MBA911 Quantitative Economics

Dr. Florian Gerth Faculty of Business [email protected]

Dr. Florian Gerth Academic Background:

• BSc International Management • University of Applied Sciences Karlsruhe, Germany • Tecnologico de Monterrey, Mexico

• Diploma in Economics • University of Kent, UK

• MSc Economics and Econometrics • University of Kent, UK

• PhD Economics • University of Kent, UK

• MA International Relations and Affairs • UOW, Australia

Dr. Florian Gerth – MBA911 – Quantitative Economics

Dr. Florian Gerth

Professional Background:

• Schaeffler Group, Germany • SEAT SA, Spain • University of Kent, UK • Central Bank of Ireland, Ireland • Researchers Sans Frontiers, UAE • Gulf and Global Development &

Security Forum, UAE • UOWD, UAE

Primary Research Field: Quantitative Macroeconomics (Business Cycle Fluctuations, Firm Dynamics, Productivity Analysis, Resource Misallocation)

Specialist in macroeconomics, firm dynamics and financial crises. My research asks on the one hand, how, during financial crises, firm behaviour affects the macroeconomy, particularly aggregate productivity, and on the other, how financial crises propagate within the economic system.

Dr. Florian Gerth – MBA911 – Quantitative Economics

Administration Consultation Hours:

• Wednesday:

• Thursday:

• By appointment only

8.30 to 10.30am

12.30 to 2.30pm

Dr. Florian Gerth – MBA911 – Quantitative Economics

Course Material

Required Text (Economics section):

• Title: Economics for Today (6th Asia Pacific edition),

Author: Allan Layton, et al. Publisher: Cengage Learning Australia

• Please read the assigned chapters before coming to the class.

Dr. Florian Gerth – MBA911 – Quantitative Economics

 Also E-Book available in the library!!!

Course Material

Required Text (Quantitative section):

• Title: Quantitative Analysis for Management (13th edition),

Author: Render, et al. Publisher: Pearson Education Ltd., UK.

• Please read the assigned chapters before coming to the class.

Dr. Florian Gerth – MBA911 – Quantitative Economics

 Also E-Book available in the library!!!

Assessments Assessment Tasks:

Weighting Due Date

• Reflective Blogs (4x) 20% next slide

• Economics in the 30% 18th of November Media presentation

• Research Report 50% 2nd of December

Dr. Florian Gerth – MBA911 – Quantitative Economics

1. Reflective blogs The reflective blogs are intended to capture the development of your critical analysis skills as an economist. You will be given four topics to think about and reflect upon, capturing your increasing knowledge of the application of economics concepts to daily business and social issues

1. 8th of October (due today!  what do I think is economics?!) 2. 28th of October 3. 13th of November 4. 2nd of December

• Each 5% of final mark

Dr. Florian Gerth – MBA911 – Quantitative Economics

2. Economics in the media presentation • This assessment provides you with the opportunity to analyse the economic

foundations and validity of propositions put forth in contemporary media stories.

• You need to form groups (2-3 people) during the second block and are to select a media story for their presentation for approval on Friday, the 4th of November

• After unpacking the economic elements of the story, you are to provide a critique of the reporting, and suggest alternative recommendations taking into account multiple stakeholder and policy viewpoints

Dr. Florian Gerth – MBA911 – Quantitative Economics

2. Economics in the media presentation

• Your presentation should be pre-recorded and not exceed 10 minutes.

• Each member needs to speak!

• Due date is the 18th of November

• 30% of final mark

Dr. Florian Gerth – MBA911 – Quantitative Economics

3. Research report • You are to select a topic of global and contemporary significance for empirical

analysis

• For approval by Sunday, the 20th of November

• Using appropriate data, you will apply critical thinking and quantitative skills to aid with the analyses of the topic

• Individual assignment

Dr. Florian Gerth – MBA911 – Quantitative Economics

3. Research report

• 3,000 words

• Due date is the 2nd of December Turnitin

• 50% of final mark

Dr. Florian Gerth – MBA911 – Quantitative Economics

Ground Rules – Class discipline • Be on time and do not leave class early

• Switch off your mobile before coming to the class

• Talk/ask in a respectful manner

• Respect others’ time and commitment

• No cross talking during lectures

• Read chapter before attending class

• Do tutorial work

• Come to office hours (if questions)

• Listen actively and attentively

Dr. Florian Gerth – MBA911 – Quantitative Economics

Ground Rules – Class discipline • Ask for clarification if you are confused

• Consider anything that is said in class strictly confidential

• Respect other peoples’ opinion

• There is no such thing as a “stupid” question, so ask

• Contribute and think!

