INTRODUCTION TO ECONOMICS 2019/2/24 Unit One INTRODUCTION TO ECONOMICS

Introduction to Economics 2019/2/24 Introduction to Economics The Economics is the study of how scarce resources are or should be allocated. The word economy comes from a Greek word for “one who manages a household.” A household and an economy face many decisions: Who will work? What goods and how many of them should be produced? What resources should be used in production? At what price should the goods be sold?

Introduction to Economics The problem of scarcity 2019/2/24 Introduction to Economics The problem of scarcity Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Scare resources The management of society’s resources is important because resources are scarce.

Introduction to Economics 2019/2/24 Introduction to Economics Unlimited wants Human wants are unlimited. This can include more food, a bigger house a longer holiday, a cleaner environment. No one would choose to live at the level of basic human needs if they could enjoy a higher standard of living.

The problem of scarcity is present in some form or another  A. in all societies. B. in the industrialized countries only. C. only in market systems. D. only in command economies.

The basic Economic problem 2019/2/24 The basic Economic problem The Economic problem Scarce resources in relation to unlimited wants. Since there are only a limit amount of resources available to produce the unlimited amount of goods and services we desire. factors of production (have limits) /society’s demands = wants (no limits) land labor capital Enterprise Factors of production

2019/2/24 What Is Economics? The Economics study of how societies use scarce resources to produce valuable commodities to satisfy our wants. It also study how to allocate their scarce resources in the most efficient way. Because our resources are limited, we cannot produce an unlimited number of different goods and service.

Exercise The major economic problem is that of A. allocating scarce resources in such a manner that society's unlimited needs or wants are satisfied as well as possible B. guaranteeing that production occurs in the most efficient manner C. comparing the success of command versus market economies D. guaranteeing a minimum level of income for every citizen 

Three Economic Questions 2019/2/24 1. What to produced? What goods and services are produced? 2. How to produce? What production methods are used? 3. For whom to produce? Who is to receive goods and services?

Three Economic Questions 2019/2/24 What to produced? We need to decide what to produce and in what quantities. Make decision Improve our standard of living Food, clothing and vehicles Improve our defences Military hardware

Three Economic Questions 2019/2/24 2. How to produce? We need to consider how we can get the maximum use out of the resources available to us. What is the best use of our scarce resources of land labour and capital? Any potential long-term health risks. The full impact on the environment

Three Economic Questions 2019/2/24 3. For whom to produce? We need to concern how many of each person’s wants are to be satisfied. What is the best method of distributing products to ensure the highest level of wants and needs are met? Who is to receive goods and services Who will get expensive hospital treatment Why is there so much poverty?

Economics is divided into two main branches: 1. Microeconomics (small) 2019/2/24 What Is Economics? Economics is concerned with trying to explain the causes of / and solutions to many of today’s important issues (e.g. unemployment, growth & living standards, distribution of income and wealth) Economics is divided into two main branches: 1. Microeconomics (small) Adam Smith---- The Wealth of Nations. 2. Macroeconomics (large) John Maynard Keynes ----- General Theory of Employment, Interest and Money.

What Is Microeconomics? 2019/2/24 What Is Microeconomics? Microeconomics is the study of the behaviour and decisions of individuals and business in markets across the economy. What Is Microeconomics Analysis? the study which investigates how scare factors of production are allocated between alternative ends the study which seeks to identify the strategic determinants of an optimally efficient use of factors of production

Microeconomics Microeconomics study the decisions and behavior of 2019/2/24 Microeconomics Microeconomics study the decisions and behavior of Consumers Producers Individual markets It is concerned with the demand and supply of particular goods, services and resources such as cars, butter, computer. e.g. Demands and supply, Elasticity ,Cost of production & Revenue and profit , Market Structure, Market Failure, etc.

Microeconomics best describes the study of A. the  growth rate of GNP. B. behaviour of individual economic agents. C. effects of aggregate inflation. D. level of national unemployment.

