1.06.2016.Economic-Chapter 1

Date:1 June 2016
CHAPTER 1-Introduction to Economics

What is Economics?
Economics is the social study on how individuals make decisions to
satisfy their unlimited wants with limited resources.

Adam Smith (1723 - 1790)
- Father of Economics

Needs and Wants
Human wants are unlimited.
We live in a world of limited resources.
The above leads to scarcity.
People try to balance needs and wants.

Scarcity:fundamental economic problem of having seemingly unlimited
human wants in a world of limited resources.
(insufficiency of amount,supply or shortage)

scarce : insufficient for the demand

Choice;Since people do not have infinite income, they need to make
choices whenever they purchase goods and services.
People wants are infinite; resources are finite, therefore, choices
must be made.

Opportunity cost: the value of the second best choice that one gives up when
making a decision.

The Factor of Production
1.Land: include the gift of nature or natural resources not created by the human effort
2.Labor: include people with the all the efforts and abilities
3.Capital:include the tools,equipment and factories used in a production 
4.Entrepreneur : are entrepreneurs who start new business and bring products to market.

Free good
Does not incur any opportunity costs in its production or when consumed
Not relatively scarce (not limited in supply)
Will not have a price
Air

Economic good
Has an opportunity cost
(goods that use resources which could have been put to use producing something else)
Uses scarce resources
Will have a price
Things we use everyday

Consumer goods – products sold to general public

- durable goods:  products that last a long time and can be used repeatedly

- non-durable goods:  products that need to be consumed very shortly after purchase

Capital goods or Producer goods – products purchased by other businesses to produce other goods and services

e.g.   computers, machinery, tools

Services  – intangible products provided by businesses

e.g.   teachers (education), doctors (healtcare)

Cateris Paribus : Basically means ‘other things being equal’.

• A very basic assumption which allows economic models to predict outcomes and relationships with a degree of certainty and conviction simply by assuming that variables not addressed in the model are kept constant.
• Example: “An increase in the amount of hours spent studying economics will lead, ceteris paribus, to an increase in average marks received on economics tests.”

Microeconomics : how the individual parts of the economy make decisions to allocate limited resources - Individual/smaller

• how individuals use limited resources to meet unlimited needs
• the consequences of their decisions
• the behavior of individual components like industries,firms and households
• how individual prices are set
• what determines the price of land, labour and capital
• inquire into the strengths and weaknesses of the market mechanism
• Examples: Salary of a worker,Cost of a firm

Macroeconomics : studies about the functioning of the economy as a whole - Country/Government/Bigger

• It examines the economy through wide-lens.
• about the total output of a nation
• the way the nation allocates its limited resources of land, labor and capital
• the ways to maximize production levels
• the techniques to promote trade
• Examples:Inflation,Gross national product (GNP),National Income (NI)

Production Possibility Curves or Frontier (PPC/PPF)

• Production – output of goods and services
• Possibility – maximum attainable amount
• Frontier – border or boundary
• PPF shows the boundary of what is possible and is used as an illustration in economics to show the choices facing all countries in producing goods which use limited factors of production.

Consumer goods : Goods produced for personal satisfaction

Capital goods : Goods used to produce other goods

Market Economics

• Derives from the principle of individual rights
• Practices little governmental control
• Encourages private ownership of business in all sectors
• Supports competition in all areas
• Allows full freedom to choose career and workplace
• Practices moderate taxation
• Occurs in the Hong Kong and Germany
• Advantages: allows freedom to make economic decisions practices low amount of governmental control
• Disadvantages: means sometimes great personal and financial, risks must be taken with little or no guarantee of even a minimal return

Command Economics

• Maintains strong governmental control
• Requires all productive resources to be owned and operated  by the government
• Forbids competition
• Permits little to no freedom in selecting a career and   workplace
• Practices heavy taxation
• Occurs in North Korea, Cuba and People’s Republic of China
• Advantages : allows for large changes to quickly be made,chooses jobs for everyone, including government,provided medical and social service
• Disadvantages : lacks in meeting consumer needs,prevents people from making their economic decisions

Mixed Economics

• In the Mixed economies the Government and the Market work together in decision making
• Gov and private sector jointly solve economic problem


Tutorial 2- Equilibrium