Presentation on theme: "Introduction to Economics & Economic Systems"— Presentation transcript:
1 Introduction to Economics & Economic Systems Topic 1Introduction to Economics & Economic Systems
2 Questions to consider: What is Economics?What do we mean by ‘economise’?Who is affected by economics?Why is economics important to property & construction?
3 Satisfaction of Individual Human ‘wants’ Q: How do people satisfy their material wants?
4 Satisfaction of collective Society ‘wants’ Q: How does Society satisfy its needs & wants?
5 Can people’s wants be satisfied in the long run? Can we have everything we want? Why not?Gmeee,Gmeee
6 INSATIABLE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE
7 ECONOMISE Best case scenario: Maximise our satisfaction with our limited resouces,i.e. choose how to use our resources to our greatest advantageECONOMISE
8 "Economic problems arise as the individual or the community has to make the most efficient use of its limited resources and is confronted with the problem of choice. Economics is accordingly concerned with the arrangements that are made for the use of scarce resources"L Ruddock, 1992
9 2.0 ResourcesSpecific known amount of resources available to each person/economyResources are anything which can be used to satisfy wantsby producing Goods & Services.i.e., Factors of Production3 types:
10 LAND – all natural resources LABOR – human effort involved in productionCAPITAL – machinery/equipment for manufacturing otherGoods & Services - expenditure on capital is ‘capital investment’
12 Labour Intensive(lots of human work)Capital Intensive(lots of money and/orInvestment)Q: Where does construction industry sit?Q: How would you measure the wealth of an economy/society?
13 ‘Real Economy’ versus ‘Money Economy’ Q: Would the wealth & standard of living of the country increaseif the Government printed more money?The real economy is concerned with the amount of Goods &Services available to the population - E.g., shopping centres,public transport, quantity of food, number of hospital beds etc..Whereas, money has no intrinsic value –it merely enablestransactions to take place –it can be exchanged for Goods & Services
14 MoneyMoney is a liquid asset (can easily beconverted into other assets)The functions of money:medium of exchangeunit of account (how rich are you?)a store of wealthThe characteristics of money:divisiblestable valueportabilitydurability
15 A measure of the wealth of an economy: Amount of G&S produced (National Production)Amount of Income received(National Income)Amount of Expenditure on G&S(National Expenditure)Q: How can we achieve true economic growth in the economy?
16 Answer:We compare ‘National Production’ on a year by year basis.However, when comparing we must take into account inflation.Therefore, economists use constant prices when comparingNational production figures, i.e.The prices of one ‘base’ year are applied to the output of otheryears
17 In 1999-2000 construction accounted for 5.5% of GDP, Construction is an important part of the economyIn construction accounted for 5.5% of GDP,And employed almost 8% of the workforce
18 3.0 Opportunity CostEconomic Goods are scarce and, therefore, have a costIn contrast to ‘free’ goodsThe cost of using an economic good is the cost of foregoing thenext best alternative to which that resource could have been put.It is a way of putting a cost on our economic decisionsOpportunity cost = true economic costQ: Why is it referred to as a cost?
19 An easy example of Opportunity cost - You are hungry. You have one dollar. You are at Wendys.You can buy one item. You must forego al other items.What one item would be your best choice to alleviate your hunger?
20 Another example,A plot of land could have several possible uses:develop shopping centredevelop office blockdevelop private housing estate
21 Suppose that after doing an initial feasibility analysis, the land owner estimates that he can make the following profit fromeach option:shopping centre = $10 millionoffice block = $5 millionhousing estate = $8 millionQ: What is the best economic use for the land?Q: What is the opportunity cost associated with this use?
22 4.0 Production Possibility Curves An economic tool/diagram with two purposes:illustrates opportunity costshows whether resources are being used efficientlyFor example, suppose an economy produces two goods:AlternativeSugar (tons)Houses (units)A34B3032C6028D9023E12016F1507G180
23 Resources & technology fixed in short term The combinations of production possibilities may be plotted on a curve,as followsQ: If the economy is at point E,then what is the opportunityCost of producing 30,000 moretons of sugar?Gx180Sugar (tons)Fx150Ex120A: We move from 16 houses to 8 produced. A cost of 8 housing units.Dx90HCxx60Bx30Ax51015202530Houses (units)
24 Q: What does it imply if the economy was producing at Point H? Consider what would happen if:There was an advance in construction technology, whichenabled houses to be produced more efficientlythe total amount of resources in the economy increased
25 A country must decided which economic system it will employ in order to utilize its finite resources.The functions of an economic system:choose which goods & services will be producedensure, as far as possible, that wastage of resources does not occurto push out the production possibility curve
26 All economies face the ‘economic problem’ Thus, they must adopt an economic system in order to allocate theirresourcesWhen allocating resources, the society must consider 3 questions:What is to be produced?How are the goods to be produced?For whom to produce?Society’s answers to these questions will determine which economicsystem they adopt: Capitalist, Mixed or Socialist
27 CONSUMERS INDUSTRY A INDUSTRY B Free Enterprise Economic System Land, labor,CapitalLand, labor,CapitalLand, labor,CapitalSales & ProfitSales & ProfitSales & ProfitProduceProduceProduceCONSUMERSSales & ProfitSales & ProfitSales & ProfitProduceProduceProduceLand, labor,CapitalLand, labor,CapitalLand, labor,CapitalINDUSTRY BFree Enterprise Economic System
28 Capitalist Economic System – Key Words free enterprise system - private business operates with minimalgovernment involvement.privately owned resources - the means and materials for productionthe economy are owned and operated by private individualsand businesses, not the government.profit motive - individuals and businesses provide goods andservices in order to make money.consumer sovereignty - the one buying the good or service is freeto make whatever choice seems most advantageous to them.
