Lecture note, lectures 1 - principles of economics PDF

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PRINCIPLES OF ECONOMICS – CH 1

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WHAT IS ECONOMICS? It is the study of human decision making when relativity of scarce human resources. This is where resources are where they should be elevated.  How human needs are satisfied with available resources in

production and consumption.   

PRODUCTION How much does the company produce? What are the combinations of goods and services are? How much the firm produces? What techniques of production it uses? How many employees?   

CONSUMPTION How much does the population spend? What the pattern of consumption is in the economy? How many people buy goods and what they choose to buy? How does the people’s consumption is affected by price, advertising etc?   SCARCITY 

The central economic problem is SCARCITY. Human needs and wants are unlimited however the resources aren’t. Thee include:  Human resources such as labour which it’s both limited in number and skills  

Natural resources such as land and raw materials Manufactured resources which is capital such as technology

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The major issue is that the resources may not be distributed between different regions, individuals or different countries.  Economists study behavior in people as consumers buying the goods they want and studies the governments influencing the level and pattern of production and consumption.   DEMANDS are related to wants. SUPPLY is limited and relates to the resources

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MACROECONOMIC ISSUES

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This is concerning the economy as a whole and is thus concerned with the aggregate demand which is the total amount of spending in the economy and aggregate supply which is the total national output of goods and services.  Attempts by government to stimulate growth and employment has often resulted to INFLATION and a increase of imports.  Economics are inherently unstable and are displayed as business cycles.  Macroeconomics are closely related to the balance between demand and supply.  If aggregate demand is too high from supply then inflation and trade deficits are likely to appear.  INFLATION – general rise in the level of prices throughout the economy. If AD rises, then the firms are likely to raise the prices. If demand is high they can still sell as much as before to make more profit. 

BALANCE OF TRADE – the excess of imports over exports. If AD rises, people are likely to purchase imports. If inflation is high, then home-produced goods will become uncompetitive with foreign goods.

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If AD is too low relative to AS, unemployment and recession may occur.  RECESSION – a decline in the output of an economy for two or more consecutive quarters. This is caused by low levels of consumer spending due to a lack of credit or worries of job security. If people spend less, then shops will buy less from manufacturers which will result in cutting down on production     

EMPLOYMENT – results from cutbacks in production. Less producing means employing fewer people.

MICROECONOMIC ISSUES This is concerning with the individual parts of the economy which is the demand of goods and services.  Choices must be made and are broken down to three main topics:

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What things are going to be produced and in what quantities if there aren’t enough resources to produce things that people need.

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How are things going to be produced given that there are more than one way of producing things? What resources are going to be used and in what quantities? What techniques are going to be used?

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For who are things going to be produced? How will the nation’s income be distributed?

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OPPORTUNITY COST With choices comes sacrifice. The more food you have to buy, the less money you’ll have left to spend on other goods. The production and consumption of one thing means the sacrifice of alternatives. This sacrifice is known as a OPPORTUNITY COST.  RATIONAL CHOICES This means weighing up the cost and benefits of any activity. For example; you figure out which shirt you’re going to buy where one shirt is top quality but expensive and the other has poor quality but the cost is low. RATIONAL DECISION MAKING Weighs up the marginal benefit and marginal cost of any activity. If marginal benefit exceeds marginal cost then it is rational to do the activity. If MC exceeds MB then don’t go ahead with it. SOCIAL IMPLICATIONS OF CHOICE Microeconomics are not just choices being made. It’s about the consequences of these choices. Problems can arise from the choices people make include:  Inefficiency

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Waste Inequality

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Pollution

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PRODUCTION POSSIBILITY CURVE

Shows a simplified picture of reality; a curve showing all the possible combinations of two goods that a country can produce within a

specified time period.  However, there are dangers in this such as oversimplifying which results the diagram to be misleading.   MICROECONOMICS AND THE PRODUCTION POSSIBILITY CURVE  This illustrates the microeconomic issues of choice and opportunity cost. For example, if the country chooses more clothing then food would have to be sacrificed.  This also illustrates the phenomenon of increasing opportunity costs. This is when additional production of one good involves everincreasing sacrifices of another.   

