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Workshop: Basic Economics
Workshop: Basic Economics
BASIC ECONOMICS
MODULE OUTCOMES
Introduction to Economics
Supply and demand
Short term versus long term
Markets in action
Microeconomics & macroeconomics
Macroeconomics theory
Economic growth & development
Labour market
Examination
INTRODUCTION TO
ECONOMICS
THE ECONOMIC PROBLEM OF
SCARCITY, CHOICE & OPP COST
When wants exceed the resources available to satisfy
them, there is scarcity.
The condition that arises because the available
resources are insufficient to satisfy wants.
Faced with scarcity, people must make choices.
Choosing more of one thing means having less of
something else.
The opportunity cost of any action is the best alternative
forgone.
WHAT IS ECONOMICS?
● Economics
The social science that studies the choices that we make
as we cope with scarcity and the incentives that influence
and reconcile our choices.
Here are some examples of scarcity and the trade-offs associated with
making choices:
• You have a limited amount of time. If you take a part-time job, each
hour on the job means one less hour for study or play.
• A city has a limited amount of land. If the city uses an acre of land
for a park, it has one less acre for housing, retailers, or industry.
• You have limited income this year. If you spend R70 on a music CD,
that’s R70 less you have to spend on other products or to save.
MICRO VS MACRO
Microeconomics
Microeconomics: The study of the choices that
individuals and businesses make, the way these
choices interact, and the influence that
governments exert on these choices.
Macroeconomics
Macroeconomics: The study of the aggregate (or
total) effects on the national economy and the
global economy of the choices that individuals,
businesses, and governments make.
WHAT IS ECONOMICS?
Capital accumulation
► FIGURE 2.2
Shifting the Production
Possibilities Curve
An increase in the quantity of
resources or technological
innovation in an economy
shifts the production
possibilities curve outward.
Starting from point f, a nation
could produce more steel
(point g), more wheat (point h),
or more of both goods (points
between g and h).
SUPPLY & DEMAND
DEMAND
The relationship between the quantity
demanded and the price of a good when all
other influences on buying plans remain the
same.
Illustrate
a table with a price and quantity
demanded.
LAW OF DEMAND
The Law of Demand
Other things remaining the same,
If the price of a good rises, the quantity demanded of
that good decreases.
If the price of a good falls, the quantity demanded of
that good increases.
Demand curve versus demand schedule
DEMAND
DEMAND
Changes in Demand
Change in the quantity demanded
A change in the quantity of a good that people
plan to buy that results from a change in the
price of the good.
Change in demand
A change in the quantity that people plan to buy
when any influence other than the price of the
good changes.
DEMAND
The main influences on buying plans that change demand are:
of Responsiveness
Elasticity: A Measure
THE PRICE ELASTICITY OF DEMAND
● Elasticity
Elastic > 1
Inelastic < 1
Unitary = 1
THE PRICE ELASTICITY OF DEMAND
• Negative marginal
returns
SHORT-RUN PRODUCTION
Increasing Marginal Returns
Increasing marginal returns occur when the
marginal product of an additional worker
exceeds the marginal product of the previous
worker.
Increasing marginal returns occur when a small
number of workers are employed and arise
from increased specialization and division of
labor in the production process.
SHORT-RUN PRODUCTION
Decreasing Marginal Returns
Decreasing marginal returns occur when the
marginal product of an additional worker is less
than the marginal product of the previous
worker.
Decreasing marginal returns arise from the fact
that more and more workers use the same
equipment and work space.
As more workers are employed, there is less
and less that is productive for the additional
worker to do.
SHORT-RUN PRODUCTION
Decreasing marginal returns are so pervasive that
they qualify for the status of a law:
The law of decreasing returns states that:
As a firm uses more of a variable input,
with a given quantity of fixed inputs, the
marginal product of the variable input
eventually decreases.
SHORT-RUN PRODUCTION
Average Product
Average product is the total product per worker
employed.
It is calculated as:
Average cost
9.3 SHORT-RUN COST
Total Cost
A firm’s total cost (TC) is the cost of all the
factors of production the firm uses.
Total cost divides into two parts:
Total fixed cost (TFC) is the cost of a firm’s
fixed factors of production used by a firm—the
cost of land, capital, and entrepreneurship.
Total fixed cost doesn’t change as output
changes.
9.3 SHORT-RUN COST
Total variable cost (TVC) is the cost of the variable
factor of production used by a firm—the cost of
labor.
To change its output in the short run, a firm must
change the quantity of labor it employs, so total
variable cost changes as output changes.
Total cost is the sum of total fixed cost and total
variable cost. That is,
TC = TFC + TVC
Table 9.2 on the next slide shows Sam’s Smoothies’
costs.
SHORT-RUN COST
SHORT-RUN COST
Figure 9.6 shows Sam’s
Smoothies’ total cost curves.
● economies of scale
A situation in which the long-run average cost of production decreases as
output increases.
● diseconomies of scale
A situation in which the long-run average cost of production increases as
output increases.
©
Pear
son
Edu
catio
Macroeconomic Policy Challenges
and Tools
Five widely agreed policy challenges for
macroeconomics are to:
1. Boost economic growth
2. External stability/balance of payments
3. Lower unemployment / Full employment
4. Price stability
5. Equitable distribution of wealth (income)
Macroeconomic Policy
Challenges and Tools
Two broad groups of macroeconomic policy tools
are :
Fiscal policy—making changes in tax rates and
government spending
Monetary policy—changing interest rates and changing
the amount of money in the economy
The Circular Flow
This model captures the essential essence of
macroeconomic activity
The circular flow model illustrates the
mechanism by which income is generated from
goods and services and how this income is spent.
