Introduction to Economics. Limits, Alternatives & Choices.
-
Upload
felix-blair -
Category
Documents
-
view
229 -
download
0
Transcript of Introduction to Economics. Limits, Alternatives & Choices.
![Page 1: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/1.jpg)
Introduction to Economics
![Page 2: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/2.jpg)
Limits, Alternatives & Choices
![Page 3: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/3.jpg)
3
Aims & Objectives• After studying this lesson, you would be able to
understand
• What is economics?• Concepts like scarcity & choice• Microeconomics Vs Macroeconomics• Individual’s & Society’s Economizing Problem• Society’s Production possibility frontier• Economics & managerial decision making
![Page 4: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/4.jpg)
4
What is economics?• Economic wants exceed productive capacity → scarcity →
calls for optimal choice making • Economics is a social science concerned with making
optimal choices under conditions of scarcity.
![Page 5: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/5.jpg)
5
Scarcity & Choice• Scarcity of goods refer to a situation in which goods are
limited relative to desires
⇒ Choices must be made
⇒ there is a cost of making a choice called Opportunity cost
![Page 6: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/6.jpg)
Microeconomics & macroeconomics
Economics is divided into two major subfields –
• Microeconomics – concerned with the behaviour of individual entities such as households, firms & markets. Adam Smith (The Wealth of Nations, 1776) is considered the founder
• Macroeconomics – concerned with the overall performance of the economy i.e. aggregate behaviour of the economy. John Maynard Keynes (General Theory of Employment, Interest and Money, 1936) is considered the founder of modern macroeconomics.
Note: the present course discusses microeconomics with focus on Firms, Markets & their behaviour
6
![Page 7: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/7.jpg)
7
Individuals Economizing Problem• An individual has limited income but unlimited wants
→ he faces a problem of constrained optimization
i.e given his budget he has to make the best choice posssible
![Page 8: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/8.jpg)
8
Society’s Economizing Problem• A society has scarce resources – land, labour, capital &
entrepreneurial ability • It has to decide how to allocate these limited resources among
thousands of different possible commodities & services• To summarize: given resources are scarce relative to wants, an
economy must choose among different potential bundle of goods, select from different techniques of production and decide in the end who will consume the goods
• Given this problem facing the economy two concepts are very important:
Inputs – commodities or services used to produce goods & services. Also called factors of production
Outputs – various useful goods or services that result from the production process & are either consumed or used for further production
![Page 9: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/9.jpg)
9
The Production Possibility frontier (PPF)
PPF shows the maximum quantity of goods that can be efficiently produced by an economy, given its technological knowledge and quantity of available inputs.
Economic growth shifts the PPF outward
![Page 10: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/10.jpg)
PPF & Opportunity cost
• In a world of scarcity, choosing one thing means giving up something else. The opportunity cost of a decision is the value of the good or service foregone. This is a very important concept in economics
• As we move up the PPF, good X is given up to have additional quantities of Y. The opportunity cost of producing additional Y is the amount of X foregone.
10
![Page 11: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/11.jpg)
How is economics useful in managerial decision making?
• Evaluating Choice Alternatives
Identify ways to efficiently achieve goals. Specify pricing and production strategies. Provide production and marketing rules to help
maximize net profits.
• Making the Best Decision
Economics, in particular managerial economics, can be used to efficiently meet management objectives.
Economics, in particular managerial economics, can be used to understand logic of company, consumer, and government decisions.
11
![Page 12: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/12.jpg)
The market system & Circular Flow
![Page 13: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/13.jpg)
13
Aims & Objectives• After studying this lesson, you would be able to
understand
• Economic Systems • Command Economy and Market Economy• Fundamental questions facing an economy• Circular Flow of Income
![Page 14: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/14.jpg)
14
Economic Systems• Economic systems are a set of institutional arrangements
and a coordinating mechanism to solve economic problems.
• Economic systems differ in two important ways: ▫ Who owns the factors of production and ▫ the method used to coordinate economic activity
• The two fundamentally different economic systems are:▫ Command economy▫ Market economy
![Page 15: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/15.jpg)
15
Command Economy • Known as socialism or communism• Government ownership of resources• Decisions made i.e. economic activity is coordinated by a
central planning board.▫ Libya, Myanmar, and Iran.
