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Table of Contents

Class-01 (28-09-22): Ten Principles of Economics............................................................. 1

The Ten Principles of Economics .................................................................................. 1
Principle 1: People Face Trade-Offs .......................................................................... 1
Principle 2: The Cost of Something Is What You Give Up to Get It ............................ 2
Principle 3: Rational People Think at the Margin ...................................................... 2
Principle 4: People Respond to Incentives ................................................................ 3
Principle 5: Trade Can Make Everyone Better Off..................................................... 3

Class-02 (12-10-22): Ten Principles of Economics............................................................. 4

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity .......... 4
Principle 7: Governments Can Sometimes Improve Market Outcomes .................... 5
Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods
and Services.............................................................................................................. 5
Principle 9: Prices Rise When the Government Prints Too Much Money ................. 6
Principle 10: Society Faces a Short-Run Trade-Off between Inflation and
Unemployment......................................................................................................... 6

Class-03 (16-10-22): Thinking Like an Economist .............................................................. 7

The Economist as Scientist ........................................................................................... 7
Effect of the research on Bangladesh ....................................................................... 7
The Role of Assumptions .............................................................................................. 8
Economic Models ......................................................................................................... 8
The Circular-Flow Diagram ....................................................................................... 8
The Production Possibilities Frontier ...................................................................... 10
The Economist as Policy Adviser ................................................................................. 11

Class-04 (19-10-22): Interdependence and the Gains from Trade .................................. 12

Use of PPF in the real world ....................................................................................... 12
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Class-05 (23-10-22): Demand and Supply ....................................................................... 15
Demand ...................................................................................................................... 15
Supply......................................................................................................................... 16
Equilibrium ................................................................................................................. 18
Shifts in the Demand Curve ........................................................................................ 20
Customer’s Income ................................................................................................. 20
Price of Related Goods ........................................................................................... 21
Customer’s Taste and Preferences ......................................................................... 21
Expectations: .......................................................................................................... 21
Number of Buyers .................................................................................................. 22
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Class-01 (28-09-22): Ten Principles of Economics

• Economics: the study of how society manages its scarce resources.

• Scarcity: the limited nature of society’s resources.
• Economics literally means Household Management, i.e., providing the needs and
wants for the family using resources. Needs represent necessity and wants
represent desire. There is a fine line between needs and wants which may
sometimes become blurry.
Needs are always evolving, faster than we can create resources. Since needs and
wants are unlimited and resources are limited and scarce, providing the basic needs
become difficult due to such evolving nature of human needs.
• Money is not the capital in economics. In economics, money is considered as a tool
for acquiring resources, and not as a resource itself. Resources are limited but these
can be developed to find new and efficient resources to adjust to increasing
demands. Resources are used to generate benefits.
• Macro-economics is a holistic approach whereas micro-economics study individuals
(consumer, producer, government etc.). Study of micro-economics helps in decision
making.

The Ten Principles of Economics

Principle 1: People Face Trade-Offs

• Both consumers and producers face tradeoffs. Tradeoff refers to choosing between
two options.
• [book] The society faces a tradeoff between efficiency and equality in a lot of cases.
Efficiency means that society is getting the maximum benefits from its scarce
resources. Equality means that those benefits are distributed uniformly among
society’s members. In other words, efficiency refers to the size of the economic pie,
and equality refers to how the pie is divided into individual slices. When government
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policies are designed, these two goals often conflict (In most cases Sir said all cases,
efficiency and equality has inverse relationship).
• Inverse relationship of efficiency and equality: For example, policies aimed at
improving the equality of the population. The government tries to help the poor by
cheap rationing or other welfare system. To sustain that effort, the government has
to ask the rich to contribute more to support it. Although it can achieve greater
equality, but the efficiency of reduces as the rich has to pay more in taxes and the
poor can get benefits in cheap. So, the population as a whole puts in less efforts. In
other words, when the government tries to cut the economic pie into more equal
slices, the pie shrinks.
• One classic trade-off is between “guns and butter.” Guns refer to national defense
and butter to consumer goods.
• People are likely to make good decisions only if they understand the options
available to them. Our study of economics, therefore, starts by acknowledging life’s
trade-offs.

