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Chapter 1 Economics and the Economy

Chapter 1 Economics and the Economy. David Begg, Stanley Fischer and Rudiger Dornbusch, Economics , 8th Edition, McGraw-Hill Education, 2005 PowerPoint presentation by Alex Tackie and Damian Ward. The Scope and Method of Economics. Appendix: How to Read and Understand Graphs.

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Chapter 1 Economics and the Economy

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  1. Chapter 1Economics and the Economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill Education, 2005 PowerPoint presentation by Alex Tackie and Damian Ward

  2. The Scope andMethod of Economics Appendix: How to Read and Understand Graphs Prepared by: Fernando Quijano and Yvonn Quijano

  3. The Study of Economics • Economics is the study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided.

  4. Why Study Economics? • An important reason for studying economics is to learn a way of thinking. • Three fundamental concepts: • Opportunity cost • Marginalism, and • Efficient markets

  5. Opportunity Cost • Opportunity cost is the best alternative that we forgo, or give up, when we make a choice or a decision. • Nearly all decisions involve trade-offs.

  6. Marginalism • In weighing the costs and benefits of a decision, it is important to weigh only the costs and benefits that arise from the decision.

  7. Marginalism • For example, when a firm decides whether to produce additional output, it considers only the additional (or marginal cost), not the sunk cost. • Sunk costs are costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred.

  8. Efficient Markets • An efficient market is one in which profit opportunities are eliminated almost instantaneously. • There is no free lunch! Profit opportunities are rare because, at any one time, there are many people searching for them.

  9. More Reasons to Study Economics • The study of economics is an essential part of the study of society. • Economic decisions often have enormous consequences. • During the Industrial Revolution, new manufacturing technologies and improved transportation gave rise to the modern factory system.

  10. More Reasons to Study Economics • An understanding of economics is essential to an understanding of global affairs. • Voting decisions also require a basic understanding of economics.

  11. The Scope of Economics • Microeconomics is the branch of economics that examines the behavior of individual decision-making units—that is, business firms and households. • Footballers’ wages and the price of oil, for example, are both microeconomic issues

  12. The Scope of Economics • Macroeconomics is the branch of economics that examines the behavior of economicaggregates— income, output, employment, and so on—on a national scale. • Gross domestic product, the aggregate price level and unemployment, for example, are all macroeconomic issues

  13. The Scope of Economics

  14. China Sweden USA Hungary UK Cuba Free market economy Command economy Market orientation

  15. What is Economics? • ECONOMICS ... • is the study of how society decides: • What • For whom • How to produce...

  16. The price of oil Tripled in 1973-74, and doubled again in 1979-80 … and affected people all over the world.

  17. An increase in the price of oil affects • What to produce • less oil-intensive products • How to produce • less oil-intensive techniques • For whom to produce • oil producers have more buying power, importers have less

  18. The distribution of world population and GNP, 2003

  19. The production possibility frontier (1) • For each level of the output of one good, the production possibility frontier shows the maximum amount of the other good that can be produced.

  20. The production possibility frontier (2)

  21. A  14 F= 4  B Food output (F) 10 G = 8 Production possibility frontier 14 6 Film output (G) F/G = opportunity cost (=1/2)

  22. The operation of markets • Market • a shorthand expression for the process by which … • households’ decisions about consumption of alternative goods • firms’ decisions about what and how to produce • and workers’ decisions about how much and for whom to work • … are all reconciled by adjustment of prices

  23. Resource allocation • Resource allocation is crucial for a society • and is handled in different ways in different societies, e.g.: • Command economy • Mixed economy • Free market

  24. Normative and Positive Economics • Positive economics deals with objective explanation • e.g. if a tax is imposed on a good its price will tend to rise • Normative economics offers prescriptions based on value judgements • e.g. a tax should be imposed on tobacco to discourage smoking

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