MACROECONOMICS AND THE PPC There is no guarantee that resources will be fully employed or that they will be used in the most efficient way hence making a point inside the curve.  The economy is producing less of both goods than it could possibly produce. This may be caused by inefficient methods of production possible.   CIRCULAR FLOW OF GOODS AND INCOMES  This is the process of satisfying human wants involving producers and consumers. This is a two-sided relationship and is represented in a flow diagram.  Consumers of goods and services are households and producers are the firms. They’re in a twin demand and supply relationship with each other: 1. Exchange takes place where goods are exchanged for money 2. Firms and households come together for factors of production; firms demand use of factors of production and households supply them.

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HOW DO COUNTRIES DIFFER IN THE WAY THEIR

ECONOMIES ARE ORGANISED?  One important difference in societies is degree of government control of the economy.  The one extreme lies the completely planned or command economy where all economic decisions are taken by the government.  The other extreme lies the completely free-market economy where all economic decisions are taken by individual households and firms with no government intervention.  In the practice, all economies are a mixture of two, depending on the degree of government intervention.   

THE COMMAND ECONOMY Usually associated with the socialist or communist economic system where land and capital are collectively owned. The state plans the allocation at three different levels:  The allocation of resources between current composition and investment for the future – sacrificing present consumption and diverting resources it chooses to devote to investment. This will depend on its broad macroeconomic strategy: the importance it attaches to growth opposing to current consumption 

The output of each industry and firm, the techniques that will be used and the labour and other resources required by each industry and firm – the state conducts some form of input-output analysis where all industries are seen as users of inputs from other industries and as producers of output for consumers or other industries. For example; the steel industry uses inputs from coal and iron-ore industries and produces output for the vehicle and construction industries. The analysis shows the sources of input for each industry and the destination of all its output. The state attempts to match up the inputs and outputs for each industry so that the planned demand for each industry’s product is equal to its planned supply

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The distribution of output between consumers – this depends on the government’s aims and distributes goods according to its judgment of people’s needs or it may give more to those who produce more therefore providing an incentive for people to work harder

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ASSESSMENT OF THE COMMAND ECONOMY  The government could take an overall view of the economy. It could direct with the nation’s resources in accordance with specific national goals.  High goal rates can be achieved if the government directed large amounts of resources into investment.  Unemployment can be avoided if the government carefully planned the labour allocation with necessary production requirements and labour skills  National income could be distributed more equally 

A command economy could achieve these goals only at considerable social and economic cost with reasons being:  The larger and more complex the economy, the greater the task of collecting and analyzing the information essential to planning and the more complex the plan which can result to being a bit expensive to administer and involve cumbersome bureaucracy 

If there’s no system of prices or if prices are set by state, planning would involve insufficient use of resources.

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It is difficult to devise appropriate incentives to encourage workers and managers to be more productive without a reduction in quality. To avoid this, a large number of officials must be employed to check quality

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Complete state control over resource allocation would involve a loss of individual liberty which means workers would lose choice of where to work or consumers would have no choice of what to buy

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Government must enforce plans even if they are unpopular If production is planned, but consumers are free to spend money incomes, then shortages would occur if consumers started to buy more and surpluses would occur if consumers buy less

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THE FREE MARKET ECONOMY  Free decision making by individuals – all economic decisions are made by households and firms which are assumed to act in their own self interest. Assumptions include: o Firms seek to maximize profit

o Consumers seek to get the best value for money from their purchases o Workers seek to maximize wages relative to the human cost of working in a particular job. 

The price mechanism – prices respond to shortages and surpluses. Shortages causes prices to rise and surpluses causes prices to fall

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The effect on changes in demand and supply – pattern of consumer demand changes. Resulting changes act as both signals and incentives. A rise in demand is signaled by rise in price which is known as a incentive to produce more goods. A fall in demand is signaled by a fall in price. This is a incentive for firms to produce less.

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The interdependence of markets – this is between goods and factor markets. Goods markets demand for good rise which creates a shortage and causes the price of the good to rise. This eliminates the shortage by cutting some of the demand and encouraging firms to produce more. Factor markets are when the increased supply of goods causes an increase in the demand for factors of production which causes a shortage in those inputs and prices to rise.

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Competitive markets

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THE MIXED ECONOMY this is one containing elements of markets and government control.

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