1. Lesson 1: BASIC ECONOMIC CONCEPTS Lecturer: A’lam Asadov
A&F Year 1 Economics
Lesson 1: BASIC ECONOMIC CONCEPTS
Lecturer: A’lam Asadov
Room 103
Office Hours: Friday 3-4 pm

2. 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

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 produce
how to produce
for whom to produce

4. 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.

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 as
individuals, firms, governments, can only obtain
a limited amount of resources at any moment in
time.

6. 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)

7. 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?

8. Scarcity, Choice & Opportunity Cost
The Economic Problem
Limited Resources
Unlimited Wants
SCARCITY
An insufficiency of mean in relation to wants
CHOICE
OPPORTUNITY 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 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.

11. Microeconomics vs. Macroeconomics
2 category of Economics: Microeconomics & Macroeconomics

12. 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.

13. PRODUCTION POSSIBILITY CURVE
Production possibilities
Food
Clothes
Employment
Output 4 25 3 22 1 9 2 17 10 24 30

14. PRODUCTION POSSIBILITY CURVEA B C D E H G

15. 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.

16. Economic Growth Result of Economic growth
Increase in production of goods and services
Shift out the production possibilities frontier
Good Y B A D C
Good X

17. 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

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 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) 6 19

20. 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 17 20

21. 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

22. 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 10 22

23. 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

24. 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. 13 24

25. The Mixed Economy
There are both public and private sectors. The public sector complements the private sector
Areas of government control
Relative prices of goods & inputs
Relative incomes
Pattern of production and consumption
Macroeconomic management

26. 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

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.

28. Questions?