Principles of Economics
19
Division of labour
Economic principle
• Utility orientation
• Efficiency versus
effectiveness
Protection of
property rights
Basic questions about economics
> According to the rules of reason, there should be the most favorable relationship between input and
output. To realize maximum
output with available
input factors
Maximum
principle
To realize a specified
output with minimal
input factors
Minimal principle
What is
utility?
20
The economic principle (Minmax principle)
Basic questions about economics
Utility
Quantity
Is there a stable
maximum or can the
overall utility also
decrease?
21
The utility function in economics
Basic questions about economics
What is the utility (in EUR) of a bottle of water (at least) if
we pay 1.20 EUR for it?
Utility
Quantity
How can the utility
be formulated in
general?
What is the problem
with this type of
measurement?
22
How can the utility be expressed?
Basic questions about economics
> Across the economy, the gross domestic product (GDP) reflects the total realized value.
> Therefore, it is also considered a target of economic policy.
>
GDP
The total performance in a country can be described
as: Y = C + I
Consumption =
production for
private consumers
Investment =
production for other
companies
23
The utility in the economy
Basic questions about economics
Why is this
being sought?
Growth means
that Y gets
bigger.
Y = C + I
24
Excursus – Why do we need growth?
Basic questions about economics
The utility of a good can work:
positive
inside
negative
outside
External
effects affect
the
environment
of the user
of a good.
25
Externalities
Basic questions about economics
> According to the rules of reason, there should be the most favorable relationship between input and
output. To realize maximum
output with available
input factors
Maximum
principle
To realize a specified
output with minimal
input factors
Minimal principle
What is
utility?
26
The economic principle (Minmax principle)
ü
1. The assembly of a car should require as few working hours
as possible.
2. As much wheat as possible should be obtained from 1
hectare of arable land.
3. The planned turnover of a company of € 10 million is to be
achieved with as few sales employees as possible.
4. A start-up for drinking chocolates wants to get as "far" as
possible with the few existing employees and a small storage
space.
What are the principles of the examples?
What are input and output in the examples?
How could the necessary goals be achieved by way of example?
Basic questions about economics
Mini-Cases Economic Principle
27
Efficiency Effectiveness
„do the things
right“
"Short-term"
characteristics
of the principle
of rationality
„do the right
thing“
"Long-term"
characteristics
of the principle
of rationality
28
Efficiency vs. Effectiveness
Basic questions about economics
Basic questions about economics
Principles of Economics
29
Division of labour
Economic principle
• Utility orientation
• Efficiency versus
effectiveness
Protection of
property rights
30
The principle of the division of labour
Basic questions about economics
Division of labour
Division of an overall task
to several active persons
Specialization
Concentration of
employees on individual
activities to exploit
economies of scale
Coordination
Coordination of the
divided work
Forms of
coordination
Directive
Self
coordinati
on
Programs
Plans
(Internal)
Markets
Culture
How do these
mechanisms
work for huntergatherers?
31
Coordination
Basic questions about economics
Basic questions about economics
Programs
•Predefined sequence of steps
• Depends on environmental factors
(Internal) Markets
•Price signals regulate supply and demand
•Everyone adapts their production and
consumption
Self-Coordination
• Joint and equal coordination
• No anarchy!
Culture
• Common norms and values lead to
behavioural control
Directive
•Supervisor gives instructions and thus takes
over the coordination
Plans
•Plans as a temporary definition of inputs and
outputs
• Reconciliation is based on the planned
values
•Autonomous implementation of the plans
32
Coordination Forms
Basic questions about economics
Principles of Economics
33
Division of labour
Economic principle
• Utility orientation
• Efficiency versus
effectiveness
Protection of
property rights
Things have no
value in
themselves, the
decisive factor is
the right to use
objects.
Use the
good
Earn
income
from it
Change
it
Transfer
it
34
The Principle of Ownership – Property-rights
Basic questions about economics
Principle of Property
Rights
Protection of rights
Task of the Community
or the State
Prerequisite for every
investment
Availability of rights
Rights can be
transferred by a
contract
Rights can be restricted
by the state
In principle, all rights to
objects belong to the
owner.
35
Property rights – Quintessences
Basic questions about economics
What kind of
science are
economic
sciences?
On what
principles are
economics
based?
Who are the
acting units?
What is their
relationship with
each other?
Why do these
units trade?
Where do these
units "trade"?
Why isn't it just
"traded"?
