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

A&F Year 1Economics

Lesson 1: BASIC ECONOMIC CONCEPTSLecturer: A’lam Asadov

[email protected], Room 103Office Hours: Friday 3-4 pm

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

What is Economics? 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

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.

Scarcity: centraleconomic problemThe 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

asindividuals, firms, governments, can only

obtaina limited amount of resources at any moment

intime.

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)

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?

Scarcity, Choice & Opportunity Cost

The Economic Problem

Limited Resources

Unlimited Wants

SCARCITY

An insufficiency of mean in relation to wants

CHOICE

OPPORTUNITY CHOICE

Food for Thought:

Why water being so inevitable for human life is so cheap compared to diamonds, which are mostly used for jewelries?

The role of the market

A market is the process where households decide aboutconsumption of alternative goods;

firms decide about what and how to produce;

workers decide about how muchand 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.

Microeconomics vs. Macroeconomics

2 category of Economics: Microeconomics & Macroeconomics

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.

PRODUCTION POSSIBILITY CURVE

Production possibilitiesFood Clothes

Employment

Output Employment

Output

4 25 0 0

3 22 1 92 17 2 17

1 10 3 24

0 0 4 30

PRODUCTION POSSIBILITY CURVE

Production Possibilty Frontier

0

5

10

15

20

25

30

0 5 10 15 20 25 30 35

Clothes Output

Food

Out

put

AB

C

D

E

H

G

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.

Economic GrowthResult of Economic growth

Increase in production of goods and services

Shift out the production possibilities frontier

Good Y

Good X

A

C

B

D

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

Three types of Economic SystemsA. The free-market economy: all of

the economic activities are result of inter-actions in the market.

B. The planned or command economy: all of the economic decisions are taken by the government.

C. The mixed economy: some mix of free-market and planned economies.

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)

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

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

B. Command Economies

Also called socialist or centrally planned economiesFeatures 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

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

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.

The Mixed Economy

Areas of government control

Relative prices of goods & inputs

Relative incomes Pattern of production and

consumption Macroeconomic

management

There are both public and private sectors. The public sector complements the private sector

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

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.

Questions?