Lecture 1 Economics

7/29/2019 Lecture 1 Economics

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Introducing

Economics


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Economics

Introducing Economics

What do Economists Study?


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Economic problems

production and consumption

Scarcity: the central economic problem

defining scarcity use of resources (factors of production)

labour

land and raw materials

capital

demand and supply

importance of reconciling demand and supply

actual and potential demand and supply


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Macroeconomic issues

growth

unemployment

inflation

balance of payments problems

cyclical fluctuations


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Microeconomic issues

choices: what, how and for whom

the concept of opportunity cost

rational economic decision making

marginal costs and marginal benefits

MC > MB do more

MC > MB do less

microeconomic objectives

efficiency

equity


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The production possibility curve

what the curve shows


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0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8Units of clothing (millions)

Unitsoffood

(millions)

Units of food Units of clothing

(millions) (millions)

8m 0.0

7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m2m 6.4m

1m 6.7m

0 7.0m

A production possibility curve


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0

1

2

3

4

5

6

7

8


Unitsoffood

(millions)



a 8m 0.0

7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m2m 6.4m

1m 6.7m

0 7.0m

a



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0

1

2

3

4

5

6

7

8


Unitsoffood

(millions)



8m 0.0

b 7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m2m 6.4m

1m 6.7m

0 7.0m

b



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0

1

2

3

4

5

6

7

8


Unitsoffood

(millions)



8m 0.0

7m 2.2m

c 6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m2m 6.4m

1m 6.7m

0 7.0m

c



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0

1

2

3

4

5

6

7

8


Unitsoffood

(millions)



8m 0.0

7m 2.2m

6m 4.0m

5m 5.0m

4m 5.6m

3m 6.0m2m 6.4m

1m 6.7m

0 7.0m



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0

1

2

3

4

5

6

7

8


Unitsoffood

(millions)



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0

1

2

3

4

5

6

7

8


Unitsoffood

(millions)

x


w


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microeconomics and the production possibility

curve:


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curve:choices and opportunity cost


16/52Units of clothing (millions)

Unitsoffood

(millions)

Increasing opportunity costs

x

y1

1

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8


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increasing opportunity cost

I i i


18/52Units of clothing (millions)

Unitsoffood

(millions)

Increasing opportunity costs

x

y1

1

z1

2

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8


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macroeconomics and the production possibility

curve:


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curve:production within the curve

M ki f ll f


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v

x

y

O

Making a fuller use of resources

F

ood

Clothing

Production inside

the production

possibility curve


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curve:production within the curve

shifts in the curve

G th i t ti l t t


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O

Growth in potential output

F

ood

Clothing

Now

G th i t ti l t t


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O

F

ood

Clothing

Now

Growth in potential output

5 years time

G th i t ti l d t l t t


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O

F

ood

Clothing

Growth in potential and actual output

G th i t ti l d t l t t


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O

F

ood

Clothing

Growth in potential and actual output

x

y


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The circular flow of income

firms and households

Th i l fl f d d i


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The circular flow of goods and incomes


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The circular flow of income firms and households

goods markets

real flows: goods and services

Th i l fl f d d i


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Goods and services


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goods markets

real flows: goods and servicesmoney flows: consumer expenditure

Th i l fl f d d i


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Goods and services

Consumer

expenditure



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goods markets


factor markets


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goods markets


factor markets

real flows: services of labour and other factors



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Goods and services

Consumer

expenditure

Services of factors of production (labour, etc)



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goods markets


factor markets

real flows: services of labour and other factors

money flows: wages and other incomes



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Goods and services

Consumer

expenditure

Wages, rentdividends, etc.

Services of factors of production (labour, etc)



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The circular flow of income (cont.) macroeconomic issues

the size of total flows

microeconomic issues individual markets

choices within goods and factor markets


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Introducing Economics

Economic Systems


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Economic Systems

Classifying economic systems methods of classification

classification by degree of government control

Classifying economic systems


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Totallyplanned

economy


Totallyfree-market

economy



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Totallyplanned

economy

N. Korea

Cuba Poland France

UK

USA

Mid 1980s

China Hong

Kong


Totallyfree-market

economy



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Totallyplanned

economy

N. Korea

N. Korea

Cuba

China

Poland

Poland France

France

UKUSA

USA

Mid 1980s

Early 2010s

China Hong

Kong

CubaChina

(Hong

Kong)


UK

Totallyfree-market

economy


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Economic Systems

Classifying economic systems methods of classification

classification by degree of government control

other methods of classification The command economy

features of a command economy

planning:

consumption and investment

matching of inputs and outputs

distribution of output


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Economic Systems

Advantages of a command economy high investment, high growth

stable growth

social goals pursued low unemployment

Problems of a command economy

problems of gathering information expensive to administer

inappropriate incentives

shortages and surpluses


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Economic Systems

The free-market economy demand and supply decisions

the price mechanism:

shortages and surplusesequilibrium price

response to changes in demand and supply

The price mechanism:


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Goods Market

Dg shortage(Dg > Sg)

PgSg

Dguntil Dg = Sg


the effect of a rise in demand



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Goods Market


PgSg

Dguntil Dg = Sg

Factor Market

SgS

f

Dfuntil Df = SfDf shortage

(Df> Sf)Pf




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Economic Systems

The free-market economy demand and supply decisions

the price mechanism:

shortages and surplusesequilibrium price

response to changes in demand and supply

the interdependence of markets



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Goods Market


PgSg

Dguntil Dg = Sg

Factor Market

Sg shortage(Df> Sf)

PfS

f

Dfuntil Df = SfDf




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Economic Systems

Advantages of a free-market economy

transmits information between buyers and sellers

no need for costly bureaucracy

incentives to be efficient

competitive markets responsive to consumers


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Economic Systems

Problems of a free-market economy

competition may be limited: problem of market

power

inequality

the environment and other social goals may be

ignored

The mixed economy

Documents

Lecture 1 Economics