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Introduction:
Economic Issues
The Economic Problem
• Economic problems
– production and consumption
– scarcity: the central economic problem
• Macroeconomic issues
– growth
– unemployment
– inflation
– balance of trade deficits
– cyclical fluctuations
The Economic Problem
• Microeconomic issues
– choices:
• what
• how
• for whom
– the concept of opportunity cost
– rational decision making
• weighing up marginal costs and marginal
benefits
– the social implications of choice
The Economic Problem
• The production possibility curve
– what the curve shows
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
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
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
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
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
A production possibility curve
8
Units of food (millions)
7
6
5
4
3
2
1
0
0
1
2
3
4
5
Units of clothing (millions)
6
7
8
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
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
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
Units of clothing (millions)
6
7
8
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
– macroeconomics and the p.p. curve:
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
– macroeconomics and the p.p. curve:
• production within the curve
Making a fuller use of resources
x
Food
Production inside
the production
possibility curve
y
v
O
Clothing
The Economic Problem
• The production possibility curve
– what the curve shows
– microeconomics and the p.p. curve:
• choices and opportunity cost
• increasing opportunity cost
– macroeconomics and the p.p. curve:
• production within the curve
• shifts in the curve
Food
Growth in potential output
Now
O
Clothing
Growth in potential output
Food
5 years’ time
Now
O
Clothing
Food
Growth in potential and actual output
O
Clothing
Growth in potential and actual output
y
Food
x
O
Clothing
The Economic Problem
• The circular flow of income
– firms and households
The circular flow of goods and incomes
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
The circular flow of goods and incomes
The circular flow of goods and incomes
Goods and services
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
The circular flow of goods and incomes
Goods and services
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
– factor markets
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
– factor markets
• real flows: services of labour and other factors
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Services of factors of production (labour, etc)
The Economic Problem
• The circular flow of income
– firms and households
– goods markets
• real flows: goods and services
• money flows: consumer expenditure
– factor markets
• real flows: services of labour and other factors
• money flows: wages and other incomes
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Services of factors of production (labour, etc)
The circular flow of goods and incomes
Goods and services
£
Consumer
expenditure
Wages, rent
dividends, etc.
£
Services of factors of production (labour, etc)
The Economic Problem
• The circular flow of income (cont.)
– macroeconomic issues
• the size of total flows
– microeconomic issues
• individual markets
• choices within goods and factor markets
DEMAND AND SUPPLY
Factors that affect
both demand and
supply
Demand
The total amount
of
commodity
that
all
households wish
What determines Quantity demanded?
•
•
•
•
•
Commodity’s own price
Average household income
Prices of related commodities
Tastes
Distribution of income among
households
• Size of population
Demand and price
• A basic economic hypothesis is that the
lower the price of a commodity, the
larger the quantities that will be
demanded other things being equal.
Supply
The amount of a
commodity that firms
wish to sell in some
period is called the
quantity supplied.
What determines Quantity Supplied
•
•
•
•
Commodity’s own price
Price of inputs
Goals of firms
State of technology
What is Macroeconomics
• As it is study of how the economy
behaves in broad outline without
dwelling on much of its interesting.the
price levels, employment, total output
and the interest rate are key
macroeconomic variables for the
domestic side of economy.
DEMAND
• INCOME
The higher the income the
greater the quantity of
goods demanded
The lower the income the
greater the quantity of
goods demanded
The graph shows a
decrease in income.
POPULATION
• This affects the number
and type of buyers.
• The size, age of the
population etc all affect
demand.
• E.g a rise in the birth
rate will increase the
demand for baby
products
• The graph shows a rise
in population.
TASTES
• Each consumer has a
particular set of
preferences.
• These change over time
and businesses need to
continue to provide
appropriate products.
• The graph shows the
change in demand over
the years for flared
trousers.
ADVERTISING
• A business will need to
be aware of the tactics
of its competitors so as
to respond.
• If businesses advertise
their business then it
stands to reason that
demand for a good or
service will increase.
SUBSTITUTES
• If the price of a similar
good falls then the
demand for the original
good is likely to
decrease because more
people will buy the
substitute good.
• E.g The price of crunchy
nut cornflakes fall so the
demand for rice crispies
fall.
SUPPLY
• COSTS
These costs may include
the costs for raw
materials, labour,
expenses etc.
Obviously if costs are
reduced then the
company will be able to
supply more and vice
versa
The graph shows a
decrease in costs.
CHANGES IN TECHNOLOGY
• New production
methods using
computer-controlled
systems and new
materials can reduce
production costs.
• This means a
company can supply
more of a good.
PHYSICAL CONDITIONS
• World events often
affect the supply of
resources.
• This may include war in
other countries or
physical conditions
such as an earthquake
or disease.
• These factors will all
limit supply.
SUBSIDIES
• The government use
subsidies to protect
industries.
• Here producers do not
bear all the costs, goods
become cheaper to
produce and they are
supplied to the market at
a lower price
• This has the affect of
increasing supply.