Principle 2: The Cost of Something Is What You Give Up to Get It

• Price and cost are not the same thing.
• Opportunity cost is the only thing that matters. Opportunity cost is defined as
whatever must be given up to obtain some item. For example, College athletes who
can earn millions dropping out of school and playing professional sports understand
their opportunity cost of attending college is very high. Not surprisingly, they often
decide that the benefit of a college education is not worth the cost.
• Example: Quiz tomorrow, HotD new episode tonight. Do I study or do I watch the
episode?

Principle 3: Rational People Think at the Margin

• Rational people are defined as people who systematically and purposefully do the
best they can to achieve their objectives. They consider logics while taking decisions.
• Marginal change a small incremental adjustment to a plan of action. MB = Margin of
Benefit. MC = Margin of Cost. Rational people make decisions by comparing marginal
benefits and marginal costs.
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• Consider if MB = MC or not during decision making. For example, airplane company
with 10 tickets remaining unsold 3 hours before a flight, each with a price of Tk.
4000. Do I lose Tk. 40,000 in revenue? Do I sell the tickets for 50% discount and
make or lose Tk. 20,000? Also have to consider the cost of serving each additional
passenger (the variable costs). A rational decision maker takes an action if and only if
the action’s marginal benefit exceeds its marginal cost. (Sir said if MB = MC)

Principle 4: People Respond to Incentives

• Incentive is something that induces a person to act, such as the prospect of a
punishment or reward. Incentive decreases opportunity cost and as a result makes
tradeoffs decision easier.
• [book] Many policies change the costs or benefits that people face and, as a result,
alter their behavior. A tax on gasoline, for instance, encourages people to drive
smaller, more fuel-efficient cars. That is one reason people drive smaller cars in
Europe, where gasoline taxes are high, than in the United States, where gasoline
taxes are low. A higher gasoline tax also encourages people to carpool, take public
transportation, live closer to where they work, or switch to hybrid or electric cars.
Also see, the seat belt law.

Principle 5: Trade Can Make Everyone Better Off

• When person A has abundance of something that B desires and When person B has
abundance of something that A desires, trade takes place. We trade only when it
benefits us.
• Without trading, everyone would have to account for all their needs. For example, a
teacher would have to grow their own vegetables. This could result in a decrease in
efforts in his actual job (teaching) and his yield of vegetables will not be as high as a
professional farmer. As such, efficiency also reduces.
• [book] Consider how trade affects your family. When a member of your family looks
for a job, she competes against members of other families who are looking for jobs.
Families also compete against one another when they go shopping because each
family wants to buy the best goods at the lowest prices. In a sense, each family in an
economy competes with all other families. Despite this competition, your family
would not be better off isolating itself from all other families. If it did, your family
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would need to grow its own food, sew its own clothes, and build its own home.
Clearly, your family gains much from being able to trade with others. Trade allows
each person to specialize in the activities she does best, whether it is farming,
sewing, or home building. By trading with others, people can buy a greater variety of
goods and services at lower cost.

Class-02 (12-10-22): Ten Principles of Economics

Principle 6: Markets Are Usually a Good Way to Organize Economic Activity

• Traditionally, markets are defined as the places where customers buy things and
producers sell things. In economics, market is a mechanism/system that enables
people to trade. People need information to trade and come to a decision on how to
make the trade. So, a mechanism called market is created.
• Economic Activity: Making some decisions based on which we trade. The household
takes decisions like What to buy or Who to work for. Whereas the producers take
decisions like What to produce or Who to hire.
• [book] Market economy: An economy that allocates resources through the
decentralized decisions of many firms and households as they interact in markets for
goods and services.
• Organize Economic Activity:
Core questions (three): Supplementary Questions (two):
What to produce? How to provide for the growth of
How to produce? the system?

