Download The Economic Problem and Production

The Economic Problem and
Production
Introduction to Economics
• Whether people have jobs or are unemployed,
the kind of work people do, the things they
produce, how much they are paid, what they
purchase, how much they consume, and the
influence of the government on economic activity
are the subject matter of economics.
• The study of economics is important for a proper
understanding of business.
• The study is important for business because often
common sense is not a good guide to how a firm
should operate to get the best out of a particular
situation
• Sound knowledge and understanding of
economics is essential for understanding the
business environment and business decisionmaking
• Economics is regarded as a science because it
is based on the formal methods of science
• If you have not studied economics before
there is no need to worry if you do not like
mathematics, graphs and equations
Positive and Normative Economics
• Positive economics is concerned
understanding of how economies function by
using theories that can be tested in the real
world and rejected if they make false
predictions. Positive economics is concerned
with "what is" not with "what should be”
• Normative economics is concerned with
opinions.
The Methods of Economic Analysis:
the Ceteris Paribus Assumption
• The economic behaviour of individuals is
complex. Economic theory deals with such
complexity by using a useful assumption when
developing models of economic behaviour,
analysing markets and government economic
policy. It makes use of the ceteris paribus
assumption. This is a Latin expression which
means holding other things constant.
Microeconomics and Macroeconomics
• Microeconomics ("micro" from Greek, meaning
small) considers the economic behaviour of
individuals in their roles as consumers and
workers, and the behaviour of individual firms. It
also involves the study of the behaviour of
consumers and firms in individual markets.
• Macroeconomics ("macro" again from Greek,
meaning large) considers the working of the
economy as a whole. It deals with questions
relating to the reasons why economies grow,
undertake international trade and investment,
and experience inflation or unemployment
Some Fundamental Questions
• What, in terms of goods and/or services,
should be produced ?
• How resources should be used in order to
produce the desired goods and services ?
• For whom the goods and services should be
produced?
Choice and Opportunity Cost
• Opportunity cost is one of the most important
concepts in economics. It is also one of the most
valuable contributions that economists have
made to the related disciplines of business
management and politics.
• Suppose the community's priorities for these
three options are (in order) hospital, housing
estate and then school. If it chooses to build the
hospital it sacrifices the opportunity for having its
next most favoured option – the housing estate.
It is therefore logical to say that the housing
estate is the opportunity cost of using the land
for a hospital.
Alternative Economic Arrangements
• The different arrangements that have been
tried range from the fully centrally-planned
economy at one end of the scale to the
completely free market economy at the
opposite end.
• As with all such categorisations, actual
arrangements tend to lie between the
extreme limits and combine various degrees
of planned and free market arrangements.
Economic Goods and Free Goods
• Goods are economic if scarce resources have
to be used to obtain or modify them so that
• they are of use, i.e. have utility, for people.
• They are free if they can be enjoyed or used
without any sacrifice of resources.
Production Factors
• The process of want satisfaction can also be termed "the
creation of utility or usefulness"; it is also what we
understand by "production". In its widest economic sense,
production includes any human effort directed towards the
satisfaction of people's wants.
• The resources employed in the processes of production are
usually called the factors of production and, for simplicity,
these can be grouped into a few simple classifications.
• Land
• Labour
• Capital
• Enterprise as a Production Factor
Fixed and Variable Factors of Production
SOME ASSUMPTIONS RELATING TO THE MARKET
ECONOMY
•
•
•
•
Consistency and Rationality
The Forces of Supply and Demand
Basic Objectives of Producers and Consumers
Consumer Sovereignty