Learning Objectives By the end of this unit, you should be able to: give an overview of Economics deal with the Economic Problem discuss the Methodology in Economics differentiate between Microeconomic Issues Macroeconomic Issues
What is Economics? 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 produce how to produce for whom to produce
Scarcity, choice People 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.
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 as individuals, firms, governments, can only obtain a limited amount of resources at any moment in time.
Factor of Production 1. 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)
Opportunity cost Opportunity 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?
Scarcity, Choice & Opportunity Cost The Economic Problem Limited ResourcesUnlimited Wants SCARCITY An insufficiency of mean in relation to wants CHOICE OPPORTUNITY CHOICE
Food for Thought: Why water being so inevitable for human life is so cheap compared to diamonds, which are mostly used for jewelries?
The role of the market A market is the process where households decide about consumption of alternative goods; firms decide about what and how to produce; workers decide about how much and for whom to work. Prices of goods, and resources, such as labour, machinery, and land, adjust to ensure that limited resources are used to produce the goods and services that society demands.
Microeconomics vs. Macroeconomics ECONOMICS How society manages its scares resources efficiently MICROECONOMICS Focuses on individual parts of the economy how households and firms make decisions and how they interact In specific markets MACROECONOMICS Looks at the economy as entire/whole Economy wide phenomena for e.g. Inflation Unemployment Economic growth 2 category of Economics: Microeconomics & Macroeconomics
PRODUCTION POSSIBILITY CURVE Example. An economy with four workers (as a resource) and two goods – food and clothes. Production in each industry satisfies the law of diminishing returns, which means that each additional worker adds less to industry output than the previous additional worker added.
PRODUCTION POSSIBILITY CURVE Production possibilities FoodClothes EmploymentOutputEmploymentOutput
PRODUCTION POSSIBILITY CURVE A B C D E H G
Economic efficiency Economic efficiency. A situation where each good is produced at a minimum cost and where individuals and firms get the maximum benefit from their resources.
Economic Growth Result of Economic growth Increase in production of goods and services Shift out the production possibilities frontier Good Y Good X A C B D
Sources of Economic Growth New Technology Addition of labor and capital Invention and innovation Discovery of new resources Improvement in productivity Better educated and more skilled labor force
Three types of Economic Systems A. The free-market economy: all of the economic activities are result of inter- actions in the market. B. The planned or command economy: all of the economic decisions are taken by the government. C. The mixed economy: some mix of free-market and planned economies.
A. Market Economies Also called Capitalist or Private Enterprise systems Features are: Productive resources are predominantly owned by the private sector Economic decision making is decentralised, i.e. the level of government intervention is low Economic motivation is self interest (utility or profit) Competition Markets and prices (the invisible hand)
Market Systems: Advantages and Disadvantages Advantages of market systems Economic freedom Minimum state intervention maximises individual welfare ( consumer surplus and producer surplus) Efficiencies (in production, distribution and consumption) or Pareto-efficiency resource allocation
Market Systems: Advantages and Disadvantages Disadvantages of market systems Unequal distribution of income and wealth Inflation and unemployment Disadvantaged groups (e.g. migrants, long-term unemployed) are unfairly treated Output fluctuations and business cycles
B. Command Economies Also called socialist or centrally planned economies Features are: Productive resources are owned predominantly by the state or government sector Economic decision making is undertaken by a central authority or government Collective welfare (i.e. goods/services) distributed to benefit the state as a whole, rather than individuals Allocation by non-price mechanisms Equity is valued
Command Economies: Advantages and Disadvantages Advantages of command systems Abundant provision of collective goods (e.g. education, health, public transport and recreational facilities) The government provides employment security Equal opportunity and equity Disadvantages of command systems Inefficiencies and problem of coordination Undesired production decisions Misallocation of resources because of unreal prices
C. The Mixed Economy All modern economies are said to be a mixture of: market forces and government intervention In the past, major examples of centrally planned economies were the former USSR and China. These now have allowed levels of market forces to operate.
The Mixed Economy Areas of government control Relative prices of goods & inputs Relative incomes Pattern of production and consumption Macroeconomic management There are both public and private sectors. The public sector complements the private sector
The Mixed Economy: Advantages To restrain the unfair use of economic power To correct the inequalities of the capitalized economy To provide goods and services that private enterprise would be reluctant or unable to provide To 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 industries To manage inflation rates, employment levels and etc in accordance with social objective; To moderate the ups and downs in the trade cycles
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.