For whom to produce? How to ration a given quantity of a

commodity over time?
• How to produce? For example, pick between use of technology or use of manpower
for production. A nation with huge and skilled manpower may choose to input 80%
as manpower and the rest as technology. Whereas an advanced nation may choose
to input 70% technology and the rest 30% as manpower to complete the production.
• For whom to produce? Produce for those who has the need and has the willingness
and the ability to pay for it.
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• How to provide for the growth of the system? There has to be an inherent system
that accommodates the growth. The growth of the system has allowed the evolution
of trade from simple exchange or barter trade to paper money. Growth and system
development of the market facilitates trade.
• How to ration a given quantity of a commodity over time? Decide on which
mechanism to go through to ensure limited commodities are rationed but not force
someone to do it. These rationings are determined by the market itself - No one else
should intervene. For example: use of oil or gas and other natural resources. Since
these are limited, it will run out one day.

Principle 7: Governments Can Sometimes Improve Market Outcomes

• Sometimes market failure /inefficiency occurs and in such cases the government
MAY bring better outcomes by intervening in the market. We cannot say the same
intervention should be repeated for similar problems. Rather the interventions
should vary based on the country, culture, market forces and other factors.
• [book] Property rights: The ability of an individual to own and exercise control over
scarce resources.
• Market Failure: A situation in which a market left on its own fails to allocate
resources efficiently
• Externality: the impact of one person’s actions on the well-being of a bystander
• Market Power: The ability of a single economic actor (or small group of actors) to
have a substantial influence on market prices

Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce

Goods and Services
• Surplus of goods and services allows a country to trade. The more a country
produces goods and services, the more it can trade. Resulting in an increased
standard of living.
• Mean/Median income is not the standard of living of a country.
• [book] Productivity: The amount of goods and services produced by each unit of
labor input. Nations with higher productivity enjoy a higher standard of living.
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Similarly, the growth rate of a nation’s productivity determines the growth rate of its
average income.

Principle 9: Prices Rise When the Government Prints Too Much Money
• Money is an abstract. The total amount of money owned by population is not in
circulation. Only a small portion of the total money is in circulation and the rest are
“creations” of the banking system. Less cash in circulation is actually better for the
economy. Because when you have more cash, you tend to spend more.
• [book] Inflation: an increase in the overall level of prices in the economy
• When a government can't pay back loans, it prints money. More money in
circulation results in more spending. Also, it sends a signal to market that the govt.
has more money, resulting in devalued currency. This increases loan repayment fee
[since most loans are based on foreign currency (USD) and devaluation of a currency
(BDT) means more money (BDT) needs to be repaid now for the same amount (USD)
in the past] and govt start printing more money. Resulting in more devaluation and
the cycle continues.

Principle 10: Society Faces a Short-Run Trade-Off between Inflation and

Unemployment
• While an increase in the quantity of money primarily raises prices in the long run,
the short-run story is more complex.
• Increasing amount of money results in more spending and more demand for goods
and services. Higher demand encourages firms to raise prices. However, it also
encourages the firms to higher more workers in order to increase the production
levels. More hiring means the unemployment rate reduces due to increase in
inflation. This simply means that, over a period of a year or two, many economic
policies push inflation and unemployment in opposite directions.
• [book] This short-run trade-off plays a key role in the analysis of the business cycle—
the irregular and largely unpredictable fluctuations in economic activity, as
measured by the production of goods and services or the number of people
employed.
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• [book] By changing the amount that the government spends, the amount it taxes,
and the amount of money it prints, policymakers can influence the overall demand
for goods and services. Changes in demand in turn influence the combination of
inflation and unemployment that the economy experiences in the short run.

Class-03 (16-10-22): Thinking Like an Economist

The Economist as Scientist

• Economics is considered as Social Science.
• Economics uses scientific models.
• Economists work similar to scientists. They: Use the Scientific Method, Make
Assumptions and Develop Models.
• Scientists develop theories by observations (examining hypotheses). Observations
lead to theory. Then the theory needs to be proved thorough experiments and
observations. Economists study the society (actions & interactions made by people),
with these observations, they provide theories. It is very hard and impractical to
experiment in economics. It is better to observe past data. So, economics is
considered as social sciences.
• The 2022 Nobel Prize in Economic Sciences has been awarded to former Fed Chair
Ben Bernanke of the Brookings Institution, Douglas Diamond at Chicago and Philip
Dybvig at Washington University in St. Louis “for their research on banks and
financial crises”. Summary on the research here.