![Page 16: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/16.jpg)
16
Demise of Command System• Soviet Union, Eastern Europe, and China• System was a failure• The coordination problem• The incentive problem
![Page 17: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/17.jpg)
17
Market Economy• Known as capitalism• Private ownership of resources• Decisions based on markets
▫ Australia, Switzerland, and the U.K.
![Page 18: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/18.jpg)
18
Characteristic of the Market System
• Private property • Freedom of enterprise and choice• Self-Interest• Competition• Markets and prices• Technology & capital goods
![Page 19: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/19.jpg)
19
Private property
• Private individuals and firms own most of the private property (land and capital):
Private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, control, use, and dispose of this property.
Private property rights encourage investment, innovation, exchange of assets, maintenance of property, and economic growth.
Property rights extend to intellectual property through patents, copyrights, and trademarks.
![Page 20: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/20.jpg)
20
Freedom of enterprise and choice• Freedom of enterprise means that entrepreneurs and
businesses have the freedom to obtain and use resources, to produce products of their choice, and to sell these products in the markets of their choice.
• Freedom of choice means: Owners of property and money resources can use resources as they choose, workers can choose the training, occupations, and job of their choice, consumers are free to spend their income in such a way as to best satisfy their wants.
![Page 21: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/21.jpg)
21
Self-Interest• Self interest is one of the driving forces in a market
system. Entrepreneurs try to maximize profits or minimize losses; resource suppliers try to maximize income; consumers maximize satisfaction. As each tries to maximize profits, income, and satisfaction, the economy will benefit if competition is present.
![Page 22: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/22.jpg)
22
Competition• Competition requires two or more independently acting
buyers and sellers. This serves to decentralize economic power. Also, it requires freedom to enter or leave the markets.
![Page 23: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/23.jpg)
23
Markets and prices• Markets and prices: this characteristic reflects that the
decisions made on each side of the market determine a set of product and resource prices that guide owners, entrepreneurs and consumers as they all make choices based on their respective self-interests.
![Page 24: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/24.jpg)
24
Technology & Capital goodsMarket systems reward individuals and businesses for development of new technologies thereby encouraging their development and implementation.•Specialization allows economies to take better advantage of their resources and their capabilities.
![Page 25: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/25.jpg)
25
Active but limited Government• Although the market system promotes efficiency, it has
certain shortcomings. • There may be over production of goods with social costs,
and an underproduction of goods with social benefits. • There are tendencies for businesses to increase monopoly
power.• Hence Government intervention is observed as and when
required
![Page 26: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/26.jpg)
26
Five fundamental questions facing an Economy• All economies whether a market system, or otherwise,
must address the following five fundamental questions:
• What goods and services will be produced?• How will the goods and services be produced?• Who will get the goods and services?• How will the system accommodate change?• How will the system promote progress?
![Page 27: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/27.jpg)
Circular flow of income• Let us for the time being assume a simple economy
which has no government and is closed. The economy has only two sectors: Households & Firms
Households Firms
Factor services (land, labour, capital & organization)
Payments for factor services (rent, wages, interest & profits)
Payment for goods & services
Goods & services
Refer next slide for complete diagram
27
![Page 28: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/28.jpg)
28 Abroad
Government
Households
Borrowings & imports
Firms
Pay for imports & borrowings
Imports
Taxes (T)
Transfer payments
Payments for goods & services
Goods & services
Factor inputs (land, labour, cap, org)
Factor incomes (rent, wager, interest, profits)
Banks
Payment for goods & services & subsidies
Exports & pay for imports
Imports & pay for exports
Interest rate (lending rate)
Y Yd = Y - T
= C+S
Demand & time deposit
Interest rate (deposit rate)
Reserves CRR, SLR, repo rate
Securities & Gold Bond Mkt.
Payment for imports
Loans
![Page 29: Introduction to Economics. Limits, Alternatives & Choices.](https://reader035.fdocuments.us/reader035/viewer/2022062305/5697bfc81a28abf838ca8380/html5/thumbnails/29.jpg)
29
Thank You