Introduction To Economics What is economics Week

Introduction To Economics What is economics?

Week 1: Key terms and words l l l Production Consumption Goods Services Scarcity Choice Natural resources Land Labour Capital Enterprise l l l l l 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 l l 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 raw materials – natural resources ¡ Capital – Manufactured resources ¡

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

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

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

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

Introduction to Economics Economic Systems

Demand supply ¡ Markets l l l 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 capital collectively owned ¡ State planning - allocation of resources: ¡ l l l Current consumption or future investment Output of each industry/company Distribution of output between consumers

Free Market Economies ¡ Price mechanism l Shortage and surpluses Shortage -> price rises ¡ Surplus -> price falls ¡ l Equilibrium: demand = supply Land 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?

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

Introduction to Economics Two branches: Macro- and Microeconomics

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

Microeconomics ¡ MICRO – small (Greek – tiny) l l l 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? ¡ ¡ l l l Individuals/households Firms Governments

Opportunity Cost ¡ The cost of production or consumption in terms of the next best alternative, based on: l Rational choices: ¡ Costs and benefits ¡ Consequences (positive or negative) l l 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 l l 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 ¡ ¡ ¡ Food [millions of units] Highly simplified Choice Increasing opportunity costs Clothing [millions of units] 8. 0 0. 0 7. 0 2. 2 6. 0 4. 0 5. 6 3. 0 6. 0 2. 0 6. 4 1. 0 6. 7 0. 0 7. 0

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

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

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

Introduction to Economics Positive and Normative Statements

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

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

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

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

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