Effect of the research on Bangladesh

(Taken from an article by Asjadul Kibria in The Financial Express)

For developing countries like Bangladesh, this year's Nobel in economics bears some
significance. A series of scams and irregularities hit the country's overall banking
sector in the last decade making the sector vulnerable. Now, default or non-
performing loans (NPL) are increasing. The ratio of gross NPL stood at 8.96 per cent
at the end of last fiscal year (FY22) against 8.18 per cent at the end of FY21.
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As a matter of fact, there has been a longstanding vulnerability in the banking sector
of Bangladesh. Low asset quality coupled with low levels of capital, and weak
governance hamper productive lending and create stability risks.
The World Bank, in its latest country economic memorandum on Bangladesh, titled
Change of Fabric, also said: "Most banks are controlled by owners of large business
groups and politicians, and are heavily engaged in related-party lending, diverting
scarce financial resources from the most productive use. Strong presence of the
state in the financial sector, both through the ownership of underperforming state-
owned banks and the interventions such as interest-rate caps, further contributes to
crowding out of scarce resources from the private sector."
It also found the current regulatory and supervisory framework for banking sector
weak and required to be aligned with international good practice so that the existing
vulnerabilities could be addressed. Thus, the message of this year's Nobel prize in
economics needs to be taken seriously, especially by the policymakers in
Bangladesh.

The Role of Assumptions

• We need assumptions everywhere in economics.
• Assumptions can simplify the complex world and make it easier to understand. •In
most cases, we will assume an ideal scenario - An ideal market with very high
competition.
• Set Par: If everything else remains the same.
• Assumptions make models simplistics

Economic Models
The Circular-Flow Diagram
• It is a visual model of the economy that shows how dollars flow through markets
among households and firms
• The model assumes that
o There is no other entity other than firms and household
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o Households come to market to trade

• [book] In this model, the economy is simplified to include only two types of decision
makers—firms and households. Firms produce goods and services using inputs, such
as labor, land, and capital (buildings and machines). These inputs are called the
factors of production. Households own the factors of production and consume all
the goods and services that the firms produce.
• [book] Let’s take a tour of the circular flow by following a dollar bill as it makes its
way from person to person through the economy. Imagine that the dollar begins at a
household—say, in your wallet. If you want a cup of coffee, you take the dollar
(along with a few of its brothers and sisters) to the market for coffee, which is one of
the many markets for goods and services. When you buy your favorite drink at your
local Starbucks, the dollar moves into the shop’s cash register, becoming revenue for
the firm. The dollar doesn’t stay at Starbucks for long, however, because the firm
spends it on inputs in the markets for the factors of production. Starbucks might use
the dollar to pay rent to its landlord for the space it occupies or to pay the wages of
its workers. In either case, the dollar enters the income of some household and,
once again, is back in someone’s wallet. At that point, the story of the economy’s
circular flow starts once again.
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• When there are any other forces, the model grows abnormal. In real life, there will
always be a third party.

The Production Possibilities Frontier

• It is a graph that shows the combinations of output that the economy can possibly
produce given the available factors of production and the available production
technology.

