The Basics of Economics

Principles of Economics, N. Gregory MankiwPrepared by Mark P. Karscig, Central Missouri

State University

Business is...

“…any activity that provides goods or services to consumers for the

purpose of making a profit”

DistinctionsGoods

Athletic Shoes Apparel Equipment

Services Banking Legal Medical Travel

For profitvs.

Nonprofit

ExternalForces on Business

Business

EconomyEconomy

ConsumerTrends

ConsumerTrends

Gov’tGov’t

PublicPressurePublic

Pressure

Economics“…study of how scarce resources are used to produce outputs

—goods and services—to be distributed among people”

Some people will get things and others will not...The question is then, how do we determine who gets what

The word economy comes from a Greek word for “one who manages a household”

How Do Economists Think? Scarcity and GoodsScarcity and Goods

If there were no scarcity, there would be no need for economics

!!!!

ScarcityScarcity arises because society does not have enough

resources to produce or that there is a limited quantity of

almost all the things people would like to have

Goods are any items that are desired by people...Most goods

are available in scarce quantities

Then the economic questions are...

• What to Produce?

• How to Produce?

• For Whom to Produce?

How Do Economists Think?Utility and RationalityUtility and Rationality

• Economists assume that people act to

maximize their own happiness.. They are

selfish

• This happiness that economists assume

people maximize is called utility

• We also assume all people act rationally

How Do Economists Think - ResourcesResources

• The reason that there is scarcity of goods

and services is that there is scarcity of

resources that are used to make goods

• Resources are all the elements that go into

the production of a good or service

Factors (Resources) of Production

Land - Natural Resources (raw materials)

Labor - Skills of People

Capital - Plant and equipment- this differs from

“financial capital”

Entrepreneurs – Risk takers who start new

businesses or bring in new products in search for

profits

Factors of Production

Land

Labor Capital

Entrepreneurship

Business(Transform

)

Outputs

Goods Services

How Do Economists Think ?Rationing Device

• Since there are scarce resources and consequently scarce

goods, how do we decide who gets what?

• A rationing device is a process by which we determine who

gets what. It could be coupons, a line, height, or

alphabetical order. What is the rationing device for most

goods in any economy?

Price

A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Households decide what to buy and who to work for

Firms decide who to hire and what to produce

Circular Flow of Inputs and Outputs

Adam Smith made the observation that

households and firms interacting in markets

act as if guided by an “invisible hand”• Both households and firms look at prices to decide

what to buy and sell

• As a result, prices guide decision makers to

reach outcomes that tend to maximize the welfare of

society as a whole

Governments can sometimes improve market outcomes

Market failure occurs when the market fails to allocate resources

efficiently

When the market fails government can intervene to promote efficiency

Market failure may be caused by;

– an externality, which is the impact of one person or firm’s actions

on the well-being of a bystander

– market power, which is the ability of a single person or firm to

influence market prices

Economic SystemsPla

nned

Free M

arke

t

Communism Socialism Capitalism

Increasing Gov’t Control

Decreasing Social Services

Mixed Market Economy

Perfect Competition

Standardized Product

Many Sellers

Many Consumers

• Firms are price takers

• Goods of different firms are homogeneous

Supply & Demand

Supplied

Demanded

Pri

ce

Quantity

0 10 20 30 40 50

$0

$10

$20

$30

$40

$50

$60

$70

Equilibrium

Point

Monopolistic Competition

Differentiated Product

Many Sellers

Consumers Group B

Consumers Group C

•Large number of competing

firms

• Heterogeneous

products

Oligopoly

Similar Product

Seller A

Consumer Group A

Consumer Group B

Consumer Group C

Seller B

MonopolySeller

Consumer A

Consumer D

Consumer B

Consumer E

Consumer C

Measuring Economic Goals

Growth—Gross Domestic Product (GDP)

Employment—

Unemployment Rate

Price Stability—Consumer Price Index

Gross Domestic Product

“…the market value of all goods

and services produced by the

economy in a given year…

includes only those goods and

services produced domestically”

Source: World Bank

Source: CIA World Factbook (16 May 2008)

Business Cycle

-15

-10

-5

0

5

10

15

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Years

GD

P

% C

han

ge

Prosperity

Depression

Recession

Recovery

Unemployment Rate

“...contains the percent of the labor

force that is without jobs”

Unemployment RateUnemployment Rate

Source: CIA World Factbook (16 May 2008)

May 2008 Data

İşsizlik oranı % 9.8 iken, tarım dışı işsizlik oranı % 12.7’dirSource: TİK(2008)

Inflation Rate

“... the annual percent change in consumer prices compared with the previous year's consumer prices”

– One cause of inflation is the growth in the quantity of money

– When the government creates large quantities of money, the value of the money falls

So prices rise when the government prints too much money

Inflation RateInflation Rate

Source: CIA World Factbook (16 May 2008)

Consumer price index

A measure that examines the weighted average of prices of a

basket of consumer goods and services, such as

transportation, food and medical care

The CPI is calculated by taking price changes for each item in

the predetermined basket of goods and averaging them

Changes in CPI are used to assess price changes associated

with the cost of living

CPI is one of the most frequently used statistics for identifying

periods of inflation or deflation.. large rises in CPI during a

short period of time typically denote periods of inflation  

Current Account Deficit

“The Current Account deficit is the country’s trade deficit plus

interest payments on what the country borrows from foreigners

to finance the trade deficit ”

Source: TUIK

Government andEconomic Management

Monetary Policy

Control = Merkez bankası

Contractionary Expansionary

Fiscal Policy

Control = government

TaxationSpending

National Debt

Fields of EconomicsMacroeconomics—Study of

the economy as a whole

Microeconomics—Study of the economic choices of individual

consumers & businesses