Lecture 1 Microeconomics

Transcription

1 Lecture 1 Microeconomics Business 5017 Managerial Economics Kam Yu Fall 2013

2 Outline 1 Some Historical Facts 2 Microeconomics The Market Economy The Economist 3 Economic Institutions of Capitalism Game Theory Property Rights Trade Property Rights Revisited 4 Organizational Economics and Management Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

3 Ancient History Some Historical Facts 12 Income per person (1800 = 1) Malthusian Trap Great Divergence Industrial Revolution 0 BC AD 2000 Figure 1.1 World economic history in one picture. Incomes rose sharply in many countries after 1800 but declined in others. Source: Gregory Clark (2007) A Farewell to Alms: A Brief Economic History of the World, Princeton University typical Press. English worker of 1800, even though the English table by then included such exotics as tea, pepper, and sugar. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

4 Some Historical Facts Recent History (Canada) Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

5 Some Historical Facts A Tale of Two Tribes Wealth is not just measured in terms of dollar per person, but also in product variety Tribe Income Per Person Stock Keeping Unit Yanomamö $ to 10,000 New Yorker $36,000 1 to 100 million Source: Beinhocker (2006, 8 9) Two prominent features of a modern economy: 1 Division of labour 2 The use of fossil fuel to underpin all economic activities Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

6 Microeconomics How Economists See the World The Market Economy Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

7 Microeconomics The Market Economy Ingredients of a Market Buyers Sellers Voluntary exchanges Terms and conditions of the contract Outcomes: market price and quantity of the exchanges Entrepreneurs: enterprising persons who discover and explore profitable opportunities and organize and manage production ventures Assumption: all parties behave in their self interests. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

8 Microeconomics The Market Economy The Economic Problem Two facts: 1 Resources such as capital, labour, energy, land, and talent are in limit supply (scarcity) 2 People always want more than what they have Problems to be resolved: 1 What will be produced? 2 How will things be produced? 3 Who get what? 4 Who make these decisions? Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

9 Microeconomics The Economist What Do Economists Do? Social scientist study and explain how society resolve the economic problem by looking at people s incentives and behaviours under various constraints. Policy analyst Design and analysis of how government policies and regulations to achieve efficiency. Business consultant and advisor Translate an organization s problem into an economic model, find the best solution, and translate the results back into business actions and strategies. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

10 Microeconomics The Economist Tools that Economists Use Economic theory or models A model is an abstract representation of reality. Examples are a highway map a electrical circuit diagram an organization chart a formal mathematical system a prototype Empirical analysis collecting raw data, data construction, and statistical analysis. Forecasting Combining theoretical and empirical analysis to predict the future. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

11 Economic Institutions of Capitalism Game Theory What is a Game? Game theory is an important tool in the study of social science. Unlike air molecules, human behaviours may not be universal or time consistent. Players (economic agents) engage in strategic actions, depending on the rules of the game (institutional constraints) and actions of other players. The starting point is the so-called Prisoners Dilemma. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

12 Economic Institutions of Capitalism Game Theory Prisoners Dilemma Two criminals are apprehended by the police and interrogated separately. If both remain silent there is only enough evidence to convict each for one years in prison. If Criminal 1 confesses and testifies against Criminal 2, who remains silent, Criminal 1 is free and Criminal 2 gets three years. Vice versa for Criminal 2 against Criminal 1. If both confess and testify each other, each gets two years. The situation is represented by a payoff matrix. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

13 Economic Institutions of Capitalism Game Theory Payoff Matrix of the Prisoners Dilemma Criminal 1 Criminal 2 Confess Don t Confess Confess (2, 2) (0, 3) Don t Confess (3, 0) (1, 1) What will Criminal 1 do? If Criminal 2 confesses, 1 is better off by confessing. If Criminal 2 doesn t confess, 1 is also better off by confessing. Same for Criminal 2. Both end up confessing, which is called the dominant strategies. Both, however, can be better off by not confessing. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

