Principles of economics
Tags: economics, behavior, humans
Published: 2021-06-09 13:10:03

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title: Principles of economics
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tags: economics, behavior, humans
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( This is going to be a placeholder for things I learn in the context of 'Principles of economics' , updated almost daily, until I complete the course)

What it takes to think like an economist?

The fundamental idea in economics is scarcity.
Any entity - individual, corporation, government - has access to scarce resources and they need to decide how and where to allocate them.

People make choices with scarce resources, and they interact with other people ( in market ) when they make these choices.

Choices, Scarcity, Interaction.

What choices do people make with the scarce resource and how they interact with the world ? - This is the mantra of economics.

Suppose you are a developer - you have a limited resource - time / money. How do you allocate that and where do you allocate that ?

Suppose you are a corporation - you have a limited resource - time / money / people working for you. How do you allocate these and where do you allocate these and when do you allocate these ?

Suppose you are a government - you have limited resources - time, money, natural resources, people. How do you allocate these and where do you allocate these and when do you allocate these ?

When we examine the behavior of governments, what we are dealing with is: macroeconomics.
When we deal with individual firms / individuals - what we are dealing with is: microeconomics.

And there are opportunity costs - it is the cost of what you give up, if you pick up something among various choices. For example, if you can do some coding which will take 1 hour. And you can also watch Netflix webseries which will take 1 hour. You have chosen to watch NetFlix, then you have paid opportunity cost of not coding 1 hour. You could as well have done coding and completed some task, for example. 

What's happening in the world economy ?
What's happening in economy in your country ?

Did you know that downtime of Fastly affects economy in a way ? Fastly outage can affect sales of Shopify or any other ecommerce business based on Fastly.

In a way, all things are related.



##### Production Possibilities Curve

Production Possibilities Curve is a depiction of increasing opportunity costs for goods/products from a sector, when workers from that sector move to other sector, producing more goods/products of the other sector.

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/e5dyv3mfontu4cz2mnfc.png)
courtesy: Stanford University

For example, if we consider 2 sectors - movies, computers. We initially have skilled workers in computer sector. When we move these workers gradually to movies sector, slowly there is a decline in the output of no. of computers being produced. So, the involvement of workers in movies sector is an opportunity cost in the computers sector. More of something leads to less of something else.

And the opportunity costs are increasing , in the sense, that the rate with which the productivity reduces with computer, with the increase in productivity of movies. The curve represents the production possibilities of goods/services representing these sectors. 


 
![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/o52ztg3pmlnxti3rtao1.png)
courtesy: Stanford University

###### Possibilities and Impossibilities - 
The curve also represents the possibilities and impossibilities, for example, we cannot produce 30000 computers and simultaneously produce 1000 movies. The curve and the area under the curve represent the possibilities of production.

###### Efficient/ Inefficient - 
The curve also allows to understand efficient production / inefficient production. If production of goods/services in both the sectors happen according to the boundaries of the curve, then, there's efficient productivity. But, if the production of the products lies within the curve, then there's inefficient productivity. For example, there's an efficient possibility of producing 5000 computers and 200 movies. But if the number of movies  produced are less than 200, for example, 150, then it means that there's inefficient productivity of the movies. 



###### Evolution of PPC - 

As the economy evolves, the old PPC is replaced with new PPC, when the possible no. of goods/services produced increases, which lead to economic growth. When we produce more, we earn more, the standard of living improves etc. 

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/b02p63oyk3paoch5np7z.png)
courtesy: Stanford University

###### Investment vs Consumption

Products such as computers lead to investment, you can use them to produce something, in the future.
Products such as movies are consumption products, because you can just consume them.

###### Real Gross Domestic Product 

A given country consists of producing various goods/services across sectors. And there is a quantifiable number which represents the total no. of goods/services produced by the country, which represents the economic state of the country, which is GDP. The real GDP is GDP, where inflation is not accounted for. 
So, over the years, the GDP as a number can be plotted against the year. And we can see that GDP curve increasing to top right. 
Sometimes , there might be dips in the GDP curve, which indicates the dip in productivity, which could be caused, by various factors, for example - recession.

###### No. of employed workers curve

And also, there is another curve which represents the total no. of employed workers in an economy, which can be plotted against the year. So, more number of workers, more productivity.
Sometimes, again, there could be dips in no. of employed workers, due to recession. (covid pandemic - black swan).

