LECTURER’S BRIEF CV

DR. MINH HUYNH

● 2000: B.A, English Linguistics & Literature,
University of Social Sciences & Humanities.
● 2001: B.A, Economics,
University of Economics, HCMC.
● 2000-2004: Production manager at Poh Huat Group, and other
positions at some FDI businesses & Corporations.
● 2004-2006: Journalist, editor at BinhDuongNews, TuoiTreNews.
● 2008: M.Econ at the Fulbright Program.
Lecturer at Hoa Sen University, HCMC University of Economics, …
● 2010-present: Lecturer at EIU.
● March 2019: Doctoral degree in Economics.

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 The site
● All electronic materials are available on the site:
https://sites.google.com/a/eiu.edu.vn/eco204-
q2-minh/
● Email: [email protected]

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 Lecture 1

INTRODUCTION TO ECONOMICS

PRINCIPLES OF MICROECONOMICS

Prepared by: Minh Huynh, PhD

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 Objectives
● 1.1. Explain what economics is about.
● 1.2. Construct and interpret the Production
Possibility Frontier Curve.
● 1.3. Distinguish between Microeconomics and
Macroeconomics; Positive economics & Normative
economics.
● 1.4. Explain why trade makes everyone better off .

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 Contents
1 Definition of Economics
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2 The Production Possibility Frontier

3 Microeconomics and Macroeconomics

4 Positive Economics & Normative Economics

5 Interdependence and the Gains from Trade

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 Structure of Economic Theory
● Assumption
– Prerequisites
– Example: the more the better, profit maximizing, utility
maximizing
– No need to be true, evaluated by final theory

● Body(Model): Economists use models to simplify reality in order to improve

our understanding of the world

 Endogenous variable
– Dependent variable generated within a model and therefore, a variable whose
value is changed (determined) by one of the functional relationships in that
model.

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 Structure of Economic Theory
Exogenous variable
– Independent variable that affects a model
without being affected by it, and whose
qualitative characteristics and method of
generation are not specified by the model builder.
Hypothesis
Predictions

● Conclusion

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 Building and Testing a Theory

Evidence supports the

theory. No further action is
necessary, although it is a
good idea to continue to
examine the theory closely.

Decide on what Identify the State the State the Test the theory Either
it is you want to variables that assumptions of hypothesis. by comparing
explain or you believe are the theory. its predictions
predict. important to against real-
what you want world events.
to explain or
Or
predict.

Evidence rejects the theory, so

Return either formulate a new theory,
or amend the old theory in terms
of its variables, assumptions,
and hypotheses.
 DEFINITION OF ECONOMICS
● To produce goods and services….

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 DEFINITION OF ECONOMICS
…We have to use resources:

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 DEFINITION OF ECONOMICS
 Economics is the study of how individuals and
societies use/allocate limited resources to satisfy
unlimited wants.

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 DEFINITION OF ECONOMICS
 Physical capital: factories, machines, tools,
buildings, airports, highways and other
manufactured items employed to produce goods
and services

 Human capital: consists of the knowledge and skill

people acquire to enhance their labor productivity

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 DEFINITION OF ECONOMICS
Land
 Includes not only land in the conventional sense but
also all other natural resources.
 Gifts of nature including bodies of water, trees, oil
reserves, etc.

Entrepreneurial Ability (Entrepreneurship)

 Special kind of human skill.
 Talent required to dream up a new product or find a
better way to produce an existing one.

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DEFINITION OF ECONOMICS

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 Society and Scarce Resources
● The management of society’s resources is
important because resources are scarce.
● Scarcity. . . means that society has limited resources
and therefore cannot produce all the goods and
services people wish to have.

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Society and Scarce Resources

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THE PRODUCTION POSSIBILITY FRONTIER (PPF)
● Consider an economy that Production Computer Car
produces only two goods: Possibility

Computers and Cars. A 3,000 0

● In a given period of time,
B 2,400 600
the economy may choose
to produce only computer, C 2,000 700

only car, or a combination D 0 1,000

of the two according to
U 3,000 1,000
the following table:
I 1,000 300

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 Figure 1 The Production Possibility Frontier
Quantity of
Computers
Produced

3,000 A
U

B
2,400
2,000 C
Production
possibility
frontier
1,000 I

D
0 300 600 700 1,000 Quantity of
Cars Produced
THE PRODUCTION POSSIBILITY FRONTIER (PPF)
 The production possibility frontier is a graph
showing the various combinations of output that
the economy can possibly produce when all
resources are being utilized in the most
(productively) efficient manner possible, given the
current level of technology.
● Attainable and Unattainable:
 All points on or inside the frontier are
attainable.
 All points outside the frontier are unattainable.
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THE PRODUCTION POSSIBILITY FRONTIER (PPF)
 Concepts Illustrated by the PPF
● Scarcity
 All points on or inside the frontier are
attainable. Which points?
 How abt. point U? Unattainable. Why?
 Scarcity
o Production possibilities are bounded

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THE PRODUCTION POSSIBILITY FRONTIER (PPF)
 Concepts Illustrated by the PPF
● Efficiency, Inefficiency and Unemployment
 Efficiency: the economy is getting all it can from
the scarce resources it has available (All points
on the PPF).
 Inefficiency: Point I?
 Unemployment

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THE PRODUCTION POSSIBILITY FRONTIER (PPF)
 Concepts Illustrated by the PPF
● Opportunity Cost: The opportunity cost of an item
is what must be given up to obtain that item.
 A movement from point B to point C.
o To increase car-production by 100, we must give
up computer-production by 400 .
o The opportunity cost of 100 cars is 400
computers.
 Calculate the slope of the PPF?