This provides the basis for the way economists
think about the interactions between different
parts of the economy and the measurement of
economic activity
The Circular Flow of income n spending
MACROECONOMICS
THEORY
MACROECONOMIC
VARIABLES
Gross Domestic Product (GDP)
Inflation
Unemployment
Balance of payments
Gross Domestic Product
GDP Defined
GDP or gross domestic product, is the market
value of all final goods and services produced in a
country in a given time period.
This definition has four parts:
Market value
Final goods and services
©
Pear
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Gross Domestic Product
Final Goods and Services
GDP is the value of the final goods and
services produced.
A final good (or service) is an item bought by
its final user during a specified time period.
A final good contrasts with an intermediate
good, which is an item that is produced by one
firm, bought by another firm and used as a
component of a final good or service. ©
Pear
son
Edu
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Gross Domestic Product
Excluding intermediate goods and services avoids a
problem called double counting.
Produced Within a Country
GDP measures production within a country domestic
production.
In a Given Time Period
GDP measures production during a specific time period
Excluding intermediate goods and services avoids
double counting normally a year or a quarter of a
year. ©
Pear
son
Edu
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GDP, INCOME, AND
EXPENDITURE
Figure 1
shows the
circular flow
of income
and
expenditure.
Nominal vs Real GDP
Real GDP is the value of final goods and
services produced in a given year when valued
at constant prices.
The first step in calculating real GDP is to
calculate nominal GDP.
Nominal GDP
Nominal GDP is the value of goods and
services produced during a given year valued at
the prices that prevailed in that same year.
Inflation
Inflation is a a continuos and considerable rise in
price level in general.
The commonly used indicator of general price
level is the CPI
To calculate inflation rate - is the percentage
change in the price level.
(P1 – P0)
P0 100
Inflation
Is Inflation a Problem?
Unpredictable changes in the inflation rate are a problem
because they redistribute income in arbitrary ways between
employers and workers and between borrowers and
lenders.
A high inflation rate is a problem because it diverts
resources from productive activities to inflation forecasting.
Eradicating inflation is costly because it brings a period of
greater than average unemployment.
©
Pear
son
Edu
catio
When an inflation occurs ____________.
all prices are rising
oil prices are rising
©
Pear
son
Edu
catio
Unemployment
defined
Cyclical unemployment
Seasonal unemployment
Structural unemployment is
unemployment created by changes in
technology and foreign competition that
change the skills and location match
between jobs and workers.
Cyclical unemployment is the fluctuation
in unemployment caused by the business
cycle e.g. in a recession AD & thus output
falls.
Unemployment
population growth
©
Pear
son
Edu
catio
Measuring Economic Growth
When GDP increases, we know that either
We produced more goods and services or
We paid higher prices
1. A peak
2. A trough ©
Pear
son
Edu
catio
Cycle Patterns, Impulses
and Mechanisms
DL
10 15 19 Number Employed
The Labour Market
The market demand for labour will shift or
change due to:
The number of firms or employers changes
The number of product changes
The productivity of labour changes
There is a new substitute for labour
The price of substitute changes
The price of a complementary factor of production
changes
The demand for labour
The Labour Market will shift if:
•Productivity of labour
increases
Wage Rate (£ per week) At
Thea relatively
demand for high
labour
•New
At amachinery
wage lower wage
rate of £250
isper
rate used
the
is downward sloping
which
firm increases
week,
from can afford
the
left value
to toadded
right take on
£250 more workers.
productivity
by the worker The
must demand
be
for labourtoiscover
greater inversely
the cost
related to the wage
•If there is an increase
of hiring that rate
labour.
Demand is likely to be
in the demand for the
lower.
good/service itself
•If the price of the
good/service increases
£100
DL1
DL
Q1 Q3 Q2 Q4
Quantity of labour employed
The Labour Market
The Supply of Labour
The amount of people offering their labour
at different wage rates.
Involves an opportunity cost – work v. leisure
Wage rate must be sufficient
to overcome the opportunity cost
of leisure
The Labour Market
The market supply of labour will shift or
change due to:
Tastes (for leisure, income and work)
Income and wealth
Expectations (for income or consumption)
Skill levels required
Size and structure of the population – age, gender, etc.
Opportunity cost of work – income and substitution
effects
The Labour Market
Income effect of a rise in wages:
As wages rise, people feel better off and therefore may not feel a
need to work as many hours
Substitution effect of a rise in wages:
As wages rise, the opportunity cost of leisure rises (the cost of
every extra hour taken in leisure rises). As wages rise, the
substitution effect may lead to more hours being worked.
The net effect depends on the relative strength of the
income and substitution effects
A rise in the demand for
labour would force up
DL1
DL
Q1 Q2
Number employed
The Labour Market
Wage Rate (£ per hour)
SL An increase in the
supply of labour
would lead to a fall
in the wage rate as
there would be an
Sexcess
L1 supply of
6.00 labour.
5.00
Excess Supply
DL
Q1 Q2
Number employed
GOODLUCK WITH YOUR
EXAM