• [book] The production possibilities frontier is a graph that shows the various
combinations of output—in this case, cars and computers—that the economy can
possibly produce given the available factors of production and the available
production technology that firms use to turn these factors into output. Figure 2
shows this economy’s production possibilities frontier. If the economy uses all its
resources in the car industry, it produces 1,000 cars and no computers. If it uses all
its resources in the computer industry, it produces 3,000 computers and no cars. The
two endpoints of the production possibilities frontier represent these extreme
possibilities.
• Guns & Butter example works here as well.
• There are three possible points that can explain all possible scenarios.
o Point A, B, E, F: We are using all available resources with 100% efficiency.
The line connecting all such points is called the production possibilities
frontier or PPF. When the economy is producing at such a point, say point A,
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there is no way to produce more of one good without producing less of the
other.
o Point C: This is the expected point that we want to reach. But achieving this
point is not possible with the resources available.
o Point D: This represents underutilization or inefficient use of resources.
• The production possibilities frontier shows one trade-off (between the outputs of
different goods at a given time) that society faces. Once we have reached an
efficient point on the frontier, the only way of producing more of one good is to
produce less of the other.
• Why the PPF is not a straight line?
To be a straight line, there needs to be a constant tradeoff ratio always. That does
not happen due to inefficiency raised from moving workers out of their field of
expertise.
[book] When the economy is using most of its resources to make cars, such as at
point E, the resources best suited to making cars are already at work in the car
industry. Producing an additional car now requires moving some of the best
computer technicians out of the computer industry and turning them into
autoworkers. As a result, producing an additional car requires a substantial loss of
computer output. The opportunity cost of a car is high, and the frontier is steep.

The Economist as Policy Adviser

• Economists take expert opinions and formulate a policy to benefit maximum citizens
• In general, statements about the world come in two types: Positive and Normative.
o Positive (descriptive): Describes what is happening. Telling things as it is.
o Normative (prescriptive): How things should be and what should be done.
• Most economists agree on the positive statements but differ on normative ones.
• The broken window fallacy suggests that an event can have unforeseen negative
ripple effects if money is redirected to repairing broken items rather than to new
goods and services. The theory suggests that a boost to one part of the economy can
cause losses to other sectors of the economy. However, it ignores lost opportunity
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costs or otherwise unseen factors because they are not readily obvious. As such,
some economists argue that the broken window fallacy is a fallacy itself. (xD)

Class-04 (19-10-22): Interdependence and the Gains from Trade

Use of PPF in the real world

• Assume there are only two persons in the world: a farmer and a cowboy. They
produce meat and potatoes.
• There can be two scenarios:
o The farmer produces only potatoes and the cowboy only meat. So, they
have incentives to trade and will trade between each other.
o Both of them produces both potatoes and meat.
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• In the scenario in above figure, how do they decide to trade?

If the farmer offers to trade, the cowboy seemingly has no incentive to trade since
he is better at producing both potatoes and meat. To trade, the farmer has to
convince the cowboy that the trade will benefit both of them. In this case, the
consumption has to be greater than the PPF. Otherwise, none of them will trade.
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In this case, both are benefited. So, trade occurs.

• Absolute Advantage: The ability to produce a good using fewer inputs than another
producer. The cowboy can produce both products more units per hour. This gives
the cowboy an absolute advantage.
• comparative Advantage: The ability to produce a good at a lower opportunity cost
than another producer. If your opportunity cost is lower than your competitor’s, you
have a comparative advantage.
• Opportunity cost calculation:
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(Marked zone shows the competitive advantage)

• Although the cowboy has absolute advantage over both products, but he has
comparative advantage over only one product. In reality, one party can not have
comparative advantage over both products but may have absolute advantage over
both. The gains from specialization and trade are based not on absolute advantage
but on comparative advantage.
• Now that the farmer has convinced the cowboy to trade, how do they decide how
much is to be traded?
For both parties to gain from trade, the price at which they trade must lie between
their opportunity costs. The farmer will trade when his opportunity cost for
collecting (producing+trade) meat is less than 4.
• In real life, more bargaining power is a decisive factor to determine prices. A price is
considered first and then back-calculations are made to determine the ratio of trade.

Class-05 (23-10-22): Demand and Supply

• We assume that the market is perfectly competitive. That is, the products are
homogenous (all sellers have identical products) and there are many buyers and
sellers in the market so that no individual can influence the market outcomes.
• Competitive market: A market in which there are many buyers and many sellers so
that each has a negligible impact on the market price

Demand
• Quantity Demanded: At a certain price point, how many units of a product is in
demand. The amount of a good that buyers are willing and able to purchase.
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• Demand: The quantity demanded at each price point is accumulated to determine
demand. Demand refers to the market demand.
Example: The demand of Soyabean Oil is 500 tons. This demand is not at a single
price point. Some may buy at 80 tk/litre rate, and some may buy at 120 tk/litre rate.
The price of the oil may raise, but the market demand will remain the same.

