Chapter 1 - Introduction (1).pptx

8/9/2019 Chapter 1 - Introduction (1).pptx

1/50

Chapter 1: Introduction


2/50

Learning Outcomes

Define “Economics”.

Explain the different Economic categories.

List and describe the types of resources.

Explain key Economics concepts


3/50

Learning Outcomes

Define the production possibilities curve(PPF).

Plot and explain the types of PPF.

Use the PPF to explain the seven basic

Economic concepts.

List and explain the three types of economicsystem.


4/50

Building A Definition of Economics

~Goods and Bads ~

Utility- The satisfaction one receives froma good.

Disutility - The dissatisfaction onereceives from a bad.

Good - Anything that gives a personutility or satisfaction (tangible orintangible goods). i.e. Computer.

Bad – Anything that gives a persondisutility or dissatisfaction. i.e. Flu.


5/50


~ Resources ~

• The production of all goods and services

requires the resources.

- Resources – the input or factors of production.• Four (4) categories of resources:

1) Land.

2) Labour.3) Capital.

4) Entrepreneurship.


6/50


~ Resources ~

1)Land- All natural resources, such as minerals,forests, water, and unimproved land.- i.e. oil, wood.

2) Labor

- The physical and mental talents peoplecontribute to the production process.

- i.e. a person building a house.


7/50


~ Resources ~

3)Capital - Produced goods that can be used as inputs forfurther production.

- i.e. factories, machinery, tools, computers, and buildings.

4) Entrepreneurship

- The particular talent that some people have for: i) organizing the resources of land, labour andcapital to produce goods.

ii) seeking new business opportunities. iii) developing new ways of doing things.


8/50

Economics, the Science of Scarcity

- The science of how individualsand societies deal with the fact

that wants are greater than thelimited resources available to

satisfy those wants.


9/50

Key concepts:

1) Scarcity

2) Opportunity cost.3) Unintended effect.

4) Exchange/ trade.

Key Concepts in Economic


10/50

Scarcity

• The condition in which our wants are greater thanthe limited resources (i.e. land, labour, time and etc)available to satisfy those wants.

• Scarcity is our infinite wants for goods hitting up

against finite resources• i.e. we want goods, but there are just not enoughresources available to provide us with all the goodswe wants.

• Three (3) effects of scarcity:1) the need to make choices.

2) the need for rationing device.

3) competition.


11/50

Scarcity

1)Choices

•) People have to make choices because ofscarcity.

•) We must choose which wants we willsatisfy and which we will not.

•)i.e. Do I go to Bali for holiday? Or Do Ipay off my car loan earlier?


12/50

Scarcity

2) Rationing Device• A means for deciding who gets what ofavailable resources and goods.

3) Competition

• Competition exists because of scarcity.

• Because goods are limited, individualscompete to obtain the goods that areavailable, and studying this competitive

process is what an economist does.


13/50

Self Test Questions

1.Scarcity is the condition of finiteresources. True or false? Explain youranswer.

2.How does competition arise out ofscarcity?

3.How does choice arise out of scarcity?


14/50


Opportunity cost• The most highly valued opportunity oralternative forfeited when a choice is made.

• The higher the opportunity cost of doingsomething, the less likely it will be done.

• i.e. The opportunity cost of reading the

chapter is the value of what is forgone – thismight be measured in the lost income for astudent who could be working at a job, or alost hour of watching television or a forgone

nap.


15/50


Exchange/Trade

• The process of giving up one thing for

another.• People enter into

exchanges to make

themselves betteroff.


16/50



17/50

Economic Categories

Two (2) economic categories are:

1)Positive economics vs Normative

economics.2)Microeconomics vs Macroeconomics.


18/50

Economic CategoriesPositive vs. Normative Economics

1)Positive economics•) The study of “what is” in economic

matters.•) Deal with cause-effect relationships thatcan be tested.

•) i.e.What isthe effect of a cut in incometaxes on unemployment rate?

Cause Effect


19/50

Economic CategoriesPositive vs. Normative Economics

2) Normative economics• The study of “what should be” in economicmatters.

• Deal with value judgments and opinionsthat cannot be tested.

• i.e. The income taxesshould becut becausethe income tax burden on many taxpayers iscurrently high.

Judgmentand Opinion


20/50

Economic CategoriesMicroeconomics

Microeconomics deals with human behavior and choices as they relate to

relatively small units—an individual,a business firm, an industry, a singlemarket.


21/50

Economic CategoriesMicroeconomic Questions

~ How does a market work?

What level of output does a firm produce?

What price does a firm charge for the good itproduces?

How does a consumer determine how much of agood he or she will buy?

Can government policy affect business behavior?

Can government policy affect consumer behavior?


22/50

Economic CategoriesMacroeconomics

Macroeconomics deals with human behavior and choices as they relate to

highly aggregate markets (e.g., thegoods and services market) or theentire economy.


23/50

Economic CategoriesMacroeconomic Questions

How does the economy work?

Why is the unemployment rate

sometimes high and sometimes low?What causes inflation?

Why do some national economiesgrow faster than other nationaleconomies?


