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Topic 1 Introduction to Economics & Economic Systems.

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1 Topic 1 Introduction 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 Best case scenario: Maximise our satisfaction with our limited resouces, i.e. choose how to use our resources to our greatest advantage ECONOMISE

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 2.0Resources Specific known amount of resources available to each person/economy Resources are anything which can be used to satisfy wants by producing Goods & Services. i.e., Factors of Production 3 types:

10 1.LAND – all natural resources 2.LABOR – human effort involved in production 3.CAPITAL – machinery/equipment for manufacturing other Goods & Services - expenditure on capital is ‘capital investment’

11 Fourth Factor of Production – Enterprise

12 Labour Intensive (lots of human work) Capital Intensive (lots of money and/or Investment) 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 increase if 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 Money Money is a liquid asset (can easily be converted into other assets) The functions of money:  medium of exchange  unit of account (how rich are you?)  a store of wealth The characteristics of money:  divisible  stable value  portability  durability

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 comparing National production figures, i.e. The prices of one ‘base’ year are applied to the output of other years

17 Construction is an important part of the economy In construction accounted for 5.5% of GDP, And employed almost 8% of the workforce

18 3.0Opportunity Cost Economic Goods are scarce and, therefore, have a cost In contrast to ‘free’ goods The cost of using an economic good is the cost of foregoing the next best alternative to which that resource could have been put. It is a way of putting a cost on our economic decisions Opportunity cost = true economic cost Q: 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 centre develop office block develop private housing estate

21 Suppose that after doing an initial feasibility analysis, the land owner estimates that he can make the following profit from each option: shopping centre = $10 million office block = $5 million housing estate = $8 million Q: What is the best economic use for the land? Q: What is the opportunity cost associated with this use?

22 4.0Production Possibility Curves An economic tool/diagram with two purposes: illustrates opportunity cost shows whether resources are being used efficiently For example, suppose an economy produces two goods: AlternativeSugar (tons)Houses (units ) A034 B3032 C6028 D9023 E12016 F1507 G1800

23 Resources & technology fixed in short term The combinations of production possibilities may be plotted on a curve, as follows Sugar (tons) Houses (units) x x x x x x x A B C D E F G Q: If the economy is at point E, then what is the opportunity Cost of producing 30,000 more tons of sugar? H x A: We move from 16 houses to 8 produced. A cost of 8 housing 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, which enabled houses to be produced more efficiently the 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 produced ensure, as far as possible, that wastage of resources does not occur to push out the production possibility curve

26 All economies face the ‘economic problem’ Thus, they must adopt an economic system in order to allocate their resources When allocating resources, the society must consider 3 questions: 1.What is to be produced? 2.How are the goods to be produced? 3.For whom to produce? Society’s answers to these questions will determine which economic system they adopt: Capitalist, Mixed or Socialist

27 Land, labor, Capital Land, labor, Capital Produce CONSUMERS Sales & Profit INDUSTRY A Produce Sales & Profit INDUSTRY B Land, labor, Capital Land, labor, Capital Land, labor, Capital Land, labor, Capital Free Enterprise Economic System

28 Capitalist Economic System – Key Words free enterprise system - private business operates with minimal government involvement. privately owned resources - the means and materials for production the economy are owned and operated by private individuals and businesses, not the government. profit motive - individuals and businesses provide goods and services in order to make money. consumer sovereignty - the one buying the good or service is free to make whatever choice seems most advantageous to them.

29 Advantages of Capitalist System encourages most efficient methods of production by private businesses (profit motive)] encourages innovation in production techniques allows economic freedom ensures scarce resources are used carefully

30 Disadvantages of Capitalist System inequality in distribution of goods & services some 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 practices fluctuating demand is characteristic, which leads to periods of high unemployment and high inflation

31 Land, labor, Capital Land, labor, Capital Produce CONSUMERS Sales & Profit INDUSTRY A (increased demand) Produce Sales & Profit INDUSTRY B (decreased demand) Land, labor, Capital Land, labor, Capital Land, labor, Capital Land, labor, Capital Free Enterprise Economic System Land, labou, Capital Produce Sales & Profit

32 Land, labor, Capital Land, labor, Capital Produce CONSUMERS Sales & Profit Produce Sales & Profit Land, labor, Capital Land, labor, Capital Land, labor, Capital Land, labor, Capital MONETARY SYSTEM GOVERNMENT TAXATION LEGAL SYSTEM -monopoly reg’n -pollution control -building regs ESSENTIAL GOODS & SERVICES ECONOMIC POLICY -fiscal -monetary Mixed Economic System

33 Mixed Economic System – Key Words Government intervention Government role supports/facilitates free market enterprise in following ways:  establishing monetary system & legal system  controlling monopolies  provision of essential goods & services not provided  regulating undesirable business practices  alleviate inequality in society (progressive tax, social welfare)  attempting to provide stable economy

34 Government (Central Planning Authority) INDUSTRY A CONSUMERS Produce according to Gvt’s target INDUSTRY DINDUSTRY CINDUSTRY B Produce acc. to Gvt’s target Prices set by Government Owns, Plans & Allocates Resources, & Controls Production

35 Socialist Economic System – Key Words Central Planning Authority (CPA) command system central planning and ownership of resources production targets (5 year plans) to plan resource allocation production techniques/income levels decided by CPA no consumer sovereignty (although consumers can choose) no profit motive as businesses are socially owned workers encouraged by incentives & patriotic loyalty

36 distribution through market, but price not determined by market amount an individual receives depends on the proportion of wealth they receive (income level) Central Planning Authority set wage levels for different jobs/professions according to perceived value inequality does result, but not to extent of Capitalist system central authority price fixing, rationing of scarce Goods and Services essential Goods and Services are provided free of charge

37 Economic Decision Making Direct Costs: land acquisition building costs planning permission fees cost of labourers maintenance costs materials costs Direct Returns: extra production extra sales extra profit Private Costs & Benefits

38 Economic Decision Making Direct Costs: land acquisition building costs planning permission fees cost of labourers maintenance costs materials costs Direct Returns: extra production extra sales extra profit True Social Costs & Benefits Social Costs: increased pollution increased noise increased traffic congestion unsightly view + Social Benefits: increased employment more income & wealth +

39 Cost-Benefit Analysis Stage 1 The listing of all the relevant costs and benefits attributable to the project Stage 2 All cost and benefits are then evaluated so that they can be expressed as a common monetary value Stage 3 All cost and benefits are discounted back to the present. Stage 4 Project 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 1.Deciding which social costs & benefits to include in analysis - social impacts? - environmental impacts? - international impacts? Evaluation of social costs & benefits – the allocation of a market price - how do we put a value on these things?


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