CERTIFICATE IN ECONOMICS & FINANCIAL APPLICATIONS 1 ECONOMICS

Recommended Text:

Basic Economics 14th Edition Frank V. Mastrianna

TOPIC 1
The Nature and Scope of Economics Scarcity & Choice Economic System

ECONOMICS DEFINED

How people and institutions within a society make choices How the choices determine the use of societys limited resources

ECONOMICS AS A SCIENCE

An organized body of knowledge Coordinated, arranged, and systematized according to general laws and principles Social science

A study of the behavior and interactions of human beings as individuals and in groups Economics is closely link to psychology as it deals with human behaviour

ECONOMIC THEORY AND POLICY

Economic theory

Develops rules and principles A guide for action under a given set of circumstances

Economic policy

Action actually taken under a given set of circumstances Commonly modified by political, military, and social aspects

PRODUCTION

Production

The creation or addition of utility

Utility the ability of a good or service to satisfy a want Total product the sum of all goods and services produced by an economy over a given period of time
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DISTRIBUTION

Distribution

The allocation of the total product among the productive resources Monetarily the distribution of money incomes among the owners of the productive resources
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PRODUCTIVE RESOURCES

Inputs or resources necessary before a person or business can engage in the production of goods or services

Labor the time and effort expended by human beings involved in the production process Land the resources of the land, sea, and air (includes all natural resources) Capital goods used to produce other goods and services eg machines, buildings, trucks, etc.

Investment act of adding to the supply of capital

Enterprise the act of organizing and assuming the risk of a business venture

Entrepreneur a person who organizes and assumes the risk of a business venture

FUNCTIONAL DISTRIBUTION OF INCOME

RESOURCES Labor Land Capital Enterprise

TOTAL PRODUCT

TYPES OF PAYMENT Wages Rent Interest Profits

POSITIVE AND NORMATIVE ECONOMICS

Positive economics

The scientific study of what is among economic relationships Concerns matters that are the result of investigations that are verifiable Eg: When price goes up, people usually buy less of a good, ceteris paribus

Normative economics

The area of economics dealing with what ought to be (involving value judgment) Combines economics and politics and policy

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CONSUMPTION

The use of a good or service The ultimate end of economic activity Production and distribution are driven by consumption desires

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ECONOMIC GOODS

An object or service

Utility satisfy a want Scarce insufficient to meet everyones wants Transferable

Scarcity
Not a sufficient amount available to meet everyones wants A price has to be paid to obtain the good or service The greater the scarcity of an economic good, the greater its value or price

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GOODS AND SERVICES

Free good

Consumer goods

Public good

Capital goods

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FREE GOODS AND PUBLIC GOODS

Free good

A good that lacks the element of scarcity no price

Eg air, sunshine, water (in some cases)

Public good

An economic good to the supplier Free to the user Public parks, libraries, and the interstate highway system

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CONSUMER AND CAPITAL GOODS

Consumer goods

Goods that are directly used by the consuming public Books, paper, food, and clothing

Capital goods

Goods used to produce other consumer or capital goods Buildings, machinery, and equipment, raw materials and WIP Durable and nondurable

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WEALTH AND INCOME

Wealth

Things of value owned at a particular time The stock of labor talents and skills used to increase productivity The total value of the goods and services produced over a period of time (usually 1 year)

Human capital

Total income

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MICROECONOMICS AND MACROECONOMICS

Microeconomics

Deals with the economic problems of the individual, the firm, and the industry

Macroeconomics

Deals with the aggregates of economics including total production, total employment, and general price level Studies the performance of the economy as a whole

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Scarcity and Choice

Copyright (c) 2007 by Thomson South-Western. All rights reserved.

MAKING CHOICES

Individual choices

With limited income, choices have to be made as to what to buy and what to give up to maximise our satisfaction Firms and businesses have to decide what to produce, where to produce, how to produce and who to produce for? Labor size, educational level, skills and attitude Land availability of natural resources Capital amount of capital and technological development Enterprise entrepreneur skills, foresight and organisational ability
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Firm choices

National choices

PRODUCTION POSSIBILITIES CURVE

The concepts of scarcity, choice and opportunity cost apply to the individual as well as to the economy as a whole.

An economy is a mechanism which a country uses to allocate scarce resources among alternative uses.

Concepts will be more clearly shown using the PPC.

