A&F Year 1 Economics Lesson 1: BASIC ECONOMIC CONCEPTS Lecturer: A’lam Asadov [email protected],...
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Transcript of A&F Year 1 Economics Lesson 1: BASIC ECONOMIC CONCEPTS Lecturer: A’lam Asadov [email protected],...
A&F Year 1Economics
Lesson 1: BASIC ECONOMIC CONCEPTSLecturer: A’lam Asadov
[email protected], Room 103Office Hours: Friday 3-4 pm
Learning Objectives
By the end of this unit, you should be able to:
give an overview of Economics deal with the Economic Problem discuss the Methodology in
Economics differentiate between
Microeconomic Issues Macroeconomic Issues
What is Economics? Economics is the study of how people and society choose to use scarce productive resources to produce goods and services and to allocate them in such a way as to satisfy the unlimited wants of the various persons and groups in a society.
Three economic problems:Microeconomic deals with the economic choices of the individual producer, or consumer:
what to produce how to produce for whom to produce
Scarcity, choice People use goods and services to satisfy their wants. The act of producing commodities is called production and the act of using these commodities is called consumption.
Our wants may be unlimited but our resources are limited in supply. This result in the problem of scarcity.
The basic function of any economic system is to provide the framework for choice.
Resources —in this case represented by their respective incomes—are insufficient to buy all the goods and services they desire.
Scarcity: centraleconomic problemThe world’s resources are limited. There are only limited amounts of land, water, oil, food and other resources on this
planet.
Economists say that resources are scarce.Scarcity means that economic agents, such
asindividuals, firms, governments, can only
obtaina limited amount of resources at any moment
intime.
Factor of Production 1. land (natural resources e.g. agricultural land,
minerals, gases, products of forests and oceans);
2. labour (human resources both physical and mental abilities);
3. capital (man-made resources called producer goods which was mentioned earlier);
4. enterprise (supplied by entrepreneurs who take the risk to organ se production)
Opportunity cost Opportunity cost can be defined as
the next best alternative foregone, i.e., something which must be sacrificed in order to obtain something else.
For example: Whether to go to college or to
work? Whether to study or go out on a
date? Whether to go to class or sleep in?
Scarcity, Choice & Opportunity Cost
The Economic Problem
Limited Resources
Unlimited Wants
SCARCITY
An insufficiency of mean in relation to wants
CHOICE
OPPORTUNITY CHOICE
Food for Thought:
Why water being so inevitable for human life is so cheap compared to diamonds, which are mostly used for jewelries?
The role of the market
A market is the process where households decide aboutconsumption of alternative goods;
firms decide about what and how to produce;
workers decide about how muchand for whom to work.
Prices of goods, and resources, such as labour, machinery,
and land, adjust to ensure that limited resources are used to
produce the goods and services that society demands.
Microeconomics vs. Macroeconomics
2 category of Economics: Microeconomics & Macroeconomics
PRODUCTION POSSIBILITY CURVE
Example. An economy with four workers (as a
resource) and two goods – food and clothes.
Production in each industry satisfies the law of
diminishing returns, which means that each
additional worker adds less to industry output
than the previous additional worker added.
PRODUCTION POSSIBILITY CURVE
Production possibilitiesFood Clothes
Employment
Output Employment
Output
4 25 0 0
3 22 1 92 17 2 17
1 10 3 24
0 0 4 30
PRODUCTION POSSIBILITY CURVE
Production Possibilty Frontier
0
5
10
15
20
25
30
0 5 10 15 20 25 30 35
Clothes Output
Food
Out
put
AB
C
D
E
H
G
Economic efficiency
Economic efficiency. A situation where each
good is produced at a minimum cost and where
individuals and firms get the maximum benefit
from their resources.
Economic GrowthResult of Economic growth
Increase in production of goods and services
Shift out the production possibilities frontier
Good Y
Good X
A
C
B
D
Sources of Economic Growth
• New Technology • Addition of labor and capital• Invention and innovation• Discovery of new resources• Improvement in productivity• Better educated and more skilled labor force
Three types of Economic SystemsA. The free-market economy: all of
the economic activities are result of inter-actions in the market.
B. The planned or command economy: all of the economic decisions are taken by the government.
C. The mixed economy: some mix of free-market and planned economies.
A. Market Economies
Also called Capitalist or Private Enterprise systems
Features are: Productive resources are predominantly owned
by the private sector Economic decision making is decentralised, i.e.
the level of government intervention is low Economic motivation is self interest (utility or
profit) Competition Markets and prices (the invisible hand)
Market Systems: Advantages and Disadvantages Advantages of market
systems Economic freedom Minimum state intervention
maximises individual welfare ( consumer surplus and producer surplus)
Efficiencies (in production, distribution and consumption) or Pareto-efficiency resource allocation
Market Systems: Advantages and Disadvantages Disadvantages of market
systems Unequal distribution of income and
wealth Inflation and unemployment Disadvantaged groups (e.g.
migrants, long-term unemployed) are unfairly treated
Output fluctuations and business cycles
B. Command Economies
Also called socialist or centrally planned economiesFeatures are:
Productive resources are owned predominantly by the state or government sector
Economic decision making is undertaken by a central authority or government
Collective welfare (i.e. goods/services) distributed to benefit the state as a whole, rather than individuals
Allocation by non-price mechanisms Equity is valued
Command Economies: Advantages and Disadvantages
Advantages of command systems Abundant provision of collective goods (e.g.
education, health, public transport and recreational facilities)
The government provides employment security
Equal opportunity and equity Disadvantages of command systems
Inefficiencies and problem of coordination Undesired production decisions Misallocation of resources because of unreal
prices
C. The Mixed Economy
All modern economies are said to be a mixture of: market forces and government intervention
In the past, major examples of centrally planned economies were the former USSR and China.
These now have allowed levels of market forces to operate.
The Mixed Economy
Areas of government control
Relative prices of goods & inputs
Relative incomes Pattern of production and
consumption Macroeconomic
management
There are both public and private sectors. The public sector complements the private sector
The Mixed Economy: Advantages
To restrain the unfair use of economic power To correct the inequalities of the capitalized
economy To provide goods and services that private
enterprise would be reluctant or unable to provide To remove socially undesirable consequences of
private production- e.g. pollution control, regional imbalances in employment.
To direct change in the structure of the nation’s industries
To manage inflation rates, employment levels and etc in accordance with social objective;
To moderate the ups and downs in the trade cycles
Economies in Transition
Many countries are in transition from either communism or socialism to capitalism.
Privatization is a common aspect of transition from a command economy to free enterprise system. Privatization means state-owned industries are sold to private individuals and companies.
Questions?