29 Advantages of Capitalist System encourages most efficient methods of production by privatebusinesses (profit motive)]encourages innovation in production techniquesallows economic freedomensures scarce resources are used carefully
30 Disadvantages of Capitalist System inequality in distribution of goods & servicessome essential goods & services (those consumed on collective basis)will not be provided by private sector, e.g. defense, police etc.monopoly situations can arise, which may lead to unfair practicesfluctuating demand is characteristic, which leads to periods of highunemployment and high inflation
31 CONSUMERS INDUSTRY A (increased demand) INDUSTRY B (decreased demand) Land, labor,CapitalLand, labor,CapitalLand, labor,CapitalLand, labou,CapitalSales & ProfitSales & ProfitSales & ProfitSales & ProfitProduceProduceProduceProduceCONSUMERSSales & ProfitSales & ProfitSales & ProfitProduceProduceProduceLand, labor,CapitalLand, labor,CapitalLand, labor,CapitalINDUSTRY B (decreased demand)Free Enterprise Economic System
32 CONSUMERS GOVERNMENT GOVERNMENT Mixed Economic System MONETARY SYSTEM LEGALSYSTEM-monopoly reg’n-pollution control-building regsLand, labor,CapitalLand, labor,CapitalLand, labor,CapitalSales & ProfitSales & ProfitSales & ProfitProduceProduceProduceCONSUMERSECONOMICPOLICY-fiscal-monetarySales & ProfitSales & ProfitSales & ProfitProduceProduceProduceESSENTIALGOODS &SERVICESLand, labor,CapitalLand, labor,CapitalLand, labor,CapitalGOVERNMENTTAXATIONMixed Economic System
33 Mixed Economic System – Key Words Government interventionGovernment role supports/facilitates free market enterprise infollowing ways:establishing monetary system & legal systemcontrolling monopoliesprovision of essential goods & services not providedregulating undesirable business practicesalleviate inequality in society (progressive tax, social welfare)attempting to provide stable economy
34 Government (Central Planning Authority) Owns, Plans & Allocates Resources, & Controls ProductionINDUSTRY AINDUSTRY BINDUSTRY CINDUSTRY DPrices set byGovernmentProduce according to Gvt’s targetProduce acc. to Gvt’s targetProduce acc. to Gvt’s targetProduce acc. to Gvt’s targetCONSUMERS
35 Socialist Economic System – Key Words Central Planning Authority (CPA)command systemcentral planning and ownership of resourcesproduction targets (5 year plans) to plan resource allocationproduction techniques/income levels decided by CPAno consumer sovereignty (although consumers can choose)no profit motive as businesses are socially ownedworkers encouraged by incentives & patriotic loyalty
36 distribution through market, but price not determined by market amount an individual receives depends on the proportion ofwealth they receive (income level)Central Planning Authority set wage levels fordifferent jobs/professions according to perceived valueinequality does result, but not to extent of Capitalist systemcentral authority price fixing, rationing of scarce Goods and Servicesessential Goods and Services are provided free of charge
37 Economic Decision Making Direct Costs:land acquisitionbuilding costsplanning permission feescost of labourersmaintenance costsmaterials costsDirect Returns:extra productionextra salesextra profitPrivate Costs & Benefits
38 Economic Decision Making Direct Costs:land acquisitionbuilding costsplanning permission feescost of labourersmaintenance costsmaterials costsDirect Returns:extra productionextra salesextra profit++Social Benefits:increased employmentmore income & wealthSocial Costs:increased pollutionincreased noiseincreased traffic congestionunsightly viewTrue Social Costs & Benefits
39 Cost-Benefit Analysis Stage 1The listing of all the relevant costs and benefits attributable to the projectStage 2All cost and benefits are then evaluated so that they can be expressed as a common monetary valueStage 3All cost and benefits are discounted back to the present.Stage 4Project appraisal. Finally, the decision-maker needs to assess all the costs and benefits, and select a project that yields the best increase in 'social welfare', or net social benefit
40 Cost-Benefit Analysis – Disadvantages Deciding which social costs & benefits to include in analysis- social impacts?- environmental impacts?- international impacts?Evaluation of social costs & benefits – the allocation of amarket price- how do we put a value on these things?