Economic Issues www lrjj cn Economics What is

Economic Issues www. lrjj. cn

Economics • What is Economics? • Macroeconomics vs. Microeconomics • Demand Supply www. lrjj. cn

What is Economics? www. lrjj. cn

What is Economics? • “Oikonomos” – One who manages a household • The production of goods and services • The consumption of goods and services • The study of how the people allocate their limited resources to satisfy their unlimited wants (It is the study of how people make choices – involves sacrifice) • Central Economic Problem: Scarcity www. lrjj. cn

Resources & Wants • Resources are things that have value and are used to produce things that satisfy people’s wants (Supply) • Wants are all of the things that people would consume if they had unlimited income (Demand) www. lrjj. cn

Resources • Factor of production – Human resources: Labor – Natural resources: Land, raw materials – Manufactured resources: Capital www. lrjj. cn

Branches of Economics Microeconomics = Individual Macroeconomics = Whole www. lrjj. cn

Macroeconomics • The branch of economics that studies economics aggregates – demand supply • The part of economic analysis that studies the behavior of the economy of a whole – deals with economy wide phenomena e. g. GDP, CPI www. lrjj. cn

GDP & CPI • GDP – A measure of the total income and expenditures of an economy – The total market value of all final goods and services produced within a country in a given period time • CPI – A measure of the overall cost of the goods and services bought by a typical consumer www. lrjj. cn

GDP & economic well-being • GDP is a good measure of the economic wellbeing of a society • GDP person tells us the income and expenditure of the average person in the economy • But it misses… – Leisure reduction increases GDP but may reduce well -being – The value of clean environment – Non-market activities? www. lrjj. cn

Macroeconomic Issues • Aggregate demand – The total level of spending in the economy • Aggregate supply – the total amount of output in the economy • AD > AS – Inflation – Balance of trade deficit (Export & Import) • AD < AS – Recession – Unemployment www. lrjj. cn

Macroeconomic policy • AD = AS – Demand-side policy – Supply-side policy www. lrjj. cn

Microeconomics • The part of economic analysis that studies decision making undertaken by individuals and by firms • Focus on the small part of economics www. lrjj. cn

Microeconomics Issues • Choices: – What – How – For whom • Opportunity cost • Rational decision making – Weighting up the benefit (Value for money) • Marginal Costs & Marginal Revenues • Social implications/consequences of choices www. lrjj. cn

Economic Models • “Ceteris Paribus” (other things being equal) • Production Possibility Curve • Circular Flow of Goods and Incomes www. lrjj. cn

Units of food (millions) A production possibility curve Units of food Units of clothing (millions) 8 m 7 m 6 m 5 m 4 m 3 m 2 m 1 m 0 0. 0 2. 2 m 4. 0 m 5. 6 m 6. 0 m 6. 4 m 6. 7 m 7. 0 m Units of clothing (millions) www. lrjj. cn

A production possibility curve Units of food (millions) a Units of food Units of clothing (millions) a 8 m 7 m 6 m 5 m 4 m 3 m 2 m 1 m 0 0. 0 2. 2 m 4. 0 m 5. 6 m 6. 0 m 6. 4 m 6. 7 m 7. 0 m Units of clothing (millions) www. lrjj. cn

A production possibility curve Units of food (millions) b Units of food Units of clothing (millions) b 8 m 7 m 6 m 5 m 4 m 3 m 2 m 1 m 0 0. 0 2. 2 m 4. 0 m 5. 6 m 6. 0 m 6. 4 m 6. 7 m 7. 0 m Units of clothing (millions) www. lrjj. cn

A production possibility curve Units of food (millions) c Units of food Units of clothing (millions) c 8 m 7 m 6 m 5 m 4 m 3 m 2 m 1 m 0 0. 0 2. 2 m 4. 0 m 5. 6 m 6. 0 m 6. 4 m 6. 7 m 7. 0 m Units of clothing (millions) www. lrjj. cn

A production possibility curve Units of food (millions) x w Units of clothing (millions) www. lrjj. cn

Production Possibility Curve • Microeconomics & PPC – Choices and opportunity cost – Increasing opportunity cost • Macroeconomics and PPC – Production within the curve – Shift in the curve www. lrjj. cn

Increasing opportunity costs Units of food (millions) x 1 y 1 2 z 1 Units of clothing (millions) www. lrjj. cn

Making a fuller use of resources x Food Production inside the production possibility curve y v O Clothing www. lrjj. cn

Food Growth in potential output Now O Clothing www. lrjj. cn

Growth in potential output Food 5 years’ time Now O Clothing www. lrjj. cn

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

The Circular Flow of Income • Macroeconomic issues – The size of total flows • Microeconomic issues – Individual markets – Choices within goods and factor markets www. lrjj. cn

Economic Systems • Command economy (Socialist/Communist) • Free-market economy – Price mechanism: price respond to shortage and surpluses – Equilibrium • Mixed market economy www. lrjj. cn

Command Economy • Planning – Consumption and investment – Matching of inputs and outputs – Distribution of output • Advantages – High investment, high and stable growth – Social goal pursued – Low unemployment www. lrjj. cn

Command Economy • Problem – Gathering information – Expensive to administer – Inefficient allocation of resources • Inappropriate incentives • no system of prices – shortages and surpluses – lack of response to consumer demand www. lrjj. cn

Free-Market Economy • Based on free decision making by individuals and firms • Demand supply decisions • Price mechanism – Price respond to shortage and surpluses – Equilibrium www. lrjj. cn

The price mechanism: the effect of a rise in demand Goods Market Dg shortage (Dg > Sg) Pg Factor Market Sg Df shortage (Df > Sf) Pf Sg Dg¯ until Dg = Sg Sf until Df = Sf Df ¯ www. lrjj. cn

Competitive Market • Perfectly competitive market • Price taker www. lrjj. cn