Introduction To Economics What is economics? Week 1:

Introduction To Economics What is economics?

Week 1: Key terms and words Production Consumption Goods Services Scarcity Choice Natural resources Land Labour Capital Enterprise Needs Wants Choice Opportunity cost Modelling Economic systems Positive & Normative Macroeconomics Microeconomics

What is Economics? Concerned with production …and with consumption …and with scarcity …and anything to do with the process of satisfying human wants The study of how we apply limited resources to unlimited wants

The major economics issues What, how and for whom? What goods and services to produce? How to produce? For whom to produce?

What is the difference between “goods” …………..and “services”?

Scarcity The fundamental problem of economics Unlimited wants Limited resources So we cannot have everything we want Generates a need to make choices

Factors of production (Resources) Labour – human resources Land and raw materials – natural resources Capital – Manufactured resources

Labour Limited number Limited skills Location Entrepreneurs Organise productive resources Specialised form of labour or fourth factor of production? Can make or break business

Land and raw materials Land area is finite Raw materials are finite diminish over time are not evenly distributed between nations

Capital Manufactured resources Factories Machines Transport Other equipment Infrastructure – roads, communications etc Limited in quantity and by technology

Economics is also concerned with Demand and Supply Demand Related to wants Virtually unlimited Supply Related to resources Limited

Introduction to Economics Economic Systems

Demand and supply Markets Demand for goods and services Supply of goods and services Price movements Economic systems – level of control Goal – To use scarce resources to meet the needs and wants of people so as to improve their welfare (or well-being)

Question?????? Is their any difference between needs and wants?

Economic Systems Command Economies Free Market Economies Mixed Economies

Command Economies Land and capital collectively owned State planning - allocation of resources: Current consumption or future investment Output of each industry/company Distribution of output between consumers

Free Market Economies Price mechanism Shortage and surpluses Shortage -> price rises Surplus -> price falls Equilibrium: demand = supply Land and capital privately owned Firms seek to maximise profits Consumers seek best value for money Workers seek to maximise wages

Mixed Economies Mixture of public (state) and private sector ownership and activity State influence on key areas depending on government priorities Price and profit provide major incentives In practice ALL economies are a mixed Key distinction – how much is government involved?

Totally planned economy N. Korea N. Korea Cuba China Poland Poland France France UK USA USA Mid 1980s Late 2000s China Hong Kong Cuba China (Hong Kong) Classifying economic systems UK Totally free-market economy

Introduction to Economics Two branches: Macro- and Microeconomics

Macroeconomics MACRO – large, great (Greek) The economy as a whole Aggregate demand (spending) Aggregate supply Broad issues Growth Inflation Unemployment International trade/Balance of payments

Microeconomics MICRO – small (Greek – tiny) Individual companies Individuals Supply of, demand for, particular goods and services

Fundamental choices What should be produced? How should production be organised? For whom should production take place? Who chooses? Individuals/households Firms Governments

Opportunity Cost The cost of production or consumption in terms of the next best alternative, based on: Rational choices: Costs and benefits Consequences (positive or negative) Marginal costs Marginal benefits

Discussion You have all decided to study in the UK – but you could have gone to a University in your home country What are the costs and benefits of your decision? What is the opportunity cost of your studying in the UK?

Economic modelling How we describe economic concepts Diagrammatical – graphs and flow charts Mathematical Verbal Ceteris paribus – other things being equal

Economic modelling Examples: Production possibility curve Increasing opportunity costs Circular flow of goods and income

Production possibility curve Highly simplified Choice Increasing opportunity costs

Production possibility curve 2 Growth Investment – production of items not for immediate consumption

Economic analysis - modelling The circular flow of income Two key players - firms and households Two markets Goods markets real flows: goods and services money flows: consumer expenditure Factor markets real flows: services of labour and other factors money flows: wages and other incomes

Goods and services £ Consumer expenditure Wages, rent dividends, etc. £ Services of factors of production (labour, etc) The circular flow of goods and incomes

Introduction to Economics Positive and Normative Statements

Is economics a science? Positive versus Normative Economics Positive statements – facts Normative statements - values

Positive Statements Statements of fact Accuracy can be tested Objective Examples?

Normative Statements Statements of value Opinion Subjective Cannot be proved or disproved Examples?

Positive or normative? Should the new sales tax be introduced? How much revenue will the new sales tax bring next year? How much would that revenue increase if the tax were raised a further 5%? Should the new sales tax be raised?

Positive or normative? The gap between the rich and poor in the UK is increasing. The gap between the rich and poor in the UK is too great. The gap between the rich and poor in the UK is useful in motivating the workforce