Economics

Economic Principles

Dept. of Economics @ NCKU

Weng, Ming-Hung
Outline

About this course

Introduction to Economics
About this course
Grading (avg. 80-83)
Participation (25%)
Quizzes (15%)
Poster (30%) (Sat, May 20)
Final (30%) (Jun 16, a week
before the final week)
 Course Evaluation
1. Group Report (30%): poster presentation for your
investigation on nearby industry/market or relevant issues
in group of 4-6 students . You are expected to use your
economics intuition and knowledge to discover problems
and to provide possible remedies on May 20 (Saturday.
There will still be Friday class in the same week. Hence
instead of skipping one week of class, we move the final
one week earlier.) with the following questions to be
answered in the poster(36 inches * 48 inches):
A. What is the question/issue?
B. Why should we care about it?
C. What is your answer/conclusion?
D. How did you get there? (efficiency improving/doable?)
 Course Evaluation
2. Participation (25%) refers to how well students are
engaged in in-class activities using IRS and etc.

3. Quizzes (15%) evaluate students' comprehension

identified by their performance in IRS quizzes given at the
end of each class.

4. Final (30%) is the paper-based exam scheduled on Jun 16

(Friday), the week before the final week.

5. There's also extra credit (at most 5% ) rewarding students

whenever they spontaneously engage in class
discussions.
 Class rules
No electronic devices are allowed during
classes.

Absences will be excused only if the instructor

is provided with official paper proofs.

Dishonest IRS Responding (ex: responding for

others, etc. ) is considered cheating and will
be reported to school for appropriate penalty.
 Tentative schedule
1 Introduction to Economics
2 Trade
3 Market Equilibrium
4 Consumers and Incentives
5 Sellers and Incentives
6 Elasticity
7 Efficiency
8 Government and Taxation
9 Monopoly
10 Game Theory and Oligopoly
11 Externality
12 Public Goods and Common Pool Resources
13 Markets for Factors of Production
14 Trade-off Involving Time and Risk
 Introduction to Economics
Economics Scopes
Microeconomics
Rationale of decision making
How markets and their efficiency
Macroeconomics
GDP, interest rate, exchange rate, etc

Economic Principles
Optimization
Equilibrium
Empiricism
The First Principle of Economics:
Optimization (*)
How many laps would
you jog (walk) a week?
1. none
2. 10 or less
3. 30
4. 50 or more
Optimization
Determinants of your
(optimal) choices?

If health condition when

other things being equal?
For cooler season?
Competition?
Are others jogging?
Being paid?

Benefit/Opportunity cost
1.3 The First Principle of Economics: Optimization
Trade-offs and Budget Constraints (*)

What is the optimal level of crime? (*)

Number of violent
crimes per 100,000
persons

1. 1,118.
2. 0.

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 Optimization for part-time job

Hours 20 30 40 50

Pay (total) 2400 3600 4800 6000

1 2 3 4
 Optimization for part-time job

Hours 20 30 40 50

Pay (total) 2400 3600 4800 6000

cost 500 1500 3200 5000

1 2 3 4
Optimization
Optimization
Optimization
Optimization
 Difficulties in optimizing rise from
Information deficit
Inability
Inexperience
1.$1,500 2. $1,000
@University Rd. @YongKong.
1.$33,000 2. $32,500
@University Rd. @YongKong.
The Second Principle of Economics:
equilibrium

Is this an equilibrium?
1.Yes
2.No
equilibrium
In equilibrium, every
economic agent
is optimizing
will not benefit
from changing their
own behavior
Equilibrium is stable
and more
meaningful for
analysis and
comparison.
1.4 The Second Principle of Economics: Equilibrium

Is this an equilibrium?
1. Yes
2. No

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 The Third Principle of Economics:
Empiricism
Causation: Economic Models
link causes and consequences

Correlation: Data provides

reflection and insights

Theory + empirical evidence =

perfect
1.5 The Third Principle of Economics: Empiricism

Crowded beaches
and hot temperatures
go together.

So if we want to make it cooler, keep

people from going to the beach!

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2.2 Causation and Correlation

Buttercup

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2.2 Causation and Correlation

Why isnt correlation the same thing as causality?

1. Omitted variables (Red Ad Campaign Blues)

2. Reverse causality

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Evidenced-Based Economics Example
Is it really free to play
Pokemon Go?

Why would some play

less/more frequently?
2.1 The Scientific Method
An Economic Model

Speaking of Harvard
dropouts
1. College education is
not helpful
2. Argument by Anecdote
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2.1 The Scientific Method
An Economic Model

Evidenced-Based Example:

The value education

Assumption:
one more year of education results in a
10% increase in future earnings (why?)
4 more year results in a 46% increase,
why not 40%? 2015 Pearson Education,
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2.2 Causation and Correlation

Evidence-Based Economics and Natural Experiments

How much is an extra year of school worth?

In 1947, the UK raised the minimum drop-out age from

14 to 15.
Those students reaching age 14 before 1947 =
control group
Those students reaching age 14 in 1947 or after =
treatment group
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2.1 The Scientific Method
An Economic Model

Two important features of models:

1. They are not exact. Not everyone will

see their wages increase by 10% with
every additional year of education
2. They generate predictions that can be
tested with data

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2.1 The Scientific Method
An Economic Model

Exhibit 2.3 Average Annual Earnings of 30-Year-Old Americans by Education Level

(2013 data)
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 Conclusion
Economic agents choose the optimal
benefit/opportunity cost combination among
possible options by taking all factors into account.

Economics studies how changes in (market)

equilibrium are related variations in their
environment

Economists use empirical observation to support

or test their theories.