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PRODUCTION POSSIBILITIES CURVE

Shows the alternative combinations of different goods and services that a society can produce given its available resources and technology Figure 2-1 illustrates the production possibilities curve for houses and food
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PRODUCTION POSSIBILITIES CURVE

A

Houses (thousands)

15 12 9 6 3 0

B C

D
Points A and F refer to the maximum amount of each good that can be produced E

F 1 2 3 4 5 Food (millions of pounds)

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PRODUCTION POSSIBILITIES CURVE

Houses (thousands)

15 12 9 6 3

B C

D
E

As we move in either direction along the curve, we choose among the alternative combinations of food and housing

F 0 1 2 3 4 5 Food (millions of pounds)

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Production Possibilities Curve

15 12 9 6 3 F 0 1 2 3 4 5 Food (millions of pounds)
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Houses (thousands)

B C

D
E

At point D, the economy can produce 9,000 houses and 3 million pounds of food can be produced given existing resources and technology

Production Possibilities Curve

15 12 9 6 3 F 0 1 2 3 4 5 Food (millions of pounds)
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Houses (thousands)

B C

If we move from point D to point E, we sacrifice 3,000 homes and gain 1 million pounds of food D
E This trade-off is known as the opportunity cost

OPPORTUNITY COST(CHI PHI CO HOI)

The value of the next-best alternative(gia tri su dung) that must be sacrificed when a choice is made Thus, the opportunity cost of increasing the output of food from 3 to 4 million poundsmoving from point D to point Eequals the 3,000 houses that must be given up

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OPPORTUNITY COST

AN EXAMPLE IN CALCULATION

Moving from point A to B, 2 million units of consumer goods have to be given up for the first 10 million units of capital goods. OC per unit of capital good can be calculated as follows: Change in consumer goods / Change in capital goods (50 48)/ (10 0) = 2 million/10 million 0.2 unit of consumer good
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OPPORTUNITY COST

AN EXAMPLE IN CALCULATION

Moving from point B to C, 5 million units of consumer goods have to be given up for the second 10 million units of capital goods. OC per unit of capital good can be calculated as follows Change in consumer goods /change in capital goods (48 43)/ (20 10) = 5 million/10 million 0.5 unit of consumer good

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SHAPE OF THE PRODUCTION POSSIBILITIES CURVE

The production possibilities curve is curved outward because resources are not equally suited for producing both houses and food As we move from point A towards point F, we sacrifice more and more houses to gain equal increments of food opportunity costs increase

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POINTS INSIDE THE PPC

Attainable

combinations BUT represent combinations which do not fully or efficiently employ resources (e.g. point U). Involve unemployment or underemployment of resources. When economy is on a point inside the PPC, additional units of one good can be obtained without getting less of another good.
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EXPANSION OF OUTPUT FROM WITHIN THE CURRENT PRODUCTION POSSIBILITIES CURVE

15 12 9 6 3 0 1 2 3 4 5 Food (millions of pounds)
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Houses (thousands)

B C

When the nation is operating inside the current production possibilities curvefor example, at point Uit is a result of either idle or unemployed resources from a recession or from less than maximum efficiency in the use of resources in a fullD employment economy E

pp1
F

POINTS OUTSIDE THE PPC

Represent unattainable combinations, given current fixed resources and technology. Possible only with new sources of economic growth.

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EXPANSION OF OUTPUT FROM BEYOND THE CURRENT PRODUCTION POSSIBILITIES CURVE

18 15 12 9 6 3 0 1 2 3 4 5 Food (millions of pounds) 6
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Economic growth an increase in an economys total output of goods and services

Houses (thousands)

As shown by the shift from pp1 to pp2, the economy can now produce more of both houses and food

pp1

pp2

SOURCES OF ECONOMIC GROWTH

Addition of labor and capital New technology Invention Innovation Discovery of new resources Improvements in productivity

Better educated and more highly skilled 34 labor force

SCARCITY AND CHOICE IN THE UNITED STATES

The United States has an excellent combination of the four resources

A skilled, versatile, and mobile labor force A plentiful supply of land and natural resources The greatest amount of capital in the world Thriving entrepreneurial spirit

What about the case in Singapore?

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PROBLEMS OF SCARCITY

Some areas of the world lack the proper ratio of land, labor, and capital Some areas are short of capital and technology, natural resources, or skilled labor Solutions include:

Increased productivity Aid to developing nations

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SPECIALIZATION AND EXCHANGE

Specialization
The process of limiting the scope of an economic units productive efforts instead of trying to produce everything it needs What is produced in Brazil, Switzerland, Japan, etc??