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THE PRODUCTION POSSIBILITY FRONTIER (PPF)
 Concepts Illustrated by the PPF
● Opportunity Cost
 Calculate the slope of the PPF?
o The negative slope of the PPF implies that
whenever we increase production of one
good…
o … we must give up some of the other good .

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A C T I V E L E A R N I N G 1:
PPF and Opportunity Cost
In which country is the opportunity cost of cloth lower?
FRANCE ENGLAND
Wine Wine
600 600

500 500

400 400

300 300

200 200

100 100

0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
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A C T I V E L E A R N I N G 1:
Answers
England, because its PPF is not as steep as France’s.
FRANCE ENGLAND
Wine Wine
600 600

500 500

400 400

300 300

200 200

100 100

0 0
0 100 200 300 400 0 100 200 300 400
Cloth Cloth
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THE PRODUCTION POSSIBILITY FRONTIER (PPF)
 Concepts Illustrated by the PPF
● Economic Growth
 Over time an economy can grow
o More labor and capital
o Technological progress
 What happens to the PPF? Shifts outward!
o Previously unattainable levels of production…
o … now become attainable

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 Figure 2 A Shift in the Production Possibility Frontier

Quantity of
Computers
Produced

4,000

3,000

2,100 E
2,000
A

0 700 750 1,000 Quantity of

Cars Produced
MICROECONOMICS VS. MACROECONOMICS
 Microeconomics focuses on the individual parts of
the economy.
 How households and firms make decisions and
how they interact in specific markets.
 Macroeconomics looks at the economy as a whole
(the study of economic aggregates).
 Economy-wide phenomena, including inflation,
unemployment, and economic growth.

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THE ECONOMIST AS POLICY ADVISOR
 As scientists, economists make
positive statements,
which attempt to describe the world as it is.
 Called descriptive analysis
 As policy advisors, economists make
normative statements,
which attempt to prescribe how the world should
be.
 Called prescriptive analysis

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A C T I V E L E A R N I N G 2:
Identifying positive vs. normative
Which of these statements are “positive” and which are
“normative”? How can you tell the difference?
a. Prices rise when the government increases the
quantity of money.
b. The government should print less money.
c. A tax cut is needed to stimulate the economy.
d. An increase in the price of gasoline will cause a
decrease in consumer demand for motorbikes.

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A C T I V E L E A R N I N G 2:
Answers
a. Prices rise when the government increases the
quantity of money.
Positive, describes a relationship, could use data to
confirm or refute.
b. The government should print less money.
Normative, this is a value judgment, cannot be
confirmed or refuted.

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A C T I V E L E A R N I N G 2:
Answers
c. A tax cut is needed to stimulate the economy.
Normative, another value judgment.
d. An increase in the price of gasoline will cause an
increase in consumer demand for video rentals.
Positive, describes a relationship.
Note that a statement need not be true to be positive.

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INTERDEPENDENCE AND THE GAINS FROM TRADE
 Why ?
– Interdependence(Interaction or cooperate each
other) occurs because people are better off when
they specialize and trade with others.
 What determines the pattern of production and
trade?
– Patterns of production and trade are based upon
differences in opportunity costs.

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 Our Example

● Two countries: Japan and Vietnam

● Two goods: computers and clothes
● One resource: labor, measured in hours

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 Absolute advantage

HOURS OF LABOR

PRODUCTS
Japan Vietnam

Computers 6 12

Clothes 3 4

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 Absolute advantage

● Absolute advantage: the ability to produce a good

using fewer inputs than another producer.
 Japan has an absolute advantage in the
production of computers:
Producing a computer uses 6 labor hours
in Japan vs. 12 in Vietnam.
 Which country has an absolute advantage in
clothes?

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 Absolute advantage

 Which country has an absolute advantage in

clothes?
Producing one set of clothes requires
4 labor hours in Vietnam,
but only 3 in Japan.
 Japan has an absolute advantage in both goods!

So why does Vietnam specialize in computers? Why

do both countries gain from trade?

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 Two Measures of the Cost of a Good
● Two countries can gain from trade when each
specializes in the good it produces at lowest cost.
● Absolute advantage measures the cost of a good in
terms of the inputs required to produce it.
● Recall: Another measure of cost is
opportunity cost.
 In our example, the opportunity cost of a computer is
the amount of clothes that could be produced using the
labor needed to produce one computer.