• Do not sleep

• Course material is very powerful! Do not waste your (and my) time!!!

Dr. Florian Gerth – MBA911 – Quantitative Economics

Learning Outcomes

Dr. Florian Gerth – MBA911 – Quantitative Economics

1. Critically analyse the economic elements of contemporary global business issues and events.

2. Select and apply appropriate quantitative tools for the analyses of international economic data.

3. Propose evidence-based solutions to economic problems that encompass multiple stakeholder perspectives.

4. Collaborate responsibly to achieve individual and collective outcomes. 5. Effectively communicate complex concepts and information, through a

range of media.

What this course is about? ECONOMICS

• This subject deals with the micro- and macroeconomic analysis of economies. • Microeconomics

• How do individual consumers and businesses interact with each other in a market economy. • Behaviour of individuals, firms, and industries.

• Macroeconomics • Aggregate behaviour of different sectors of the economy to determine how changes in

behaviour in each of these sectors influence the overall level of economic activity. • Mainly interested in the questions:

• Unemployment • Economic Growth • Inflation

Dr. Florian Gerth – MBA911 – Quantitative Economics

What this course is about?

QUANTITATIVE ANALYSIS

• Tools that help us measure economic concepts • Data behaviour and frequency

• Forecasting • Understanding the relationship and interaction/dynamics between variables

Dr. Florian Gerth – MBA911 – Quantitative Economics

Structure of MBA911

1. Short videos (15-20 minutes) 2. Face-to-Face lecture (60-90 minutes) 3. MCQs (30 minutes) 4. Tutorial questions (45 + 30 minutes) 5. Economics discussion (30 + 15 minutes)

Dr. Florian Gerth – MBA911 – Quantitative Economics

1. Short videos (15-20 minutes)

• Short videos which you watch on your own

• To be found on within the slides (direct links)

• Before the lecture starts

• To give you an overview of what is being discussed

Dr. Florian Gerth – MBA911 – Quantitative Economics

2. Face-to-Face lecture (60-90 minutes)

• In-depth lecture based on the chapters in the book

• Lecture slides and notes on board will be the medium of exchange of information

• To facilitate grounded understanding in Quantitative Economics

Dr. Florian Gerth – MBA911 – Quantitative Economics

3. MCQs (30 minutes)

• Quizzes are found on Moodle

• To test your understanding of the material being discussed during the lecture

• Not marked!

• You can always go back and attempt the quiz again Dr. Florian Gerth – MBA911 – Quantitative Economics

4. Tutorial questions (45 + 30 minutes)

• Hands-on approach to the material being discussed during the lecture

• You need to write your answer for each questions in the 45- minute slot

• Discussion in class (30 minutes) to check your answers and to brain-storm on ideas

Dr. Florian Gerth – MBA911 – Quantitative Economics

5. Economics discussion (30 + 15 minutes)

• Discuss your perception of the article and give your qualified opinion (30 minutes)

• Discussion in class after you submitted your answer (15 minutes) • Possible topics:

• Zimbabwe pushed to brink of famine • Poland attacks EU aid as “smoke and mirrors” • Coronavirus Economic Impact Could Decimate the Middle East • Turkey's economic plight could impact MENA • Oil prices fall to lowest level in 17 years as demand slumps • etc.

Dr. Florian Gerth – MBA911 – Quantitative Economics

Session 1 – Part A • What is economics? • Production possibilities and opportunity costs • Market demand and supply • Markets in action

• Market equilibrium • Surplus vs. shortage • Price ceiling vs. price floor

• Elasticities (= measure of responsiveness)

Dr. Florian Gerth – MBA911 – Quantitative Economics

What to do now…

1. Watch videos (16 minutes) 1. What is economics? (5 minutes) 2. Microeconomics vs. Macroeconomics (3 minutes) 3. Production Possibility Frontier (5 minutes) 4. Opportunity cost (3 minutes)

Dr. Florian Gerth – MBA911 – Quantitative Economics

Chapter 1 Thinking like an economist

Dr. Florian Gerth – MBA911 – Quantitative Economics

The problem of scarcity

• The condition in which human wants are forever greater than the available supply of time, goods, services and resources.

