Introducing Economics LEARNING OUTCOMES At the end of this topic you should be able to: Explain why it is important to learn Economics as a subject Describe basic concepts in Economics Illustrate how factor market and, goods and services market interact Explain the concept of Production possibility frontier INTRODUCING ECONOMICS What do economists study? WHAT DO ECONOMISTS STUDY? Economic problems production and consumption
Scarcity: the central economic problem
defining scarcity
use of resources (factors of production)
labour land and raw materials capital WHAT DO ECONOMISTS STUDY? Demand and supply actual and potential demand and supply
the role of firms in satisfying demand
Dividing up the subject
microeconomics
macroeconomics Which one of the following is a microeconomic issue?
A. The government spends more
than it receives in tax revenue.
B. House prices rise more rapidly.
C. Unemployment rises.
D. The Bank of England raises
interest rates.
E. Imports exceed exports.
WHAT DO ECONOMISTS STUDY? Microeconomic issues choices: what, how and for whom the concept of opportunity cost rational economic decision making marginal costs and marginal benefits MC < MB → do more MC > MB → do less microeconomic objectives efficiency equity WHAT DO ECONOMISTS STUDY? Aggregate demand and supply Macroeconomic issues the objective of economic growth cyclical fluctuations in the economy recessions
unemployment inflation balance of trade deficits Assume that a firm can produce 6 units of good X or 12 units of good Y per hour with its current resources. The opportunity cost of a unit of X is: A. 72 units of Y
B. 12 units of Y
C. 6 units of Y
D. 2 units of Y
E. ½ unit of Y WHAT DO ECONOMISTS STUDY? The circular flow of income firms and households WHAT DO ECONOMISTS STUDY? The circular flow of income firms and households
real and money flows
WHAT DO ECONOMISTS STUDY? The circular flow of income firms and households
real and money flows
goods and factor markets
The circular flow of goods and incomes WHAT DO ECONOMISTS STUDY? The circular flow of income firms and households
real and money flows
goods and factor markets
macroeconomics: the total flows
WHAT DO ECONOMISTS STUDY? The circular flow of income firms and households
real and money flows
goods and factor markets
macroeconomics: the total flows
microeconomics: individual markets
Which one of the following does NOT represent a flow of income earned by factors of production?
A. Wages earned by workers in a
factory. B. Rent received by landowners. C. A machine sold by a firm. D. Profits earned by businesspeople. E. Salaries earned by lecturers. 8 A Production Possibility Curve 7
0 0 1 2 3 4 5 6 7 8 Units of clothing (millions) WHAT DO ECONOMISTS STUDY? The production possibility curve what the curve shows microeconomics and the production possibility curve: choices and opportunity cost 8 A Production Possibility Curve 7
x 6 Units of food (millions)
1 y 5 1 4
0 0 1 2 3 4 5 6 7 8 Units of clothing (millions) WHAT DO ECONOMISTS STUDY? The production possibility curve what the curve shows microeconomics and the production possibility curve: choices and opportunity cost increasing opportunity cost 8 A Production Possibility Curve 7
x 6 Units of food (millions)
1 y 5 1 4 2
3 z 1 2
0 0 1 2 3 4 5 6 7 8 Units of clothing (millions) WHAT DO ECONOMISTS STUDY? The production possibility curve what the curve shows microeconomics and the production possibility curve: choices and opportunity cost increasing opportunity cost
macroeconomics and the production possibility
curve: WHAT DO ECONOMISTS STUDY? The production possibility curve what the curve shows microeconomics and the production possibility curve: choices and opportunity cost increasing opportunity cost
macroeconomics and the production possibility
curve: production within the curve Making a Fuller Use of Resources
x Production inside Food
the production y possibility curve
O Clothing WHAT DO ECONOMISTS STUDY? The production possibility curve what the curve shows microeconomics and the production possibility curve: choices and opportunity cost increasing opportunity cost
macroeconomics and the production possibility
curve: production within the curve shifts in the curve Food Growth in Potential Output
O Clothing Investment Vs Consumption Which of the following would shift the p.p. curve outwards?
A. An increase in the population of
working age. B. A reduction in unemployment. C. A reduction in VAT. D. An increase in the general level of prices. E. A reduction in expenditure on education. POSITIVE Vs NORMATIVE Positive Economics – Economist as a scientists attempt to describe the world as it is
Normative Economics – Economist as policy
advisor
attempt to prescribe how the world should be
THE NATURE OF ECONOMIC REASONING Economics as a science models in economics building models using models assessing models
Economics as a social science
difficulties in conducting controlled experiments in many parts of the subject problems of predicting human behaviour
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