Basic questions about economics:
Basic questions about economics
36
In economics, the figure of "Homo oeconomicus" is an essential
basis of all theories. It is representative of all people and
... tries to maximize its benefits
... applies the economic principle to its actions
... always acts rationally
37
Acting units of economics
Basic questions about economics
https://www.lustiges-taschenbuch.de/entenhausen/charaktere/die-ducks/dagobert-duck (02.10.19)
We do not expect our meals from the goodwill of the butcher, brewer or
baker, but from their consideration of their own interest.
We do not turn to their love of humanity, but to their self-love and never
speak of our own needs, but of their advantages.
From "Prosperity of Nations" by Adam Smith
38
How the individual “utitlity" works
Basic questions about economics
The "homo oeconomicus" is to be viewed
critically, since many assumptions are not
to be found in reality:
Lack of
rationality
Mis- judgements
Lack of
knowledge
Imperfect
information
39
Limits of "Homo oeconomicus"
Basic questions about economics
What kind of
science are
economic
sciences?
On what
principles are
economics
based?
Who are the
acting units?
What is their
relationship with
each other?
Why do these
units trade?
Where do these
units "trade"?
Why isn't it just
"traded"?
Basic questions about economics:
Basic questions about economics
40
The acting persons do not act in a vacuum, but meet other utility maximizers. This creates
the following relationships between the units:
– Overarching relationship
(Principal and Agent)
– Equal / opponent ratio
(Prisoner's dilemma)
41
Acting units in economics
Basic questions about economics
Basic questions about economics
From principals and agents...
WiSe 18/19 University of Applied Sciences Augsburg, Prof. Dr. Stephan Zimmermann 42
Confess Keep quiet
Confess
Keep quiet
20
20
30
0
0
30
5
5
Alternatives A
Alternatives B
Case:
Two criminals are caught and interrogated separately.
Together they committed a serious crime (bank
robbery) and a minor crime (car theft). The serious
crime is not immediately detectable; the smaller one is
detectable.
• If one confesses, he/she is released as a key
witness, the other gets the full punishment.
• If both confess, they will receive a discount on the
penalty for their cooperation.
• If both remain silent, they are punished for the
minor crime.
43
How does the
case end?
Prisoner's dilemma
Basic questions about economics
What kind of
science are
economic
sciences?
On what
principles are
economics
based?
Who are the
acting units?
What is their
relationship with
each other?
Why do these
units trade?
Where do these
units "trade"?
Why isn't it just
"traded"?
Basic questions about economics:
Basic questions about economics
44
Man's drive is to
meet his needs.
Needs correspond
to unfulfilled
wishes. They are to
be distinguished
into:
• Collective needs
• Individual needs
45
Why do these units trade?
Basic questions about economics
>Collective needs
– Infrastructure
• Roads
• Telephone
• Electricity
– Security
• Internal
• External
– Health
• Disease prevention
– Education
Collective and individual needs
46
>Individual needs
– Food
– Apartment
– Clothing
– Cultural / sports events
– Travel
– Jewellery
– ...
–
Basic questions about economics
Luxury
needs
Existential needs
Basic needs Food, clothing, shelter
Participation in cultural life:
travel, culture, ...
Jewelry, luxury cars,...
47
Needs can also be categorized according to urgency.
(Pyramid of needs simplified/based to Maslow)
Basic questions about economics
Tangible
goods
Services Rights of
use
48
Goods – Definition: Goods are a means of satisfying needs
Basic questions about economics
Types of goods > What is the difference between goods and
services?
Goods
Physical / Material
Storable
Services
Always immaterial
Never storable
Arises only through the
cooperation of the customer
49
Basic questions about economics
50
Classification of goods
Basic questions about economics
(based on Thommen 2017)
What kind of
science are
economic
sciences?
On what
principles are
economics
based?
Who are the
acting units?
What is their
relationship with
each other?
Why do these
units trade?
Where do these
units "trade"?
Why isn't it just
"traded"?
Basic questions about economics:
Basic questions about economics
51
• Imaginable space in which
supply and demand meet
• If supply and demand
match, there is a market
balance
• Ideal image "Perfect
Market"
Definition
• Perfection
• Competition
• Traded goods
• Phases
Criteria for
distinguishing
markets
52
Goods Market - Term
Basic questions about economics
... is a theoretical model for deriving economic relationships. Assumptions
are:
> Many small suppliers, many small buyers (no market power)
> Same good
> Transparency
> Mobility
> ...
53
Perfect market ...
Basic questions about economics
Monopoly •On the supplier or demand side, only one party is
represented.
•Monopoly profits
Oligopoly •On the supplier or demand side,
few parties are represented.
•Risk of collusion
Polypole •On the supplier or
demand side, many
parties are represented.
•Intense competition can you do  a summerise