24/50

Wall Street Journal

The Wall Street Journal is a is a rich sourceof information which provides real lifeexamples of micro- and macro economic

activities. Check today’s issue to see themost current news.

http://www.wsj.com

http://www.wsj.com/http://www.wsj.com/


25/50

Other Useful Sources of CurrentEconomic News

New York Timeshttp://www.nytimes.com/pages/business/index.html

Financial Timeshttp://www.ft.com/home/us

The Economisthttp://www.economist.com/index.html

http://www.nytimes.com/pages/business/index.htmlhttp://www.ft.com/home/ushttp://www.economist.com/index.htmlhttp://www.economist.com/index.htmlhttp://www.ft.com/home/ushttp://www.nytimes.com/pages/business/index.html


26/50

Economic Activities

Two (2) types of economic activities:

1)Producing.- Production possibilities frontier (PPF).

2)Trading. - Exchange and trade.


27/50

Economic Activities:Production Possibilities Frontier

PPF:• Represents thepossible combinations of twogoods that can beproduced in acertain periodof time under the conditions of agiven state

of technology and fully employed resources.


28/50

• Two (2) types of PPF:

1)TheStraight Line PPF – constantopportunity costs.

2) TheConcavedownward PPF – increasing

opportunity costs.


29/50

Production Possibilities FrontierConstant Opportunity Costs

• Opportunity costs of 1 TV = 1 computer.• Opp. Costs between TV and Computer isconstant.

• i.e. Point A to B => 10k computers (from50k to 40K)not produces but 10k TV set

are produce; ratio is 1:1.


30/50

Production Possibilities FrontierIncreasing Opportunity Costs

• As more of one good is produced, the opp. costs between computers and TV sets changes.• As the economy produces more TV sets, theopp.costs of producing TV sets increases.i.e.

Point A to B => opp. cost of 1 TV = ½ computers.Point B to C => o . costs of 1 TV = ¾ com uters.


31/50

Production Possibilities FrontierLaw of Increasing Opportunity Costs

Law of Increasing Opportunity Costs•Asmore of a good is produced, the

opportunity costs of producing thatgoodincrease.

• must employ resources which are less

efficient and/ or appropriate whenincreasing production.• In real world, most PPF lines are concavedownward.


32/50

Increasing Opportunity Costs


33/50

Production Possibility FrontierFramework for Understanding

P d ti P ibilitF ti


34/50


1)Scarcity•) Wherewants (for goods) are greater than theresources available to satisfy those wants.

•) Scarcity implies that some things areattainable.

- Attainable

– consists of thepoints on the PPF and all pointbelow PPF.

- i.e. Point A to point F.-Unattainable

- consists of thepoint above and beyond the PPF.

- i.e. Point G.


35/50



36/50


2) Choice Individuals mustchoose the combination of thetwo goods they want to producewithin theattainable region.

i.e. Combination of point A or point B or point C.


37/50

3) Opportunity Costs

-Thevalue of the best alternative forgone when a choice is made.

Move from one point to another on thePPF.

i.e. Point A to point B => Opp. Cost of 1car = ½ TV sets.


38/50


4) Productive Efficiency

•The condition where the maximum output isproduced with given resources and technology.

• Lie on PPF ( Point A – B – C – D).


39/50

5) Productive Inefficiency• The condition where less than themaximum output is produced with given

resources and technology.• Productive inefficiency implies that moreof one good can be produced without any

less of another good being produced.

• Lie inside the PPF (Point F).


40/50


6) Unemployment

• Resources are unemployed when it isnot producing

the maximum output with the available resources

and technology (productive inefficiency).


41/50

7) Economic growth

• An increase in resources (i.e. a newdiscovery of resources) or anadvance intechnology can increase the productioncapabilities of an economy, leading toeconomic growth andshift outward in

the production possibilities frontier.

ProductionPossibilityFrontier


42/50

Production Possibility FrontierFramework for UnderstandingEconomic Growth: Advanced Technology

An advance intechnology commonly refers to

theability to producemore output with afixed amount of

resources OR theability to produce thesame output with

fewer resources.


43/50

Economic Systems

Economic System: the way in which societydecides to answer key economic questions—inparticular those questions thatrelate to

production andtrade.There are hundreds of countries butonly TWOmajor economic systems.

We refer to these two major systems asSocialism andCapitalism.

Most Countries have Chosen Elements fromBOTHeconomic systems.


44/50

Mixed Capitalist Economies

An economic system characterized bylargely private ownership of factors ofproduction, market allocation of

resources, and decentralized decisionmaking. Most activities take place in theprivate sector in this system, butgovernment plays a substantial and

regulatory role.The United States has a Mixed CapitalistEconomy.

E S dh PPF


45/50

Economic Systems and the PPF:Who Decides Where the Economy Will Operate on thePPF?

Capitalist:

TheMarket DecidesSocialist:

TheGovernment

Decides


46/50


47/50

How Will The Goods Be Produced?

Capitalism: decided byprivate producers.

Socialism:government plays alarge part in deciding

what is produced.


48/50

For Whom Will The Goods BeProduced?

Capitalism:goods will be produced forthosepersons who are able and willing to

pay the prices for the goods.Socialism:moregovernment control overwho gets what goods.


49/50

Trade

Capitalism: bothparties benefit from the

trade.Socialism:trade isviewed asmaking one

person better off at theexpense of anotherperson.


50/50

Prices

Capitalist :

Prices ration goods andservices

Prices convey informationPrices serve as anincentiveto respond to information

Socialist :Price is viewed as beingset by greedy businesses withvast economic power

Chapter 1 - Introduction (1).pptx

Documents