• Examples: • Individuals: Bigger flat-screen TV, more restaurant meals, more

leisure time • Governments: Education, highways, defense

Dr. Florian Gerth – MBA911 – Quantitative Economics

The problem of scarcity • Cornerstone and essential fundament of the discipline of

economics

• Coping with scarcity is the essence of the human condition: • Wants > Supply • Because of scarcity it is impossible to satisfy every desire • Scarcity is manifested in the prices one must pay for goods and

services

Dr. Florian Gerth – MBA911 – Quantitative Economics

Scarce resources and production • Because of the economic problem of scarcity, no society has

enough resources to produce all the goods and services necessary to satisfy all human wants.

• Resources are the basic categories of inputs used to produce goods and services  a.k.a factors of production

• Economists divide resources into three categories: land, labour and capital

Dr. Florian Gerth – MBA911 – Quantitative Economics

Three categories of resources

Dr. Florian Gerth – MBA911 – Quantitative Economics

Resources: land • Any resource provided by nature

• Includes anything natural above or below the ground; e.g. forests, minerals, oil, wildlife, rivers, lakes, oceans

• May be renewable or non-renewable

Dr. Florian Gerth – MBA911 – Quantitative Economics

Resources: labour • The mental and physical human capacity of workers to produce

goods and services

• Examples: Services of farmers, factory workers, lawyers, professional football players and economists

• Entrepreneurship is the creative ability of individuals to seek profits by combining resources to produce new or existing products

Dr. Florian Gerth – MBA911 – Quantitative Economics

Resources: labour

• Both, the number of people available for work and the skills or quality of workers (labour productivity) measure the labour resource

• Differs in countries due to education, experience, health and motivation of workers

Dr. Florian Gerth – MBA911 – Quantitative Economics

Resources: Capital • The physical plant, machinery and equipment used to produce

other goods

• Human-made goods that do not directly satisfy human wants

• In economics, money is not capital; it simply gives a measure of the value of assets, including capital goods  ≠ financial capital

Dr. Florian Gerth – MBA911 – Quantitative Economics

Economics

…the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants

Dr. Florian Gerth – MBA911 – Quantitative Economics

Economics: the study of scarcity and choice

• The problem of scarcity forces people to make choices. It is the basis for the definition of economics

• Society makes two kinds of choices: –individual (microeconomics) –economy-wide (macroeconomics)

Dr. Florian Gerth – MBA911 – Quantitative Economics

TWO BRANCHES OF ECONOMICS

• Studies decision-making by a single individual, household, firm or industry

Microeconomics

• Studies the performance of, and decision-making in, the economy as a whole.

Macroeconomics

Dr. Florian Gerth – MBA911 – Quantitative Economics

Microeconomics

• The branch of economics that studies decision-making by a single individual, household, firm or industry

• Focus is on the behavior of small economic units, such as the economic decision of particular groups of consumers or businesses

Dr. Florian Gerth – MBA911 – Quantitative Economics

Macroeconomics

• The branch of economics that studies decision-making for the economy as a whole

• Applies an overview perspective to an economy by examining economy-wide variables such as inflation, unemployment, money supply and the flows of export, imports and international financial capital

• …decision making considers “big picture” policies

Dr. Florian Gerth – MBA911 – Quantitative Economics

The methodology of economics

• Economists use the same scientific method used in other disciplines (e.g. criminology, biology, physics)

• The scientific method is a step-by-step procedure for solving problems

Dr. Florian Gerth – MBA911 – Quantitative Economics

The steps in the model-building process

Dr. Florian Gerth – MBA911 – Quantitative Economics

Example: petrol consumption

• Petrol consumption by motorists has fallen. Why?

Identifying the problem:

• Identify the variables (e.g. petrol prices, car prices). • Express these verbally, graphically or mathematically.

Developing a model:

• Gather data that tell us how well the model estimates or predicts relationships.

Testing the model:

Dr. Florian Gerth – MBA911 – Quantitative Economics

The methodology of economics • Model

• Simplified description of reality used to understand and predict the relationship between variables

• Foundation of underlying theory • Looks at the factors -variables- that explain the event • Construct an abstraction from real-world complexities and make events

understandable

Dr. Florian Gerth – MBA911 – Quantitative Economics

Hazards of the economic way of thinking Ceteris paribus assumption

• “While certain variables change, all other things remain unchanged”

• This assumption holds everything constant and therefore allows to concentrate on the study of the relationship between two key variables: X and Y

• A model cannot be tested legitimately unless the ceteris paribus assumption is satisfied

Dr. Florian Gerth – MBA911 – Quantitative Economics

Hazards of the economic way of thinking Association/Correlation versus Causation

• We cannot always assume that, when one event follows another, the first caused the second

• For example, suppose that in the last month, Indonesian exports to Australia increased and the hole in the ozone layer grew.

