PRINCIPLES OF ECONOMICS (BUS5POE)

Big Picture of the Subject and

Economics

Week 1, Chapter 1
Lecturer: Dr Emmanuelle Walkowiak
DWB 326A, Department of Economics and Finance
E-mail: e.walkowiak@latrobe.edu.au
Office Hours: Tuesday 11 am-1pm
 Subject Guide: Important Reading
It is very important that you read the guide carefully before the
next lecture. Why?
You can ask questions about it in the next lecture, and make
alternative suggestions!
Coming to the lectures and tutes is essential!
Any questions regarding enrolling in tutorials?
Similarly, without doing the tute work you will most likely
struggle on the quizzes and in the exams.
As the subject guide explains: There is a striking degree of
correlation between the tutorial mark and the exam score
occurring every semester. Out of the students who score
(close to) full marks in tutes over 80% of them commonly
achieve a grade of A on the exams. In contrast, of those
who score less than 1/3 of the available tutorial marks, 2
more than 80% usually fail the exams, and the subject.
 Subject Guide: Important Reading
The topic of weeks 2 and 3 game theory is not covered in
the textbook, so it is essential that you attend the lectures in the
next two weeks.
Textbook: Principles of Economics: Australia and New
Zealand Edition (6th edition, 2014), by Gans, King, Stonecash,
Byford, Libich and Mankiw
Why the 6th edition?
LMS and materials
Details in the subject guide, now a little demonstration
Taking notes
lecture slides are not exhaustive. Why?
Tutorial problem sets
As a guide: if something is not in the lectures or the 3
problem set it will not be on the exams or quizzes.
 LMS Posts as Emails
We will also use the discussion board on LMS
If your LMS setting is such that every post arrives
as a separate email, you can change your
settings to only receive one email DAILY
containing all new posts for all your subjects:
On LMS go to My LMS subjects (the starting
page) -> My profile settings (in the left hand side
menu) -> user account -> edit profile -> forum
preferences -> email digest type: Choose
Complete (daily email with full posts).
 Emphasis and Method
The main objective is to provide you with
tools to think independently about the real
world economy and policy
This will require deep rather than surface
approach to learning
Into which of these does memorizing fall?
The exams as well as the tutorial assessment
will test your understanding and ability to
apply the material. Why?
Therefore your interaction: Discussion will
be an essential part of tutorials as well as
lectures.
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 Educational Research Reveals
that after 48 hours students on average
retain:
10% of what they read
20% of what they hear
30% of what they see
50% of what they see and hear
70% of what they talk over with others
80% of what they use and do in real life
95% of what they teach someone else
Source: Rose, C. and Goll, L. (1992), Accelerate Your Learning: The 6
Action Handbook, Surrey, Unwin Bros Ltd
To stimulate discussion and let you see the real-world
relevance of economics, the problem sets will often feature
video-interviews with leading policymakers (all are
available at www.youtube.com/c/JanLibich)

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In November 2015 a book
based on these interviews
was published. If you are
interested in economic policy,
and would like to work at
places like the RBA, the
Treasury or the ACCC, you
may consider checking it out
(if nothing else, it has many
cartoon jokes about
economics and there are no
equations). It costs around
$48 but if purchased in the
Bundoora campus Coop
bookshop together with the
main textbook, it is only
$10. 8
 Emphasis and Method Contd
Importance of group work
Sitting next to another student in the
lecture
You are encouraged to do the problem
sets in groups of up to three people (can
submit only one PS for the group!)
You will also work in groups in the
tutorials

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What Do We Expect You to Know
for the Exam?
Let me stress that you are NOT expected to
know all the material that is in the textbook!
In most weeks we will only cover some parts
of relevant chapters, so you are only
expected to know the material that will get
covered in the lectures and tutorials.
There will be no surprises on the exams,
the questions will be similar to those on
the problem sets.
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 The Subject
Discussion in pairs (we will have such
discussion in every lecture, and call
them buzz-time):

What is economics all

about?

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 Thinking Like an Economist
This topic is covered in chapter 2, but you do NOT need to
read this chapter, the discussion in the lecture will be sufficient
Models
Why do we make them? Are they ever 100% accurate?
All models are wrong but some are useful (George Box)
It is said that Economics is the only field in which two
people can get a Nobel Prize for saying the opposite thing

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 A Good Economist
is humble and aware of the limitations of what
economics can do
Unlike the one in this joke: A party of economists
was climbing in the Alps. After several hours
they became hopelessly lost. One of them
studied the map for some time, turning it up and
down, sighting on distant landmarks, consulting
his compass, and finally the sun.
Finally he said, ' OK see that big mountain
over there?'
'Yes', answered the others eagerly.
'Well, according to the map, we're standing on
top of it. 13
 More like this saying:
Economics cant make you
a millionaire, and it cant
keep you out of the poor
house, but it can help you
understand how you got
there.
Or perhaps this is also
wrong, Mick Jagger, Tiger
Woods and Arnold
Schwarzenegger studied
economics
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 Thinking Like an Economist
Assumptions
A classic joke: A physicist, a chemist and an
economist are stranded on an island, with nothing
to eat. A can of soup washes ashore. The
physicist says, Lets smash the can open with a
rock. The chemist says, Lets build a fire and
heat the can first. The economist says, Lets
assume that we have a can-opener
What are they? Why do we make them? Lets
make some up
Lets come up with some examples
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 Thinking Like an Economist
The language of mathematics
Why do we use it? How should we approach it?
It helps us to be more precise about things.
It is more common in more advanced subjects in
economics.
A great learning tool: www.mathalicious.com
Diagrams
Why do we make them?
Helps us to visualize relationships between
variables
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Here is a famous example:
 Source: Lisa Simpson from The Simpsons
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 Scarcity
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 want.
What if resources abundant?

