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Economics

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

6
Units of food (millions)

5 Units of food Units of clothing


(millions) (millions)

4 8m 0.0
7m 2.2m
3 6m 4.0m
5m 5.0m
4m 5.6m
2 3m 6.0m
2m 6.4m
1 1m 6.7m
0 7.0m

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