Introduction to Economics - LEC 1 PDF

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Introduction to EconomicsLecture 1What is Economics?Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs...

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Introduction to Economics Lecture 1

What is Economics? Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs, trying to determine how these groups should organize and coordinate efforts to achieve maximum output.

Scarcity Vs. Wants -

Resources are limited o Human resources, Capital and Machinery, Natural Resources Human wants are unlimited o Leisure, Possessions, World Concerns, Lifestyle Economics studies anything that involves the process of meeting these wants with scarce resources

Microeconomics & Macroeconomics Micro = Small Macro = Large Microeconomics studies individual units: -

Households Firms Industries

Macroeconomics studies the economy as a whole: -

Total Output Unemployment Economic Growth Inflation

Market Economy Centrally Planned Economy: -

An economy in which the government decides how economic resources will be allocated

Market Economy: -

An economy in which the decisions of households and firms interacting in markets determine the allocation of economic resources

Mixed Economy: -

An economy in which most economic decisions result from the interactions of buyers and seller in markets, but in which the government plays a significant role in the allocation of resources

Efficiency Productive Efficiency: -

When a good or service is produced using the least amount of resources

Allocative Efficiency: -

When production reflects consumer preferences In particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it

Dynamic Efficiency: -

When new technology and innovation are adopted over time

The Economist as a Science Economists apply the ‘scientific method’ -

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Devise Theories o E.g. Theory of Inflation – “High inflation is a result of the government printing too much money” Gather Data Test the theories against the Data

The Role of Assumptions -

Assumptions help us to simplify complex situations, focusing our attention on the details that are most relevant to the problem at hand Using assumptions, we can construct economic models to learn about the world

Economic Models: -

Every Science uses models Simplified versions of reality used to analyse real-world economic situations

Normative and Positive Analysis: -

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Positive Analysis: o Analysis concerned with what is  Involves value-free statements that can be tested by using the facts Normative Analysis: o Involves making value judgements that cannot be tested

Opportunity Cost: -

Resources are limited Choices between alternative options must be made Examples: o Business o Individuals o Government

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Opportunity cost is defined as the next best alternative that is foregone when a choice is made In economics, opportunity cost is essential o All cost measurements include the opportunity cost Example: o A firm earns 3% accounting profit on an investment. If 5% could be earned elsewhere. (i.e. the opportunity cost), from an economist’s point of view, a loss of 2% has occurred.

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Production Possibility Frontiers (PPF) (Curves): -

A Production Possibility Frontier (PPF), is a curve which shows all the maximum output levels possible of two goods that can be produced Assumptions: > On any one Production Possibility Frontiers o Resources are fixed o Technology is constant o All resources are fully employed o Most efficient methods are used

The slope of the curve shows the rate of substitution between outputs -

It therefore shows the concept of opportunity cost – that is, what must be given up in order to produce more of another good The concavity of the PPF reflects the increasing opportunity cost of concentrating production in a single activity

If the economy is operating at a point inside the curve, maximum possible output is not being produced – it is an inefficient point....