2 Learning Objectives By the end of this unit, you should be able to: give an overview of Economicsdeal with the Economic Problemdiscuss the Methodology in Economicsdifferentiate between Microeconomic IssuesMacroeconomic Issues
3 What is Economics? Three economic problems: Economics is the study of how people and society choose to use scarce productive resources to produce goods and services and to allocate them in such a way as to satisfy the unlimited wants of the various persons and groups in a society.Three economic problems:Microeconomic deals with the economic choices of the individual producer, or consumer:what to producehow to producefor whom to produce
4 Scarcity, choicePeople use goods and services to satisfy their wants. The act of producing commodities is called production and the act of using these commodities is called consumption.Our wants may be unlimited but our resources are limited in supply. This result in the problem of scarcity.The basic function of any economic system is to provide the framework for choice.Resources —in this case represented by their respective incomes—are insufficient to buy all the goods and services they desire.
5 Scarcity: central economic problem The world’s resources are limited.There are only limited amounts of land,water, oil, food and other resources on this planet.Economists say that resources are scarce.Scarcity means that economic agents, such asindividuals, firms, governments, can only obtaina limited amount of resources at any moment intime.
6 Factor of Production1. land (natural resources e.g. agricultural land, minerals, gases, products of forests and oceans);2. labour (human resources both physical and mental abilities);3. capital (man-made resources called producer goods which was mentioned earlier);4. enterprise (supplied by entrepreneurs who take the risk to organ se production)
7 Opportunity costOpportunity cost can be defined as the next best alternative foregone, i.e., something which must be sacrificed in order to obtain something else.For example:Whether to go to college or to work?Whether to study or go out on a date?Whether to go to class or sleep in?
8 Scarcity, Choice & Opportunity Cost The Economic ProblemLimited ResourcesUnlimited WantsSCARCITYAn insufficiency of mean in relation to wantsCHOICEOPPORTUNITY CHOICE
9 Food for Thought:Why water being so inevitable for human life is so cheap compared to diamonds, which are mostly used for jewelries?
10 The role of the marketA market is the process where households decide aboutconsumption of alternative goods;firms decide aboutwhat and how to produce;workers decide about how muchand for whom to work.Prices of goods, and resources, such as labour, machinery,and land, adjust to ensure that limited resources are used toproduce the goods and services that society demands.
11 Microeconomics vs. Macroeconomics 2 category of Economics: Microeconomics & Macroeconomics
12 PRODUCTION POSSIBILITY CURVE Example. An economy with four workers (as aresource) and two goods – food and clothes.Production in each industry satisfies the law ofdiminishing returns, which means that eachadditional worker adds less to industry outputthan the previous additional worker added.
13 PRODUCTION POSSIBILITY CURVE Production possibilitiesFoodClothesEmploymentOutput42532219217102430
15 Economic efficiency Economic efficiency. A situation where each good is produced at a minimum cost and whereindividuals and firms get the maximum benefitfrom their resources.
16 Economic Growth Result of Economic growth Increase in production of goods and servicesShift out the production possibilities frontierGood YBADCGood X
17 Sources of Economic Growth New TechnologyAddition of labor and capitalInvention and innovationDiscovery of new resourcesImprovement in productivityBetter educated and moreskilled labor force
18 Three types of Economic Systems The free-market economy: all of the economic activities are result of inter-actions in the market.The planned or command economy: all of the economic decisions are taken by the government.The mixed economy: some mix of free-market and planned economies.
19 A. Market EconomiesAlso called Capitalist or Private Enterprise systemsFeatures are:Productive resources are predominantly owned by the private sectorEconomic decision making is decentralised, i.e. the level of government intervention is lowEconomic motivation is self interest (utility or profit)CompetitionMarkets and prices (the invisible hand)619
20 Market Systems: Advantages and Disadvantages Advantages of market systemsEconomic freedomMinimum state intervention maximises individual welfare ( consumer surplus and producer surplus)Efficiencies (in production, distribution and consumption) or Pareto-efficiency resource allocation1720
21 Market Systems: Advantages and Disadvantages Disadvantages of market systemsUnequal distribution of income and wealthInflation and unemploymentDisadvantaged groups (e.g. migrants, long-term unemployed) are unfairly treatedOutput fluctuations and business cycles
22 B. Command EconomiesAlso called socialist or centrally planned economiesFeatures are:Productive resources are owned predominantly by the state or government sectorEconomic decision making is undertaken by a central authority or governmentCollective welfare (i.e. goods/services) distributed to benefit the state as a whole, rather than individualsAllocation by non-price mechanismsEquity is valued1022
23 Command Economies: Advantages and Disadvantages Advantages of command systemsAbundant provision of collective goods (e.g. education, health, public transport and recreational facilities)The government provides employment securityEqual opportunity and equityDisadvantages of command systemsInefficiencies and problem of coordinationUndesired production decisionsMisallocation of resources because of unreal prices
24 C. The Mixed Economy All modern economies are said to be a mixture of: market forces andgovernment interventionIn the past, major examples of centrally planned economies were the former USSR and China.These now have allowed levels of market forces to operate.1324
25 The Mixed EconomyThere are both public and private sectors. The public sector complements the private sectorAreas of government controlRelative prices of goods & inputsRelative incomesPattern of production and consumptionMacroeconomic management
26 The Mixed Economy: Advantages To restrain the unfair use of economic powerTo correct the inequalities of the capitalized economyTo provide goods and services that private enterprise would be reluctant or unable to provideTo remove socially undesirable consequences of private production- e.g. pollution control, regional imbalances in employment.To direct change in the structure of the nation’s industriesTo manage inflation rates, employment levels and etc in accordance with social objective;To moderate the ups and downs in the trade cycles
27 Economies in Transition Many countries are in transition from either communism or socialism to capitalism.Privatization is a common aspect of transition from a command economy to free enterprise system. Privatization means state-owned industries are sold to private individuals and companies.