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Ten lessons from economics
The textbook mentions 10 lessons
Not an exhaustive or representative list
Just to get you thinking
We will only discuss some of them
Three main categories
How people make decisions
How people interact with each other
Both studied by Microeconomics
The forces and trends that affect how
the economy as a whole works
Studied by Macroeconomics
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Lesson 1: People face trade-offs
Making decisions requires trading off
one goal against another.

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Lesson 1: People face trade-offs
To get one thing, we have to give up
another thing.
leisure time v. study v. work
clothing v. holidays
efficiency v. equity
The textbook argues that: There is no
such thing as a free lunch!
Do you agree?
Is it the same as saying: There is no
such thing as a win-win situation?

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Lesson 2:
The cost of something is
what you give up to get it
Decisions require comparing costs and benefits
of alternatives.
Whether to go to university or
to work?
Whether to go to lectures or sleep in?
The opportunity cost of an item is what you
give up to obtain that item (specifically your
second preferred option).
In net terms, i.e. need to adjust for various
related costs: an example of Rolling Stones
and Justin Timberlake concerts in the problem
set
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 Opportunity Cost Example
Consider the following ranking of your
preferences (with their values to you in
bracket):
1) Study ($40)
2) Work ($30 salary, but need to take a bus
that costs $3)
3) Movie ($20)
What is your opportunity cost of study?
How will your opportunity cost of study
change if the bus ticket you need to pay to
get to work becomes $2 more expensive?
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Lesson 2:
The cost of something is
what you give up to get it
Is there such a thing as a fair wage?
Imagine yourself negotiating a wage
Do people always take the opportunity cost into
account? Lets see
https://www.youtube.com/watch?v=d_XvrIwPfQs

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 What does the cartoon imply about the
elderly mans opportunity cost, compared to
the womans?
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Lesson 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 and benefits at the margin.
Will I buy another car?
Should I sweat on the treadmill
another second/minute? etc

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Lesson 4: People respond to incentives
Marginal changes in costs or benefits motivate
people to respond.
Tutorial assessment in this unit (incentives to make
you work hard)
Your Examples

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 Examples of Wrong Incentives
Lets watch the video The Truth About Real Estate
Agents: Freakonomics Movie at
www.youtube.com/watch?v=aFYlgqv3T-w
http://vitals.nbcnews.com/_news/2011/10/26/8472045
-desperate-to-qualify-for-weight-loss-surgery-some-
pile-on-the-pounds
See also:
http://www.tntmagazine.com/news/weird/video-viral-
clip-shows-russians-trying-to-get-run-over-on-purpose-
for-insurance-scam
Economist Potty Training: Freakonomics Movie at
https://www.youtube.com/watch?v=W2hhIWbz0Ns
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 Lesson 5: Trade can make
everyone better off
People gain from their ability to trade with one
another.
Selling a car
Check out the I, pencil essay:
www.econlib.org/library/Essays/rdPncl1.html
Or The toaster project (building it from
scratch): www.thetoasterproject.org
An interesting demonstration of the benefits
of division of labour, specialisation, and the
gains from trade
Watch:www.ted.com/talks/thomas_thwaites_h
ow_i_built_a_toaster_from_scratch.html 29
30
Here is the toaster (after a
year of the designers work)

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 Lesson 6: Markets are
usually a good way to
organise economic activity
What is a market economy?
decentralised decisions of many firms and
households
What decisions do these make?
Adam Smith made the observation that households
and firms interacting in markets act as if guided by
an invisible hand. What did he mean?
This about the above toaster project (every time
someone under appreciates the benefits of the
markets)
If you (do not) buy a mobile phone, what
information are you sending to the
market/others? 32
Lesson 7: Governments can
sometimes improve (or worsen)
market outcomes
Market failure may be caused by:
an externality, which is the impact of
one person or firms actions on the
wellbeing of a bystander.
Can you see some externality in the
leaves cartoon above?
Give other examples
Government failure
Give examples
Which is more frequent? 33
 Lesson 8: The standard of living
depends on a countrys production
Almost all variations in living standards are
explained by differences in countries
productivity.
Productivity is the amount of goods and
services produced from each hour of a
workers time.
Marxism believed that Machines steal jobs...
What do you think?
Does breaking a window increases
GDP/productivity/wellbeing?
Recommended reading: Frdric Bastiat,
Petition of Candlestick makers, at:
http://bastiat.org/en/petition.html
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If you read it post your comments on LMS
 10 Lessons Differently
For an interpretation of the Ten Lessons by
a stand-up comedian/economist see:
www.youtube.com/watch?v=xPaCbn1N8MU
For a rap version of the Ten Lessons see:
www.educationalrap.com/song/demand-
supply.html

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To stimulate your
deeper thinking (and
have some fun), each
problem set will
feature a cartoon from
Jan Libichs book, but
without the text.
As an optional task,
you will have the
opportunity to come up
with your own text
that relates to the
topic of that week.

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 Summary
When individuals make decisions, they face trade-offs
between alternative goals.
The cost of any action is measured in terms of foregone
opportunities.
Rational people make decisions by comparing marginal
costs and marginal benefits.
People change their behaviour in response to the
incentives they face.
Trade can be mutually beneficial.
Markets are usually a good way of coordinating trade
among people.
Government can potentially improve market outcomes
if there is market failure or if the market outcome is
inequitable.
Productivity is the ultimate source of living standards.
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