CH1 Fundamental Concepts n Economics is the study

CH-1 - Fundamental Concepts n Economics is the study of how we can best increase a country’s wealth with the resources that we have available to us. 1

Economics is. . . n n Many people think that economics is about money. We will see later money is only important because of what it allows us to do; money is a tool. 2

Economics is …. - How much money people are paid. - How much they are spend. - What it costs to buy various items. - How much money firms earn. - How much money there is in total in the economy. 3

What are resources? Factors of Production 1 - Labor: Human resources. (quantity , quality) 2 - Land raw materials. All natural resources 4

What are resources? Factors of Production 3 - Capital: a- physical capital goods used to make other goods. like machines, transportation, equipment and technology. 5

What are resources? Factors of Production b- Financial capital … stocks, bonds and bank loans. Financial capital facilities building of physical capital. 6

Economy concerned with: n Production: The transformation of inputs into outputs by firms in order to earn profit (or to meet some other objective). n Consumption: The act of using goods and services to satisfy wants. (purchasing). 7

Determine the kind of resources. n n n Building of soap factory Raw materials use it in soup Industry Accountant factory 8

Economics has two major branchrs : 1 - Macroeconomics Studies whole economy : e. g. the overall level of prices, output , inflation, recessions and employment in the economy. For inflation and unemployment rates, visit http: //www. bls. gov 9

Economics has two major branches : 2 - Microeconomics Concerned with the individual parts of the economy, with demand supply of particular goods, services and resources. For more in formations visit www. bloomberg. com 10

The Economic Problem n The basic economic problem is scarcity. Human wants are unlimited, but resources are limited. n so with scarcity, we must make choices, and with choices, come costs. 11

The Opportunity Cost: - The sacrifice made to do activity. It is the best thing that could have been done as an alternative. - Is the value of the best alternative forgone, in a situation in which a choice needs to be made between several alternatives given limited resources.

Three Questions to answer: 1 - What to produce? 2 - How to produce? 3 - For whom to produce? 13

Production Possibilities Curve -PPC A curve showing all the possible combinations of two goods that can produce within a specified time period with all its resources fully and efficiently employed. Model of scarcity , choice and opportunity cost. 14

PPC n The Production Possibilities Curve GUNS 600 500 400 300 E C F B G A D 350 500 580 700 Guns Roses 0 700 300 580 400 500 350 600 0 ROSES 15

Economic Growth If an economy is operating at a point on the production possibilities curve, curve all resources are used, and they are utilized as efficiently as possible. GUNS 600 500 400 300 E C F B G A D 350 500 580 700 ROSES 16

CH- 1 - Fundamental Concepts n Economic Growth Is Caused by: v. Increases in Resources v. Advances in Technology 17

Economic Systems are: 1 - Capitalism Characteristics The role of the government is limited to the most essential functions. Ø All prices are determined in the free market (supply and demand). Ø 18

Economic Systems are: 2 - Socialism Characteristics Ø Government makes all decisions regarding production, prices, wages, interest rates, and income distribution. 19

Economic Systems are: 3 - Communism Characteristics (Mixed Economy) Ø Most economic decisions are made by the private sector, but the role of the government is significant. Government spending and taxes are relatively high. 20

CH- 1 - Fundamental Concepts n Economic Growth and Economic Systems Ø Countries with the highest overall economic standard of living have the freest markets (more elements of capitalism). Examples: Hong Kong, Japan, Taiwan, Britain, Canada, Sweden, South Korea, and Singapore. Ø 21

CH- 1 - Fundamental Concepts n 2010 Purchasing Power Parity (unless otherwise noted) Gross Domestic Product estimated in billions of dollars, and Per Capita (person) GDP Country/Area GDP Per Cap. GDP World $ 74, 540 $ 11, 200 China Hong Korea - North Korea - South Luxembourg Qatar $ 10, 090 $ 326 $ 40 $ 1, 459 $ 41 $ 151 $ 7, 600 $ 45, 900 $1, 800 $ 30, 000 $ 82, 600 $ 179, 000 22

The Simple Circular Flow Supply of Products Purchases of (Demand for) Products Households Products Market Businesses Supply of Labor and Resources Purchases of (Demand for) Labor and Resources Resource (Inputs) Market 23

Supply of Products Purchases of Products Services Businesses Government Taxes Products Market Products Services Households Foreign Markets Taxes Supply of Labor and Resources Purchases of (Demand for) Labor and Resources Resource (Inputs) Market 24