Download Introduction to Economics

Economic Issues
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Economics
• What is Economics?
• Macroeconomics vs. Microeconomics
• Demand and Supply
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What is Economics?
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What is Economics?
• “Oikonomos” – One who manages a household
• The production of goods and services
• The consumption of goods and services
• The study of how the people allocate their
limited resources to satisfy their unlimited wants
(It is the study of how people make choices –
involves sacrifice)
• Central Economic Problem: Scarcity
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Resources & Wants
• Resources are things that have value and
are used to produce things that satisfy
people’s wants (Supply)
• Wants are all of the things that people
would consume if they had unlimited
income (Demand)
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Resources
• Factor of production
– Human resources: Labor
– Natural resources: Land, raw materials
– Manufactured resources: Capital
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Branches of Economics
Microeconomics
= Individual
Macroeconomics
= Whole
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Macroeconomics
• The branch of economics that studies
economics aggregates – demand and
supply
• The part of economic analysis that studies
the behavior of the economy of a whole –
deals with economy wide phenomena e.g.
GDP, CPI
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GDP & CPI
• GDP
– A measure of the total income and
expenditures of an economy
– The total market value of all final goods and
services produced within a country in a given
period time
• CPI
– A measure of the overall cost of the goods
and services bought by a typical consumer
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GDP & economic well-being
• GDP is a good measure of the economic wellbeing of a society
• GDP per person tells us the income and
expenditure of the average person in the
economy
• But it misses…
– Leisure reduction increases GDP but may reduce
well-being
– The value of clean environment
– Non-market activities?
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Macroeconomic Issues
• Aggregate demand – The total level of
spending in the economy
• Aggregate supply – the total amount of
output in the economy
• AD > AS
– Inflation
– Balance of trade deficit (Export & Import)
• AD < AS
– Recession
– Unemployment
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Macroeconomic policy
• AD = AS
– Demand-side policy
– Supply-side policy
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Microeconomics
• The part of economic analysis that studies
decision making undertaken by individuals
and by firms
• Focus on the small part of economics
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Microeconomics Issues
• Choices:
– What
– How
– For whom
• Opportunity cost
• Rational decision making
– Weighting up the benefit (Value for money)
• Marginal Costs & Marginal Revenues
• Social implications/consequences of
choices
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Economic Models
• “Ceteris Paribus” (other things being equal)
• Production Possibility Curve
• Circular Flow of Goods and Incomes
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A production possibility curve
8
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
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A production possibility curve
8
a
Units of food (millions)
7
6
5
Units of food Units of clothing
(millions)
(millions)
4
a
8m
7m
6m
5m
4m
3m
2m
1m
0
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
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A production possibility curve
8
b
Units of food (millions)
7
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
b
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
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A production possibility curve
8
Units of food (millions)
7
c
6
Units of food Units of clothing
(millions)
(millions)
5
4
8m
7m
6m
5m
4m
3m
2m
1m
0
c
3
2
1
0.0
2.2m
4.0m
5.0m
5.6m
6.0m
6.4m
6.7m
7.0m
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
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A production possibility curve
8
w
Units of food (millions)
7
x
6
5
4
3
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
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Production Possibility Curve
• Microeconomics & PPC
– Choices and opportunity cost
– Increasing opportunity cost
• Macroeconomics and PPC
– Production within the curve
– Shift in the curve
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Increasing opportunity costs
8
Units of food (millions)
7
x
6
1
5
y
1
2
4
z
3
1
2
1
0
0
1
2
3
4
5
6
Units of clothing (millions)
7
8
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Making a fuller use of resources
x
Food
Production inside
the production
possibility curve
y
v
O
Clothing
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Food
Growth in potential output
Now
O
Clothing
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Growth in potential output
Food
5 years’ time
Now
O
Clothing
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The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Wages, rent
dividends, etc.
£
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Services of factors of production (labour, etc)
The Circular Flow of Income
• Macroeconomic issues
– The size of total flows
• Microeconomic issues
– Individual markets
– Choices within goods and factor markets
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Economic Systems
• Command economy (Socialist/Communist)
• Free-market economy
– Price mechanism: price respond to shortage
and surpluses
– Equilibrium
• Mixed market economy
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Command Economy
• Planning
– Consumption and investment
– Matching of inputs and outputs
– Distribution of output
• Advantages
– High investment, high and stable growth
– Social goal pursued
– Low unemployment
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Command Economy
• Problem
– Gathering information
– Expensive to administer
– Inefficient allocation of resources
• Inappropriate incentives
• no system of prices
– shortages and surpluses
– lack of response to consumer demand
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Free-Market Economy
• Based on free decision making by
individuals and firms
• Demand and supply decisions
• Price mechanism
– Price respond to shortage and surpluses
– Equilibrium
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The price mechanism:
the effect of a rise in demand
Goods Market
Dg
shortage
(Dg > Sg)
Sg
Pg
Dg
until Dg = Sg
Factor Market
Sg
Df
shortage
(Df > Sf)
Pf
Sf
until Df = Sf
Df 
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Competitive Market
• Perfectly competitive market
• Price taker
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