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Welcometo the Wonderful World of Economics
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The word "economics“has its origin in the Greek "oikonomikós" (relating to householdmanagement), from "oikos" (house).
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Economics studies how society manages its scarce resources.----------------------------------------How people make decisions:
How much they work,What they buy, How much they save or invest...
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Economics studies how society manages its scarce resources. ----------------------------------------How people interactwith each other:
How buyers and sellersTogether determine the price, and quantity of goods sold...
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Economics studies how society manages its scarce resources ----------------------------------------How the Economy as a Whole Works:
Analyze the forces and trendsthat affect the economy:Growth in average income,unemployment, inflation etc.
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Economics studies how society manages its scarce resources ----------------------------------------
How People Make Decisions “ ”
Four Principles of Individual Decision-Making
Efficiency or Equity?
1
b
People Face Trade-offs
a
c Good decisions are made when options are known
Guns or Butter?
Four Principles of Individual Decision-Making
Some costs are ignored
2
b
Cost is What You Give-Up
a
c Opportunity Cost is whatever must be given up to obtain some item
Not all costs are perceived
Four Principles of Individual Decision-Making
Marginal changes are small incremental adjustments to a plan of action
3
b
Rational People Think at the Margin
a
c Marginal costs and marginal benefits are compared to make decisions
Decisions are rarely black and white
Four Principles of Individual Decision-Making
There are direct and indirect costs and benefits
4
b
People Respond to Incentives
a
c Incentives and opportunity costsare compared in decision making
Behaviour changes, as costs or benefits change
How People Interact“ ”
Three Principles of Individual Interaction
Isolation to Specialisation
1
b
Trade Makes EveryoneBetter Off
a
c Partners in Progress
Competition and Trade is not a Win-Lose Affair
Three Principles of Individual Interaction
Adam Smith: “Invisible Hand” leads to desirable outcomes
2
b
Markets Usually Organize Economic Activities Efficiently
a
c Communism: Controls prevent self-correction and affect welfare of society as a whole
Market Economy: Resource allocation with decentralised decision making as individual and firms interact for goods and services
Three Principles of Individual Interaction
Externality: the impact of one person’sactions on the well being of another
3
b
Governments Can Sometimes Improve Market Outcomes
a
c Market Power: The ability of a single entity(or group) with substantial influence
Market failure is the failure of efficient allocation of resources
How the Economy as a Whole Works“ ”
Three Principles of the Economy as a Whole
Keys: Education , Tools and Technology
1
b
A County’s Standard of LivingDepends on Ability to ProduceGoods and Services
a
c Government Budget deficits lower investment and productivity
Standard of living is linked to productivity
Three Principles of the Economy as a Whole
Culprit: Growth in the quantityof money supply (money value?)
2
b
Prices Rise when Government Prints too Much Money
a
c Keeping inflation low is part of good public policy
Inflation: Increase in the overalllevel of prices
Three Principles of the Economy as a Whole
Restriction of money supply decreasesspending leading to less sales
3
b
Society Faces Short-run Trade off betweenInflation and Unemployment
a
cMonetary Policy and Fiscal PolicyAre the instruments of control
Reduction in inflation causestemporary increase in unemployment
Remember the 10 Building Blocks------------------------------------------------
Even the most sophisticated economic analysis is built using the ten principlesused here…
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