14 Economic Institutions of Capitalism Property Rights Private Property Rights A fundamental difference between capitalism and communism is the social construct called private property rights. In general, there are four types of property rights: 1 Ownership rights 2 Usage rights 3 Income rights 4 Transfer rights Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

15 Economic Institutions of Capitalism Property Rights Private Property Rights A fundamental difference between capitalism and communism is the social construct called private property rights. In general, there are four types of property rights: 1 Ownership rights 2 Usage rights 3 Income rights 4 Transfer rights An economic transaction is an exchange of one or more of the above property rights between agents. A market is a conceptual domain where agents carry out economic transactions. Government regulations put restrictions on property rights and the conditions of their exchanges. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

16 Economic Institutions of Capitalism Property Rights Emergence of Private Property Rights Why do private property rights exist? Take the Fred and Harry story from the textbook in the framework of game theory: Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

17 Economic Institutions of Capitalism Property Rights Fred and Harry are Prisoners Observations from Table 1.1: The payoff matrix has a similar structure as in the prisoners dilemma. Therefore the dominant strategy is for both of them violating each other s rights. But respecting each other s rights is a socially efficient and therefore desirable outcome. A solution is for them to sign a social contract to respect other s property rights. Enforcement of the contract is costly (e.g. policing). It is part of commonly called transaction cost. Throughout history, economic institutions has evolved to minimize transaction costs. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

18 Economic Institutions of Capitalism Trade Why People and Nations Trade? On the consumption side: Marginal utility: additional satisfaction from consuming the last unit of something Fred s marginal utility of papaya (15) is higher than that of coconut (10). This implies that he will be better off if he can trade a coconut for a papaya. Harry s marginal utility of coconut (90) is higher than that of papaya (30). He will be better off by trading a papaya for a coconut. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

19 Economic Institutions of Capitalism Trade The Ricardian Theory of Comparative Advantage On the production side: Labour productivity: Fred can produce 4 coconuts or 8 papayas per hour. Harry can produce 6 coconuts or 24 papayas per hour. Harry has absolute advantage in production of both goods. Relative productivity: instead of producing one papaya, Fred can produce 1/2 coconut, while Harry can produce 1/4 coconut. Fred has comparative advantage in coconut production. Fred should specializes in coconut production, Harry should specialize in papaya production. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

20 Economic Institutions of Capitalism Property Rights Revisited Communal Property Rights Back to the idea of property rights. Why is it important to be private? Most goods are rivalry and exclusive in nature: If Fred consumer a coconut, Harry cannot have the same coconut. What if the good in question belongs to the whole community, e.g., cattle grazing on the open meadows. The grass my herd eats cannot be eaten by your herd: rivalry. No problem arises if 1 there are enough meadows for all cows, 2 I care about your cows as much as mine. But what if grasslands are in limited supply (scarcity) and everyone only cares about his/her cattle? The meadows will be overgrazed: Tragedy of the commons. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

21 Economic Institutions of Capitalism Property Rights Revisited Back to Private Property Rights Other examples: fishing in international water, traffic jam, pollution, green house gases emission, space junk from obsolete satellites. Any solution? 1 National or international regulations 2 Cap and trade 3 Taxation 4 Turn the common property into private property 5 Informal institutions such as social sanctions Each solution gives rise to some forms of transaction costs. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

22 Economic Institutions of Capitalism Keep Out of My Property... Property Rights Revisited Kam Yu (LU) Lecture 1 Microeconomics Fall / 22

23 Organizational Economics and Management Transaction Cost Economics Transaction costs are information costs. Principal-Agent Problem The objectives of the employees may not align with the objectives of the employers. The form of labour contracts depends on how easy it is for the the employers to monitor the efforts of the employees. The goal is to minimize monitoring cost and provide incentives for the employees to work towards a firm s objectives. Examples: pay by the hours worked, pay by physical outputs, commission, efficient wage, bonus, stock options, etc. Collective bargaining adds another layer of complexity. Kam Yu (LU) Lecture 1 Microeconomics Fall / 22