Lecture Element of economics - Chapter 1: Introducing economics

Lecture Element of economics - Chapter 1: Introducing economics. At the end of this lecture, students should be able to: Define economics, identify the sources of economics problems, define opportunity cost, define production and possibility frontier, differentiate between positive and normative economics, differentiate between micro and macro economics, to know the different types of economic systems.

ELEMENT OF ECONOMICS Introducing Economics RET P A HC GOHOHO EMMANUEL SENA © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair Learning Objectives At the end of this lecture, students should be able to •Define Economics •Identify the Sources of Economics Problems •Define Opportunity Cost •Define Production and possibility Frontier •Differentiate between Positive and normative Economics RET P A HC •Differentiate between Micro and Macro Economics •To know the different types of Economic Systems © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair Introducing Economics What is economics? RET P A HC • According to McConnel and Brue Economics is defined as: The Social Science concerned with the efficient use of limited or scarce resources (and the various uses which compete for these resources) to achieve maximum satisfaction of human material wants • It is a science of making choice © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair WHAT DO ECONOMISTS STUDY? • Economic problems • production and consumption • Scarcity: the central economic problem • defining scarcity • use of resources (factors of production) • labour • land and raw materials RET P A HC • capital • demand and supply • importance of reconciling demand and supply • actual and potential demand and supply © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair WHAT DO ECONOMISTS STUDY? • Macroeconomic issues • growth • unemployment • inflation RET P A HC balance of payments problems cyclical fluctuations â 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair WHAT DO ECONOMISTS STUDY? • Microeconomic issues • choices: what, how and for whom • the concept of opportunity cost • rational economic decision making RET P A HC • marginal costs and marginal benefits • MC > MB more • MC < MB less © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair WHAT DO ECONOMISTS STUDY? • The production possibility curve • what the curve shows • microeconomics and the production possibility curve: • choices and opportunity cost • increasing opportunity cost • macroeconomics and the production possibility RET P A HC curve: • production within the curve • shifts in the curve © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair RET P AHC The Economic Problem:   Scarcity and Choice Prepared by: Fernando Quijano and Yvonn Quijano © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair Scarcity, Choice, and Opportunity Cost • Human wants are unlimited, but resources are not • Three basic questions must be answered in order to understand an economic system: RET P A HC • What gets produced? • How is it produced? • Who gets what is produced? © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 10 of 40 ECONOMIC SYSTEMS • Classifying economic systems • methods of classification • classification by degree of government control • other methods of classification • The command economy RET P A HC • features of a command economy © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair ECONOMIC SYSTEMS • Classifying economic systems • methods of classification • classification by degree of government control • other methods of classification • The command economy • features of a command economy RET P A HC planning: â 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair ECONOMIC SYSTEMS • Classifying economic systems • methods of classification • classification by degree of government control • other methods of classification • The command economy • features of a command economy RET P A HC • planning: • consumption and investment © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair ECONOMIC SYSTEMS • Classifying economic systems • methods of classification • classification by degree of government control • other methods of classification • The command economy • features of a command economy RET P A HC • planning: • consumption and investment • matching of inputs and outputs © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair ECONOMIC SYSTEMS • Classifying economic systems • methods of classification • classification by degree of government control • other methods of classification • The command economy • features of a command economy RET P A HC • planning: • consumption and investment • matching of inputs and outputs • distribution of output © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair ECONOMIC SYSTEMS • Advantages of a command economy • high investment, high growth • stable growth • social goals pursued • low unemployment • Problems of a command economy RET P A HC • problems of gathering information • expensive to administer • inappropriate incentives shortages and surpluses Principles of Economics, 7/e â 2004 Prentice Hall Business Publishing Karl Case, Ray Fair ECONOMIC SYSTEMS • The free-market economy • demand and supply decisions • the price mechanism: • shortages and surpluses RET P A HC • equilibrium price • response to changes in demand and supply © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair The price mechanism: the effect of a rise in demand Goods Market RET P A HC Dg  shortage (Dg > Sg) © 2004 Prentice Hall Business Publishing Pg Principles of Economics, 7/e Sg Dg until Dg = Sg Karl Case, Ray Fair The price mechanism: the effect of a rise in demand Goods Market Dg  shortage (Dg > Sg) Sg Pg Dg Factor Market RET P A HC Sg Df shortage (Df > Sf) © 2004 Prentice Hall Business Publishing until Dg = Sg Pf Principles of Economics, 7/e Sf Df until Df = Sf Karl Case, Ray Fair ECONOMIC SYSTEMS • The free-market economy • demand and supply decisions • the price mechanism: • shortages and surpluses • equilibrium price • response to changes in demand and RET P A HC supply • the interdependence of markets © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair The price mechanism: the effect of a rise in demand Goods Market Dg  shortage (Dg > Sg) Sg Pg Dg Factor Market RET P A HC Sg Df shortage (Df > Sf) © 2004 Prentice Hall Business Publishing until Dg = Sg Pf Principles of Economics, 7/e Sf Df until Df = Sf Karl Case, Ray Fair ECONOMIC SYSTEMS • Advantages of a free-market economy • transmits information between buyers and sellers • no need for costly bureaucracy • incentives to be efficient RET P A HC • competitive markets responsive to consumers © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair ECONOMIC SYSTEMS • Problems of a free-market economy • competition may be limited: problem of market power • inequality RET P A HC • the environment and other social goals may be ignored © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair Mixed Systems, Markets, and Governments Since markets are not perfect, governments intervene and often play a major role in the economy Some of the goals of government are to: • Minimize market inefficiencies • Provide public goods • Redistribute income RET P A HC • Stabilize the macroeconomy: • Promote low levels of unemployment • Promote low levels of inflation © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 56 of 40 RET P A HC © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair ... Principles of Economics, 7/e Karl Case, Ray Fair 13 of 40 Factors of Production Land - all natural resources - gifts of nature - mineral deposits - agricultural land RET P A HC - forests - limited... factor of production - human physical effort - skill RET P A HC - intellectual power © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair Factors of Production... material resources used in production - Machinery - Buildings - Ships © 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair Factors of Production Entrepreneurship: