Download UNIT 1 - GUNS and ROSES

Fundamental
Concepts of
Economics
Akelyev Evgeny
PhD, Associate professor
Department of Economics, TPU
. . . The word economy comes from a
Greek word for “one who manages a
household.”
Plato
Aristotle
Economics is
 the study of how we can best
increase a country’s wealth with
the resources that we have
available to us.
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.
Microeconomics
Price elasticity (sensitivity) of demand
for goods and services,
 firms’ production behavior,
 cost functions,

Macroeconomics
The nation's unemployment rate,
inflation,
interest rate trends,
government budgets,
government fiscal policies,
economic growth,
monetary policy,
People Face Tradeoffs.
To get one thing, we usually have to
give up another thing.
 Guns v. butter
 Food v. clothing
 Leisure time v. work
 Efficiency v. equity
Making decisions requires
trading off one goal against
another

Efficiency v. Equity
 Efficiency means society gets the most
that it can from its scarce resources.
 Equity means the benefits of those
resources are distributed fairly among
the members of society.
The Cost of Something Is What
You Give Up to Get It.

Decisions require comparing costs
and benefits of alternatives.
 Whether to go to college or to work?
 Whether to study or go out on a date?
 Whether to go to class or sleep in?

The opportunity cost of an item is
what you give up to obtain that
item.
The Production Possibilities
Curve
represents outcome or
production combinations
that can be produced with a
given amount of resources.
The Production Possibilities
Curve
GUNS
600
500
E
C
F
B
400
G
A
300
D
350
500 580
700
ROSES
If an economy is operating at a
point on the production
possibilities curve, all resources are
used, and they are utilized as
efficiently as possible.
Economic Growth Is Caused by:
GUNS
600
500
E
C
F
B
400
G
A
300
D
350
500 580
700
ROSES
The Cost of Something Is What
You Give Up to Get It.

Decisions require comparing costs and
benefits of alternatives.
 Whether to go to college or to work?
 Whether to study or go out on a date?
 Whether to go to class or sleep in?

The opportunity cost of an item is what
you give up to obtain that item.
Rational People Think at the
Margin.

Marginal changes are small,
incremental adjustments to an
existing plan of action.
 People make decisions by
comparing costs and benefits at
the margin.


Marginal changes in costs or benefits
motivate people to respond.
The decision to choose one alternative
over another occurs when that
alternative’s marginal benefits exceed its
marginal costs!
Three Economic Systems
are:
1.
Market economy (Capitalism)
2.
Command economy (Communism)
3.
Mixed economy (Socialism)
Capitalism
Characteristics
 The role of the government is
limited to the most essential
functions.
 All prices are determined in the
free market (supply and demand).
Command economics
Characteristics

Government makes all decisions
regarding production, prices, wages,
interest rates, and income distribution.
Socialism (Mixed Economy)
Characteristics
Most economic decisions are
made by the private sector, but the
role of the government is
significant. Government spending
and taxes are relatively high.
China economy
Economic Growth and
Economic Systems
Countries with the highest overall economic
standard of living have the freest markets (more
elements of capitalism).
Examples: Hong Kong, the United States, Japan,
Taiwan, Great Britain, Canada, Sweden, South
Korea, and Singapore.
Economies around the World
Most industrialized countries are mixed
economies, but they also have many
capitalist elements. Characteristics
include
 Substantial activity in the private sector
(businesses and households). Prices are
determined by demand and supply.
 A significant role by federal and local
governments.
The Role of Government
The role of most governments around the world
includes:





Spending on defense, roads, legal system, public
services and education
Redistributing incomes
through taxes and subsidies
Passing laws and imposing
regulations
Implementing price controls
Conducting monetary policy
to affect inflation,
interest rates, and employment
The Simple Circular Flow
Supply of Products
Purchases of (Demand for) Products
Households
Products
Market
Businesses
Supply of Labor and Resources
Purchases of (Demand for) Labor and Resources
Resource
(Inputs)
Market
The circular flow with government and foreign
markets
Products
Market
Purchases
of Products
Products
Services
Households
Services
Businesses
Government
Taxes
Foreign
Markets
Taxes
Supply of Labor and Resources
Purchases of (Demand for) Labor and Resources
Resource
(Inputs)
Market
Positive and Normative
Economic Statements
A positive statement can be proven or
disproven.

A normative statement is an opinion or
value judgment.
Which is the Normative and
Which is the Positive Economic
Statement?

Statement I: The minimum wage should
increase to $8.50.

Statement II: If the minimum wage
increases, then firms’ cost of production
rises.