a decision on a third party that are not
taken into account by the decision maker
They can be classified into either positive or negative
one.
Government can use direct regulation, incentive
policies such as tax or subsidy, or voluntary solutions
to achieve the socially desirable outcomes.

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Market failure and role of

government

Public goods
A good that is nonexclusive (no one can be excluded
from its benefits) and nonrival (consumption by one
does not preclude consumption by others).
Public goods could not be provided by the private
business which only pays attention to its self-interest
Government generally provides goods with significant
public aspects to them.

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Market failure and role of

government

Imperfect information
People could not gather enough information to
make informed decisions about how much to
produce or consume most efficiently.
Government can disseminate information and
promote informed choices.

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Market failure and role of

government

Imperfect competition
Some markets are dominated by a few large
firms, and the lack of competition leads to high
prices and small quantities, which can be
considered as social inefficiency.
Government can foster competition to achieve
socially optimal output.

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Market failure and role of

government

A lot of risks and unfair allocations exist in the

real life which are not considered by markets
Poor child has no education and continue with a life of
misery.
Natural disasters or human accidents
Unemployment due to recession

Government can reduce economic uncertainty by

providing the poor with a social safety net,
implementing stabilization policies.
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