Economic Issues
What is Economics? Macroeconomics vs. Microeconomics Demand and Supply Economics
What is Economics?
“Oikonomos” – One who manages a household The production of goods and services The consumption of goods and services The study of how the people allocate their limited resources to satisfy their unlimited wants (It is the study of how people make choices – involves sacrifice) Central Economic Problem: Scarcity What is Economics?
Resources are things that have value and are used to produce things that satisfy people’s wants (Supply) Wants are all of the things that people would consume if they had unlimited income (Demand) Resources & Wants
Factor of production Human resources: Labor Natural resources: Land, raw materials Manufactured resources: Capital Resources
Branches of Economics
The branch of economics that studies economics aggregates – demand and supply The part of economic analysis that studies the behavior of the economy of a whole – deals with economy wide phenomena e.g. GDP, CPI Macroeconomics
GDP A measure of the total income and expenditures of an economy The total market value of all final goods and services produced within a country in a given period time CPI A measure of the overall cost of the goods and services bought by a typical consumer GDP & CPI
GDP is a good measure of the economic well-being of a society GDP per person tells us the income and expenditure of the average person in the economy But it misses… Leisure reduction increases GDP but may reduce well-being The value of clean environment Non-market activities? GDP & economic well-being
Aggregate demand – The total level of spending in the economy Aggregate supply – the total amount of output in the economy AD > AS Inflation Balance of trade deficit (Export & Import) AD < AS Recession Unemployment Macroeconomic Issues
AD = AS Demand-side policy Supply-side policy Macroeconomic policy
The part of economic analysis that studies decision making undertaken by individuals and by firms Focus on the small part of economics Microeconomics
Choices: What How For whom Opportunity cost Rational decision making Weighting up the benefit (Value for money) Marginal Costs & Marginal Revenues Social implications/consequences of choices Microeconomics Issues
“Ceteris Paribus” (other things being equal) Production Possibility Curve Circular Flow of Goods and Incomes Economic Models
Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m A production possibility curve Units of food (millions) Units of clothing (millions)
A production possibility curve a Units of food Units of clothing (millions) (millions) a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)
A production possibility curve b Units of food Units of clothing (millions) (millions) 8m 0.0 b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)
A production possibility curve c Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m c 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m Units of food (millions) Units of clothing (millions)
w A production possibility curve x Units of food (millions) Units of clothing (millions)
Microeconomics & PPC Choices and opportunity cost Increasing opportunity cost Macroeconomics and PPC Production within the curve Shift in the curve Production Possibility Curve
1 1 2 1 Increasing opportunity costs x y Units of food (millions) z Units of clothing (millions)
Making a fuller use of resources x Production inside the production possibility curve y v Food O Clothing
Growth in potential output Now Food O Clothing
Growth in potential output 5 years’ time Food Now O Clothing
The circular flow of goods and incomes Goods and services £ Consumer expenditure Wages, rent dividends, etc. £ Services of factors of production (labour, etc)
Macroeconomic issues The size of total flows Microeconomic issues Individual markets Choices within goods and factor markets The Circular Flow of Income
Command economy (Socialist/Communist) Free-market economy Price mechanism: price respond to shortage and surpluses Equilibrium Mixed market economy Economic Systems
Planning Consumption and investment Matching of inputs and outputs Distribution of output Advantages High investment, high and stable growth Social goal pursued Low unemployment Command Economy
Problem Gathering information Expensive to administer Inefficient allocation of resources Inappropriate incentives no system of prices shortages and surpluses lack of response to consumer demand Command Economy
Based on free decision making by individuals and firms Demand and supply decisions Price mechanism Price respond to shortage and surpluses Equilibrium Free-Market Economy
Sf Sg Df shortage (Df > Sf) Pf Df ¯ The price mechanism: the effect of a rise in demand Goods Market Sg Dg shortage (Dg > Sg) Pg until Dg = Sg Dg ¯ Factor Market until Df = Sf
Perfectly competitive market Price taker Competitive Market
