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Introduction Eco E1 PB
Introduction Eco E1 PB
ECONOMICS The
Basic Concepts
RGFrancisco
1
Topics to be discussed
What is Economics
Basic Economics Question
Micro and Macro Economics
Inflation/Recession
Opportunity Cost
3 Basic Questions
4 Factors of Production
What is
Economics?
3
What is
Economics?
A social science that studies
and influences human behavior
Economics is the study of what
constitutes rational human
behavior in the endeavor to
fulfill needs and wants.
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Economics is the social science
concerned with the problem of scarcity
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The Foundation of
Economics
Scarcity
Scarcity refers to our limited resources and our
unlimited wants and needs.
For an individual, resources include time,
money and skill.
For a country, limited resources include natural
resources, capital, labor force and technology.
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Needs vs. Wants.
Human wants are unlimited.
We live in a world of limited
resources.
The above leads to scarcity.
People try to balance needs
and wants.
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ECONOMICS
MICRO MACRO
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Micro Economics
Micro Economics studies how the individual parts
of the economy make decisions to allocate
limited resources
Microeconomics studies:
how individuals use limited resources to meet
unlimited needs
the consequences of their decisions
the behavior of individual components like
industries, firms and households.
how individual prices are set
what determines the price of land, labor and
capital
inquire into the strengths and weaknesses
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of
the market mechanism.
Macro Economics
Macroeconomics studies about the functioning
of the economy as a whole
It examines the economy through wide-lens.
Macroeconomics studies about
the total output of a nation
the way the nation allocates its limited
resources of land, labor and capital
the ways to maximize production levels
the techniques to promote trade
After observing the society as a whole, Adam
Smith noted that there was an "invisible hand"
turning the wheels of the economy: a market
force that keeps the economy functioning.
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Goods items/products we value or desire
tangible goods
intangible goods
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The Factors of Production
Labor
Labor Capital
Capital
Land
Land Organization
Organization
Product
Product
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3 Basic Economic Questions
What to produce?
With limited resources, deciding what is needed
the most is often a factor in determining what
will be produced.
What is the need or want of this product?
What is the point of making a product that no one
is going to buy. Businesses need to make money
so they choose products that people want.
3 Basic Questions Cont
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Market
Economies
In a pure market
economy there is no
government
involvement in
economic decisions.
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Contd
The Government lets the market answer
the following three basic economic
questions:
1. What ?
Consumers decide what should be produced
in a market economy through the
purchases they make.
2.How ?
Production is left entirely up to businesses.
Businesses must be competitive in such an
economy and produce quality products at
lower prices than their competitors.
3.For whom ? 20
21
Contd.
Command
Economies
In a command economy the
Government answers the three basic
economic questions.
1.What?
A central planning committee decides what
products are needed.
2.How?
Since the Government owns all means of
production in a command economy, it
decides how goods and services will be
produced.
3. For Whom ? 22
23
Contd
The Economic Problem
Unlimited Wants
Scarce Resources Land, Labour,
Capital
Many Uses of Resources
Choices
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The Economic Problem
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What is Utility?
Satisfaction
Can not be measured
Marshall Utility can be measured in Utils
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What are kinds of
Utility?
Form Utility
Place Utility
Time Utility
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Form Utility
Inwhat form is a product
available
Whole chicken
Chicken parts
Cooked chicken
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Place Utility
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Time Utility
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Rational Behavior
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Opportunity Cost
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Production Possibility Frontiers
PPF Shows the different combinations of
goods and services that can be produced
with a given amount of resources
No ideal point on the curve
Any point inside the curve suggests
resources are not being utilised efficiently
Any point outside the curve not attainable
with the current level of resources
Useful to demonstrate economic growth and
opportunity cost
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Production Possibility Frontiers
If it devotes all
Capital Goods IfIf
it the
Assume country
a its is
reallocates
resources to
at point
country
resources
capital
A
can onitthe
(moving
round thegoods
PPF from A
PPF
produce
could It cantwo
produce a
Ym to B) it can produce
produce
types
maximum
more consumerthe
of goods
of Ym.
goods
combination
with
but onlyits of Yo
at the expense
ofIf it devotes
fewer capital all its
goods.
capital
resources goods and
Yo A resources
The
Xo
opportunity
consumer
capital
to cost of
goods
consumer
producing angoods
extra Xoit
X1goods
and
could consumer
produce
consumer a is
goods
Yogoods
Y1 capital
maximum of goods.
Xm
Y1
B
Xo X1 Xm Consumer Goods
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Production Possibility Frontiers
It can only produce
atProduction
points outside the
inside
PPF thea way
if it finds
Capital Goods ofPPF
expanding
e.g.its
resources or
point Bthe
improves
means the
productivity of those
Y1
C resources
countryit is already
not
has. This will push
using all its
A the PPF further
.
Yo resources
outwards.
Xo X1 Consumer Goods
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Business Cycle
Parts of the Business Cycle