Exchange

The process of trading surplus quantities of specialized products to others for other goods and services

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ABSOLUTE AND COMPARATIVE ADVANTAGE

Absolute advantage

The ability to produce a good or service using fewer resources than other producers use The ability to produce a good or service at a lower opportunity cost than other producers face

Comparative advantage

Law of comparative advantage

The individual, firm, or country with the lowest opportunity cost of producing a particular good should 38 specialize in producing that good.

COMPARATIVE ADVANTAGE BETWEENOC for 1 bale cotton: NATIONS OC for 1 bale cotton:
60/20 = 3 bushels of wheat 40/10 = 4 bushels of wheat

Before specialization
Country Shetland North Mocha Total After specialization Shetland North Mocha Total 5 0 5 50 50 0 5 5 100 100
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Cotton Wheat Resource Units Bales Resource Units Bushels 3 3 6 30 15 45 2 2 4 60 40 100

EXCHANGE RATE

The exchange rate of wheat to cotton will be set by bargaining between the two countries The final settlement will depend upon economic circumstances and the economic strength of the parties
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The Economic System

Copyright (c) 2007 by Thomson South-Western. All rights reserved.

QUESTIONS TO BE ANSWERED BY ALL ECONOMIC SYSTEMS

What goods and services to produce and in what quantities? How are goods and services produced?

Efficient use of productive resources How output and income is distributed among all members of society

Who gets what is produced?

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MARKET ECONOMY

An economy in which the decisions about:

what to produce, how much to produce, and how to allocate goods and services

are made primarily by individuals and firms in the economy

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THE ROLE OF PROFIT IN A MARKET ECONOMY

Profit

The incentive for obtaining and using resources to produce goods and services that consumers will buy The excess of revenue over all costs of production
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THE ROLE OF COMPETITION IN A MARKET ECONOMY

Rivalry among individuals and firms for sales to consumers The natural regulator that makes the free market system work
Businesses

compete for shares of the consumers $ Firms compete for scarce productive resources

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EFFECTIVE COMPETITION

The economy functions efficiently without an overseer Consumers are protected from shoddy products and exorbitant prices Resource owners and workers are protected against exploitation by the opportunities of alternative employment options Adam Smith call this the invisible hand the impersonal force of competition ensures the flow of resources towards the most efficient firms because these firms can afford to offer the highest prices for their use.
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THE GUIDING PRINCIPLE OF A MARKET ECONOMY

Privately owned firms should produce the goods and services consumers want in the quantities they wish to buy Competition is the mechanism for regulating trade

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THE ROLE OF PRICES IN A MARKET ECONOMY

Prices allocate resources

The use of land, labor, and capital is determined by the total number of dollars spent on particular goods and services

Prices help determine incomes

Purchases of individuals also determine the incomes paid to the various resources in the form of wages, rents, interest, and profits

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COMPETITION IN THE SINGAPORE ECONOMY

Government-regulated markets

Public utilities, public transportation

Mixed economy

Contains a mixture of perfect and imperfect competition Contains a mixture of regulated and unregulated industries
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ECONOMIC LIBERALISM

An economic philosophy that promoted freedom of action for the individual and the firm through the doctrines of:

Free trade Self-interest Private property Laissez faire

A policy of no government intervention in the economic activities of individuals and businesses

Competition

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THE ROLE OF GOVERNMENT IN THE ECONOMY

Government intervention
Necessary

to remedy inequities that developed under economic liberism Prevent monopolies and cartels from undermining competition Promotion of common good

Deregulation and privatization

Eg

deregulation of taxi fares,

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PRIVATIZATION

The shifting or returning of government economic functions or services to the private sector of the economy The underlying rationale is that private enterprise can provide certain goods and services more efficiently and less expensively than the government

Privatization of public utilities, public housing

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GOALS FOR AN ECONOMY

Full employment: 95 to 96% of civilian labor force employed Stable prices: Consumer Price Index moves 2% or less in either direction Economic growth A balanced budget International balance-of-payments equilibrium

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OTHER ECONOMIC SYSTEMS

Traditional economy

An economy based on self-sufficiency, with barter as the form of trade An economy in which a central authority makes most of the economic decisions regarding production, distribution, and consumption

Command economy

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