Introduction

ECONOMY
It is a system which provides people, the means to work and earn a living.
Parts of Economy
VITAL FUNCTIONS OF AN ECONOMY

CONSUMPTION

CAPITAL
PRODUCTION
FORMATION

ECONOMY
 WHY STUDY ECONOMICS?
The main reason for study of economics can be simplified to
a single word - SCARCITY
 SCARCITY
Scarcity refers to the limitation of supply in relation to demand
for a commodity.
Economics is concerned with selection
of resources under conditions of scarcity
 RESOURCES
FACTORS OF PRODUCTION - FOP
 ECONOMIZING OF RESOURCES
Refers to making optimum use of the available resources.
• Exchange • Barter
To trade one thing for another. The exchange of goods or service
without money.

Example: I want to trade in my Example: I’ll give you my cake for

green disk for a blue one. your ice cream.
 Three Kinds of
Money

Cash Checks Credit Cards

 Needs vs. Wants
• Needs – what people • Wants – the things we
must have to live. would like to have,
Food but can live without.
Clothing
Shelter
 Economic Choice
You make an economic choice when you only have money
for certain items, not all.
Example:
I do not have enough money for both popcorn and a pretzel. I must
choose, so I buy the popcorn. That is my economic choice.

YUM!
 Opportunity Cost
Opportunity cost what you must give up
when you make an economic choice.
Example:
I chose the popcorn, so I have to give up the pretzel.
That is my opportunity cost.
 Supply and Demand
• Supply is the amount • Demand is what
of a good or service people are willing and
available. able to buy.

I would like to buy one candy cane, please .

 What can I do with my money?
• Spend it

• Save it

• Invest it Give people money to use to

make more moneys, like in stocks
and bonds.
 Goods and Services
• Goods • Services
Three types of resources work together in our
economy

Natural Resources Human Resources

Capital Resources
Natural Resources are things we get from nature.

Oil Coal Trees Water

Human resources are jobs done by humans at
work.
Capital resources are the machines, tools and
buildings needed to do a job.
 Producers

Producers make goods or provide services.

 Consumers
Consumers use or buy goods and services.
 Economic Specialization
Individuals or groups who concentrate on
one type of good or service.

Apple farmer Carpenter

 Interdependence
People need each other for goods and
services.

The Ancient Greeks traded their goods across the

Mediterranean Sea.
Macroeconomics vs. Microeconomics
To understand the scope and sweep of macroeconomics, let’s
begin by looking more carefully at the difference between
microeconomic and macroeconomic questions.

MICROECONOMIC MACROECONOMIC
QUESTION QUESTION
Go to business school or take How many people are
a job? employed in the economy as a
whole?
What determines the salary What determines the overall
offered by Citibank to Cherie salary levels paid to workers
Camajo, a new Columbia MBA? in a given year?

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Macroeconomics vs. Microeconomics
MICROECONOMIC
QUESTION
What determines the cost to a
university or college of offering
a new course?
What government policies
should be adopted to make it
easier for low-income students
to attend college?
What determines whether
Citibank opens a new office in
Shanghai?
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MACROECONOMIC
QUESTION
What determines the overall
level of prices in the economy
as a whole?
What government policies
should be adopted to promote
full employment and growth
in the economy as a whole?
What determines the overall
trade in goods, services and
financial assets between the
US and the rest of the world?
Macroeconomics vs. Microeconomics
 Microeconomics focuses on how decisions are made by
individuals and firms and the consequences of those decisions.
Ex.: How much it would cost for a university or college to
offer a new course ─ the cost of the instructor’s salary, the
classroom facilities, the class materials, and so on.
Having determined the cost, the school can then decide
whether or not to offer the course by weighing the costs and
benefits.

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Macroeconomics vs. Microeconomics
 Macroeconomics examines the aggregate behavior of the
economy (i.e. how the actions of all the individuals and firms in the
economy interact to produce a particular level of economic
performance as a whole).
Ex.: Overall level of prices in the economy (how high or how
low they are relative to prices last year) rather than the price of
a particular good or service.

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 Macroeconomics or Microeconomics
• How will Ms. Martin’s tips change when a large manufacturing plant
near the restaurant where she works closes?
• What will happen to spending by consumers when the economy
enters a downturn?
• How will the price of oranges change when a late frost damages
Florida’s orange groves?
• How will wages at a manufacturing plant change when its workforce
is unionized?
• What will happen to US exports as the dollar becomes less
expensive in terms of other currencies?
• What is the relationship between a nation’s unemployment rate and
its inflation rate?

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 Consider this….
• When one person saves, that person’s wealth is
increased, meaning that he or she can consume more
in the future. But when everyone saves, everyone’s
income falls, meaning that everyone must consume
less today. Explain this seeming contradiction.

• “Paradox of Thrift”

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 The Business Cycle
The business cycle is the short-run alternation between economic
downturns and economic upturns.
A depression is a very deep and prolonged downturn.
Recessions are periods of economic downturns when output and
employment are falling.
Expansions, sometimes called recoveries, are periods of economic upturns
when output and employment are rising.

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The Business Cycle
What happens during a business cycle, and what can be done
about it?

the effects of recessions and expansions on unemployment;

the effects on aggregate output; and

the possible role of government policy.

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 Employment and Unemployment
Employment is the number of people working in the economy.
Unemployment is the number of people who are actively
looking for work but aren’t currently employed.
The labor force is equal to the sum of employment and
unemployment.

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 Employment and Unemployment
Discouraged workers are non-working people who are capable of working
but are not actively looking for a job.
Underemployment is the number of people who work during a recession but
receive lower wages than they would during an expansion due to smaller
number of hours worked, lower-paying jobs, or both.
The unemployment rate is the ratio of the number of people unemployed to
the total number of people in the labor force, either currently working or looking
for jobs.
 In general, the unemployment rate rises during recessions and falls during
expansions. It moves in the direction opposite to aggregate output, which
falls during recessions and rises during expansions.

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 Consider this…
• Why do the unemployment rate and
aggregate output move in opposite
directions over the business cycle?
• Describe some of the costs to society of
having a high unemployment rate.
• What are likely signs that a stabilization
policy has been successful over a period of
time?

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 Aggregate Price Level for
Labors

A nominal measure is a measure that has not been adjusted for

changes in prices over time.
A real measure is a measure that has been adjusted for
changes in prices over time.
The aggregate price level is the overall level of prices in the
economy.

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 Inflation and Deflation
A rising aggregate price level is inflation.
A falling aggregate price level is deflation.
The inflation rate is the annual percent change in the
aggregate price level.
The economy has price stability when the aggregate price level
is changing only slowly.

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 The Open Economy
A closed economy is an economy that does not trade goods, services, and
assets.
Open-economy macroeconomics is the study of those aspects of
macroeconomics that are affected by movements of goods, services, and
assets across national boundaries.

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 The Open Economy
One of the main concerns introduced by open-economy macroeconomics is
the exchange rate, the price of one currency in terms of another.
Exchange rates can affect the aggregate price level.
They can also affect aggregate output through their effect on the trade
balance, the difference between the value of the goods and services a
country sells to other countries and the value of the goods and services it
buys in return.
Economists are also concerned about capital flows, movements of financial
assets across borders.

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