What Is Macroeconomics? 2019/2/24 What Is Macroeconomics? it is concerned with the economy as a whole the study of aggregate economic activity Aggregate Demand – the total amount of spending in the economy Aggregate Supply – the total amount of output in the economy

What Is Macroeconomics Analysis? 2019/2/24 the study which investigates how the economy (as a whole) works Macroeconomics seeks to identify strategic determinants National income(GDP) Economic growth Unemployment Inflation International trade

Microeconomics & Macroeconomics concerned with behaviour and decisions of individuals and business in markets. Macroeconomics concerned with the economy as a whole Ingredients How to divide? The size and shape

Which of the following are macroeconomic issues, which are microeconomic ones a) The rate of inflation b) Why the price of cotton fluctuates more than that of cars. c) The rate of economic growth this year compared with last year. d) The average wage rate paid to automotive industry e) The total amount spent by UK consumers on service

Scarcity, Choice, and Opportunity Cost 2019/2/24 Scarcity Choice Trade-offs Opportunity Cost Economic Goods Free Goods 21

2. Scarcity, Choice & The Opportunity Cost 2019/2/24 Scarcity ---- economic agents, such as individuals, firms, governments and international agencies, can only obtain a limited amount of resources. A family cannot have everything it wants in fixed budget. A firm want to build a new factory but not have the resources to do. A government wish to build new hospitals but not have the finance to do.

2. Scarcity, Choice & The Opportunity Cost 2019/2/24 Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have. The resources are SCARCE. There are limited amounts of land water oil Food Housing other resources.

2. Scarcity, Choice & The Opportunity Cost 2019/2/24 Trade-offs Making a choice made normally involves a trade-off - In a world of scarcity, choosing one thing means giving up something else in exchange. “There is no such thing as a free lunch!”

Making decisions requires trading off one goal against another. 2019/2/24 Scarcity, Choice, and Opportunity Cost People face tradeoffs. To get one thing, we usually have to give up another thing. Leisure time v. work Guns v. butter Food v. clothing Making decisions requires trading off one goal against another.

Scarcity, Choice, and Opportunity Cost 2019/2/24 Scarcity, Choice, and Opportunity Cost Making choose. When you use a resource for one good, you can’t use that resource for something else. Hotel Building school Business office When you spend money on one good, you can’t use that money for anything else. Water Ice cream Newspaper 26

Scarcity, Choice, and Opportunity Cost 2019/2/24 Making choose Housing: Choices about whether to rent or buy a home Working: Choosing between full-time or part-time work, or to take a course in higher education lasting three years Transport and travel: The choice between using Euro-Tunnel, a speedy low-cost ferry or an airline when travelling to Western Europe 27

Scarcity, Choice & The Opportunity Cost 2019/2/24 Given limited resources and unlimited wants we have to choose which wants to satisfy. For example, suppose you were given a $15. you could either buy a new compact disc which costs $15 or two book for $7.5 each. What is the opportunity cost of the CD?

Scarcity, Choice, and Opportunity Cost 2019/2/24 The opportunity cost of a decision is the value of the good or service forgone. 10

Opportunity cost of going to college If the total costs of tuition, books, and travel to be ￥18000. A full time job for 18-year-old high school graduate would on average pay around ￥15000 in 2008. Calculate the opportunity cost of going to college.

Scarcity, Choice, and Opportunity Cost 2019/2/24 LA Laker basketball star Kobe Bryant chose to skip college and go straight to the NBA from high school when offered a $10 million contract. 10

Economic goods and free goods 2019/2/24 Economic goods and free goods Economic goods ---- these are goods which have a cost in terms of the real resources used. Most goods are economic goods. Economic goods are Scarce (not unlimited) Produced with resources Have an opportunity cost 32

Economic goods and free goods 2019/2/24 Example for economic goods Insurance services are Scarce (not unlimited) Produced with workers, machines, office equipment and office The resources used for insurance could have been used to produce banking services 33

Economic goods and free goods 2019/2/24 Free goods, which have no price attach to them and which require no factors of production for their enjoyment by consumers. Only a few goods are free goods. Free goods are Not scarce (unlimited) Available without using resources to produce them Do not have an opportunity cost 34

Economic goods and free goods 2019/2/24 Example for free goods Sunlight It not scarce If we use it, there is still the same amount as before We do not use resources to produce it It does not have an opportunity cost We do not need to give up anything to have sunlight 35

The economic problem in society Demands is unlimited Wants can be satisfied by Free goods (air, sunshine, rain water ,etc.) Production factors (scarce resource) (Land, Labor, Capital, Enterprise)

An important theme in economics is that  A. some types of economic systems rely on government to answer the fundamental questions. B. there are alternative uses for society's scarce resources. C. market systems are better than command economies. D. economic science is not dismal.

An important idea in the definition of economics is that the subject teaches an individual how to operate efficiently and make money.  False True Because every society faces essentially unlimited human wants and limited productive resources , every society must choose among different production and distribution alternatives.  False True