• [book] Law of Demand: The claim that, other things being equal, the quantity
demanded of a good fall when the price of the good rises.
• Set Par, if price increases, quantity demanded reduces. (Inverse relationship)
• The demand curve shows quantity demanded at each price point.

Supply
• Quantity Supplied: At a certain price point, how many units of a product is in supply.
The amount of a good that sellers are willing and able to sell.
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• Supply: The quantity supplied at each price point is accumulated to determine
supply. Supply refers to the market supply

• [book] Law of Supply: The claim that, other things being equal, the quantity supplied
of a good rise when the price of the good rises.
• Set Par, if price increases, quantity supplied increases. (Proportional relationship)
• The supply curve shows quantity supplied at each price point.
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Equilibrium
• The market works by itself to facilitate trade. Supply and demand keep changing
depending on the price until they reach an equilibrium. At the equilibrium Qd = Qs.

Surplus

Shortage

For simplicity, no other factor is considered. So, we get a straight line.

• Price drives the quantity demanded. So, price is called the invisible hand that drives
the market.
• [book] Equilibrium: A situation in which the market price has reached the level at
which quantity supplied equals quantity demanded
• [book] Equilibrium Price: The price that balances quantity supplied and quantity
demanded
• [book] Equilibrium Quantity: The quantity supplied and the quantity demanded at
the equilibrium price
• Surplus: A situation in which quantity supplied is greater than quantity demanded
• Shortage: a situation in which quantity demanded is greater than quantity supplied
• Movement along the curve is caused when only price affects the curve. Movement
takes place only for quantity demanded/supplied.
• When factors other than price affects the curve, it is called shift in the curve. There
maybe right or left shifts in the curve.
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• Because the price is on the vertical axis, a change in price represents a movement
along the demand curve. By contrast, income, the prices of related goods, tastes,
expectations, and the number of buyers are not measured on either axis, so a
change in one of these variables shifts the demand curve.
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Shifts in the Demand Curve
There are five factors that shifts the demand curve: customer’s income, customer’s
taste and preferences, price of related goods, change in the number of customers, and
future expectations.

Customer’s Income
• A lower income means that you have less to spend in total, so you would have to
spend less on some—and probably most—goods.
• Normal Good: A good for which, other things being equal, an increase in income
leads to an increase in demand. That is, If the demand for a good fall when income
falls, the good is called a normal good. Normal goods are the norm, but not all goods
are normal goods.
• Inferior Good: a good for which, other things being equal, an increase in income
leads to a decrease in demand. That is, If the demand for a good rise when income
falls, the good is called an inferior good.
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Price of Related Goods
• Substitutes: Two goods for which an increase in the price of one lead to an increase
in the demand for the other

• Substitutes are often pairs of goods that are used in place of each other, such as hot
dogs and hamburgers, sweaters and sweatshirts, and movie tickets and film
streaming services.
• Suppose that the price of frozen yogurt falls. The law of demand says that you will
buy more frozen yogurt. At the same time, you will probably buy less ice cream.
Because ice cream and frozen yogurt are both similar desires.
• Complements: two goods for which an increase in the price of one lead to a
decrease in the demand for the other.
• Complements are often pairs of goods that are used together, such as gasoline and
automobiles, computers and software, and peanut butter and jelly.
• Suppose that the price of hot fudge falls. According to the law of demand, you will
buy more hot fudge. Yet in this case, you will likely buy more ice cream as well
because ice cream and hot fudge are often consumed together.

Customer’s Taste and Preferences

• The most obvious determinant of your demand for any good or service is customer’s
tastes.
• Explaining people’s tastes is beyond economists. They examine what happens when
taste and preferences change.

Expectations:
• Expecting higher or lower income leads to increase and decrease of demand
respectively.
• Expecting price rise and fall leads to increase and decrease of demand respectively.
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Number of Buyers
• Market demand depends on the number of buyers as well. Increase in the number of
buyers lead to increasing competition to buy the same product and as a result, the
price increases.