The Basics of Economics Principles of Economics, N. Gregory Mankiw Prepared by Mark P. Karscig, Central Missouri State University
Nov 18, 2014
The Basics of Economics
Principles of Economics, N. Gregory MankiwPrepared by Mark P. Karscig, Central Missouri
State University
Business is...
“…any activity that provides goods or services to consumers for the
purpose of making a profit”
DistinctionsGoods
Athletic Shoes Apparel Equipment
Services Banking Legal Medical Travel
For profitvs.
Nonprofit
ExternalForces on Business
Business
EconomyEconomy
ConsumerTrends
ConsumerTrends
Gov’tGov’t
PublicPressurePublic
Pressure
Economics“…study of how scarce resources are used to produce outputs
—goods and services—to be distributed among people”
Some people will get things and others will not...The question is then, how do we determine who gets what
The word economy comes from a Greek word for “one who manages a household”
How Do Economists Think? Scarcity and GoodsScarcity and Goods
If there were no scarcity, there would be no need for economics
!!!!
ScarcityScarcity arises because society does not have enough
resources to produce or that there is a limited quantity of
almost all the things people would like to have
Goods are any items that are desired by people...Most goods
are available in scarce quantities
Then the economic questions are...
• What to Produce?
• How to Produce?
• For Whom to Produce?
How Do Economists Think?Utility and RationalityUtility and Rationality
• Economists assume that people act to
maximize their own happiness.. They are
selfish
• This happiness that economists assume
people maximize is called utility
• We also assume all people act rationally
How Do Economists Think - ResourcesResources
• The reason that there is scarcity of goods
and services is that there is scarcity of
resources that are used to make goods
• Resources are all the elements that go into
the production of a good or service
Factors (Resources) of Production
Land - Natural Resources (raw materials)
Labor - Skills of People
Capital - Plant and equipment- this differs from
“financial capital”
Entrepreneurs – Risk takers who start new
businesses or bring in new products in search for
profits
Factors of Production
Land
Labor Capital
Entrepreneurship
Business(Transform
)
Outputs
Goods Services
How Do Economists Think ?Rationing Device
• Since there are scarce resources and consequently scarce
goods, how do we decide who gets what?
• A rationing device is a process by which we determine who
gets what. It could be coupons, a line, height, or
alphabetical order. What is the rationing device for most
goods in any economy?
Price
A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Households decide what to buy and who to work for
Firms decide who to hire and what to produce
Circular Flow of Inputs and Outputs
Adam Smith made the observation that
households and firms interacting in markets
act as if guided by an “invisible hand”• Both households and firms look at prices to decide
what to buy and sell
• As a result, prices guide decision makers to
reach outcomes that tend to maximize the welfare of
society as a whole
Governments can sometimes improve market outcomes
Market failure occurs when the market fails to allocate resources
efficiently
When the market fails government can intervene to promote efficiency
Market failure may be caused by;
– an externality, which is the impact of one person or firm’s actions
on the well-being of a bystander
– market power, which is the ability of a single person or firm to
influence market prices
Economic SystemsPla
nned
Free M
arke
t
Communism Socialism Capitalism
Increasing Gov’t Control
Decreasing Social Services
Mixed Market Economy
Perfect Competition
Standardized Product
Many Sellers
Many Consumers
• Firms are price takers
• Goods of different firms are homogeneous
Supply & Demand
Supplied
Demanded
Pri
ce
Quantity
0 10 20 30 40 50
$0
$10
$20
$30
$40
$50
$60
$70
Equilibrium
Point
Monopolistic Competition
Differentiated Product
Many Sellers
Consumers Group B
Consumers Group C
•Large number of competing
firms
• Heterogeneous
products
Oligopoly
Similar Product
Seller A
Consumer Group A
Consumer Group B
Consumer Group C
Seller B
MonopolySeller
Consumer A
Consumer D
Consumer B
Consumer E
Consumer C
Measuring Economic Goals
Growth—Gross Domestic Product (GDP)
Employment—
Unemployment Rate
Price Stability—Consumer Price Index
Gross Domestic Product
“…the market value of all goods
and services produced by the
economy in a given year…
includes only those goods and
services produced domestically”
Source: World Bank
Source: CIA World Factbook (16 May 2008)
Business Cycle
-15
-10
-5
0
5
10
15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years
GD
P
% C
han
ge
Prosperity
Depression
Recession
Recovery
Unemployment Rate
“...contains the percent of the labor
force that is without jobs”
Unemployment RateUnemployment Rate
Source: CIA World Factbook (16 May 2008)
May 2008 Data
İşsizlik oranı % 9.8 iken, tarım dışı işsizlik oranı % 12.7’dirSource: TİK(2008)
Inflation Rate
“... the annual percent change in consumer prices compared with the previous year's consumer prices”
– One cause of inflation is the growth in the quantity of money
– When the government creates large quantities of money, the value of the money falls
So prices rise when the government prints too much money
Inflation RateInflation Rate
Source: CIA World Factbook (16 May 2008)
Consumer price index
A measure that examines the weighted average of prices of a
basket of consumer goods and services, such as
transportation, food and medical care
The CPI is calculated by taking price changes for each item in
the predetermined basket of goods and averaging them
Changes in CPI are used to assess price changes associated
with the cost of living
CPI is one of the most frequently used statistics for identifying
periods of inflation or deflation.. large rises in CPI during a
short period of time typically denote periods of inflation
Current Account Deficit
“The Current Account deficit is the country’s trade deficit plus
interest payments on what the country borrows from foreigners
to finance the trade deficit ”
Source: TUIK
Government andEconomic Management
Monetary Policy
Control = Merkez bankası
Contractionary Expansionary
Fiscal Policy
Control = government
TaxationSpending
National Debt
Fields of EconomicsMacroeconomics—Study of
the economy as a whole
Microeconomics—Study of the economic choices of individual
consumers & businesses