###### Real GDP per worker curve

Since we have GDP and we also have no. of employed workers per year, so, we could plot another curve, which would represent real GDP , per worker.

(Opportunity costs in cases of good/services with concentration of workers in sectors , mean that, when workers embrace the opportunity in one sector (for eg: movies), they simultaneously embrace the opportunity cost in another sector (for eg: computers), that means same no. of workers, same set of opportunities, but, when workers move across sectors, this incurs opportunity cost of productivity in one sector)

###### GDP studies across countries

There could also be an evaluation of GDP growth across countries, there could be dips/ peaks / rise - so, what were the factors which led to these characteristics of the curve - that could be studied in context of economics.

###### Observing and Explaining the Economy

There are lots of datasets related to economy. One of them is income distribution.
The question is:

In a country like United States, How much do the top 10% earn ( on an average ) and bottom 10% earn ( on an average ) and how has this distribution evolved over the years ?

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/a2khpqyt7tfy8h8rtqln.png)

Sometimes, change in data representation helps. For example, absolute values might not help, but, a slighly diff way of looking at things, for example: percentage change in income.

What about percentage change ?

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/dic9t15z0oiizwi2bhyl.png)

In different time periods, different growth rates are there for both the groups. So, specifically, what happened in the 80s and 90s, what led to the steep growth of top 10% ? What were the economic policies which led to that or , what opportunities opened up during that time ?

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/31e5b2bv2epgywc71mq5.png)

There's an economic theory that, during the same time period, relative returns from higher education, meant that , higher the education/ skills, more returns. So, that's one possibility to see the widening of income distribution around 80s and 90s. 


####### Positive economics and Normative economics

Positive economics deals with explaining why something occurs, using economic theory.

Normative economics deals with suggestions/ recommendations of economic policies.

###### Supply and demand model

This is one of the most important and basic models in economics.

It can explain the chaotic nature of markets like auction markets.

You can have any kind of markets. Market of goods/services. For example, bike market, labour market, stock market, ( we can also treat internet as a marketplace, where the goods can be data centers provided by major cloud providers / services provided by diff software companies and many other entities )

Demand is relationship between price of a good and the quantity being demanded. Economists like to understand, how the price of a good affects its demand. Higher the price probably lowers the demand. It describes behaviors of consumers.

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/wyx5bi5s30xjiuhriouz.png)


####### Movement along the Demand Curve

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/7ds3noppxyuxpwfj8fhx.png)

This is where we see the impact of prices on the demand. So, as price increases, what happens to demand and if price decreases, what happens to demand. You go up the curve, when the demand is less and price is high.


###### Shift in demand curve

This can happen, where prices stay the same, but demand either increases/ decreases depending on other factors. For example, price of roller blades might decreases drastically, people might demand fewer bicycles because of that. OR, depending on the weather or environment concerns, the demand for bicycles might go up , so there's shift in the demand curve.

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/6vgrgr3ghz1v4em9a5dv.png)
 
###### Supply

Supply is a relationship between price of a good and quantity supplied.
We also have supply curve, which is upward sloping. 
It describes behaviors of firms.

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/9yfoln5aackjvn22zi7o.png)
 
###### Market equilibrium

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/hrm71u3rviipx6mh5uxt.png) 

This is where quantity being demanded equals quantity being supplied. And the price at which this occurs, is the equilibrium price. And the quantity is equilibrium quantity.

What if there's an increase in demand ?

That means, from the equilibrium, we want to shift and create a new demand curve, hitting the supply curve at some intersection point, which is the new equilibrium, new price which is increased and quantity also increased. So, basically prices have increased, as a result of demand increase, to maintain the new equilibrium.

![image](https://dev-to-uploads.s3.amazonaws.com/uploads/articles/0ekc8p0ummvww604ggl1.png)
 
###### Elasticity





#### Resources
1. [Awesome Economics collection on Github](https://github.com/antontarasenko/awesome-economics)


So, what do economists do ?
They look at data and try to interpret data.
Once data is there, they plot the data, to explain.

Causation: one event brings about another event
Correlation: one event closely occur alongside another event, but does not necessarily imply.

Learning continues....