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Opportunity Cost and Comparative Advantage
● Comparative advantage: the ability to produce
a good at a lower opportunity cost than another
producer.
● Which country has the comparative advantage in
computers and in clothes?
● To answer this, must determine the opp. costs of
a computer and a set of clothes in each country.

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Comparative advantage

OPPORTUNITY COST

PRODUCTS
Japan Vietnam

Computers 2 clothes 3 clothes

Clothes 1 computer 1 computer

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Opportunity Cost and Comparative Advantage
● Japan:
- To produce a computer, Japan must give up 2 sets
of clothes.

● Vietnam:
- To produce a computer, Vietnam must give up 3
sets of clothes.

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Opportunity Cost and Comparative Advantage
● Thus, op. cost to produce 1 computer in Japan is
lower than that in Vietnam.
● Meanwhile, Vietnam has lower op. cost on
production of 1 set of clothes in comparison with
Japan.
 So, Japan has a comparative advantage in
computers, Vietnam has a comparative advantage
in clothes.

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 Comparative Advantage and Trade
● Differences in opportunity cost and comparative
advantage create the gains from trade.
● When each country specializes in the good(s)
in which it has a comparative advantage,
total production in all countries is higher,
the world’s “economic pie” is bigger,
and all countries can gain from trade.
● The same applies to individual producers
(like the farmer and the rancher) specializing
in different goods and trading with each other.

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 Gains from trade

HOURS OF LABOR

PRODUCTS
Japan Vietnam

Computers 6 12

Clothes 3 4

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 Production Possibilities

● Japan has 24 hours of labor

available for production, per month.
● Vietnam has 48 hours of labor
available for production, per month.
a) Suppose each country uses half its labor to produce each of the
2 goods. How many goods each country can produce.
b) If each country specialize in the good that each has
comparative advantage. How many computers Japan can
produce? How many clothes VN can produce?
Suppose: Japan exports 2 computers;
Vietnam exports 5 clothes.

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 International Trade

● Exports:
goods produced domestically and sold abroad
● Imports:
goods produced abroad and sold domestically

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 Gains from trade

HOURS OF LABOR

PRODUCTS
Japan Vietnam

Computers 6 12

Clothes 3 4

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 Trade Makes Both Countries Better Off
Consumption Consumption Consumption Gains
without with with from
specialization, specialization, specialization trade
without trade without trade , with trade & spe.

JAPAN
Computers
Clothes
VIETNAM
Computers
Clothes
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 Trade Makes Both Countries Better Off
Consumption Consumption Consumption Gains
without with with from
specialization, specialization, specialization trade
without trade without trade , with trade & spe.

JAPAN
Computers 2 4 2 0
Clothes 4 0 5 1
VIETNAM
Computers 2 0 2 0
Clothes 6 12 7 1
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A C T I V E L E A R N I N G 4:
Absolute & comparative advantage
Argentina and Brazil each have 10,000 hours of labor
per month, and the following technologies:
Argentina
– producing one pound coffee requires 2 hours
– producing one bottle wine requires 4 hours
Brazil
– producing one pound coffee requires 1 hour
– producing one bottle wine requires 5 hours
Which country has an absolute advantage in the
production of coffee? Which country has a
comparative advantage in the production of wine?
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A C T I V E L E A R N I N G 4:
Answers
Brazil has an absolute advantage in coffee:
– Producing a pound of coffee requires only one
labor-hour in Brazil, but two in Argentina.
Argentina has a comparative advantage in wine:
– Argentina’s opp. cost of wine is two pounds of coffee,
because the four labor-hours required
to produce a bottle of wine could instead produce
two pounds of coffee.
– Brazil’s opp. cost of wine is five pounds of coffee.

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 SUMMARY
● Economics is the study of how individuals and
societies use/allocate limited resources to satisfy
unlimited wants.

● The production possibility frontier is a graph

showing the various combinations of output that
the economy can possibly produce when all
resources are being utilized in the most efficient
manner, given the current level of technology.

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 SUMMARY
● Economics is divided into two subfields:
- Microeconomists study decisionmaking by
households and firms in the marketplace.
- Macroeconomists study the forces and trends
that affect the economy as a whole.

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 SUMMARY
● A positive statement is an assertion about how
the world is.
● A normative statement is an assertion about how
the world ought to be.
● When economists make normative statements,
they are acting more as policy advisors than
scientists.

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 SUMMARY
● Interdependence and trade allow everyone to enjoy
a greater quantity and variety of goods & services.
● Comparative advantage means being able to
produce a good at a lower opportunity cost. Absolute
advantage means being able to produce a good with
fewer inputs.
● Trade makes everyone better off because it allows
people to specialize in those activities in which they
have a comparative advantage.

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 Why do we learn economics?
● 1. To read newspapers
Check out these headlines…
 Why do we learn economics?
State proposes price ceiling for milk products
(Vietnam News)
 Why do we learn economics?
● 2. What else?