• Is there any economic relation between the two events? Is this association or causation?

Dr. Florian Gerth – MBA911 – Quantitative Economics

Why do economists disagree? • As in other professions, disagreements occur in economics

• A major reason for these disagreements is the assumptions made about human nature

• Mainstream economics assumes that individuals are motivated almost exclusively by pleasure/pain principle. That is, in deciding how to react to a given set of circumstances, individuals weigh up the costs and benefits of a particular action (the pain and the pleasure) in a straightforward way and then decide what to do  rational behavior

• Gave rise to behavioural economics Dr. Florian Gerth – MBA911 – Quantitative Economics

Behavioural economics • Behavioural economics is a branch of economics in which more

comprehensive assumptions about human behaviour are employed.

• It is determined by: • the pleasure/pain principle • ethical and moral beliefs • social norms • class relationships

Dr. Florian Gerth – MBA911 – Quantitative Economics

Why do economists disagree?

Due to…

1. Positive economics: matters of fact

• Mainstream economics vs. behavioural economics

2. Normative economics: matters of opinion

Dr. Florian Gerth – MBA911 – Quantitative Economics

Positive economics • Positive economics is an analysis limited to statements that are

verifiable

• The key consideration for a positive statement is whether the statement is testable, not whether it is true or false

• Examples: • ‘Airbags save lives’ • ‘Smoking is harmful to your health’

Dr. Florian Gerth – MBA911 – Quantitative Economics

Normative economics • Normative economics is an analysis based on value judgements

• It cannot be proven by facts to be true or false

• Examples: • ‘Every teenager who wants a job should have one’. • ‘Keeping inflation under control is more important than teenage

unemployment’.

Dr. Florian Gerth – MBA911 – Quantitative Economics

Chapter 2 Production possibilities and opportunity cost

Dr. Florian Gerth – MBA911 – Quantitative Economics

The three fundamental economic questions

The fundamental economic questions around production are:

What?

Scarcity imposes restrictions on ability to

produce.

How?

What production technique should be used?

For whom?

Who receives the goods and services that are produced?

Dr. Florian Gerth – MBA911 – Quantitative Economics

What? • The problem of scarcity imposes a restriction on the ability to

produce everything we want during a given period, so that the choice to produce “more” of a good requires producing “less” of another good

• Democratic societies determine what to produce on the basis of individual preferences expressed by consumers in the marketplace

Dr. Florian Gerth – MBA911 – Quantitative Economics

How? • How to mix technology and scarce resources in order to

produce them  whether a production technique will be more or less capital intensive

• Education and training are important

Dr. Florian Gerth – MBA911 – Quantitative Economics

For whom? • Of all the people who desire to consume the goods and

services produced, who actually receives them?

• This will depended largely on the way in which incomes are distributed among different members of the community

Dr. Florian Gerth – MBA911 – Quantitative Economics

Opportunity cost • Because of scarcity, people must make choices and each

choice incurs a cost (sacrifice). Once one option is chosen, another option is given up

• The relevant cost of taking a decision is the opportunity cost of a choice  the next best alternative sacrificed for a chosen alternative

Dr. Florian Gerth – MBA911 – Quantitative Economics

Opportunity cost: Examples

• What would you be doing if you were not currently studying?

• How many new roads have to be forgone if the government spends tax revenues on hospitals?

Dr. Florian Gerth – MBA911 – Quantitative Economics

Marginal analysis • Marginal analysis examines the effects of additions to or

subtractions from a current situation

• It is a very valuable tool in economics because it considers the effects of change resulting from decision-making

• Individuals, firms and governments all face marginal analysis

Dr. Florian Gerth – MBA911 – Quantitative Economics

Marginal analysis: examples • Would you devote one extra hour in preparation for an

economics exam or nap for an hour? (What is the scarce resource?)

• Should the economy allocate more of its resources in producing capital goods or consumer goods?

Dr. Florian Gerth – MBA911 – Quantitative Economics

Marginal analysis applied

‘To fertilise or not to fertilise … that is the question.’

A farmer will only add fertiliser to an area of land if the value of the extra yield exceeds the cost of the fertiliser.

Marginal analysis helps decide between options.

Dr. Florian Gerth – MBA911 – Quantitative Economics

The production possibilities frontier

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