Economic Issues
33
www.lrjj.cn Economic Issues
description
Economic Issues. What is Economics? Macroeconomics vs. Microeconomics Demand and Supply. Economics. What is Economics?. “Oikonomos” – One who manages a household The production of goods and services The consumption of goods and services - PowerPoint PPT Presentation
Transcript of Economic Issues
www.lrjj.cn
Economic Issues
www.lrjj.cn
Economics
• What is Economics?
• Macroeconomics vs. Microeconomics
• Demand and Supply
www.lrjj.cn
What is Economics?
www.lrjj.cn
What is Economics?• “Oikonomos” – One who manages a household • The production of goods and services• The consumption of goods and services
• The study of how the people allocate their limited resources to satisfy their unlimited wants (It is the study of how people make choices – involves sacrifice)
• Central Economic Problem: Scarcity
www.lrjj.cn
Resources & Wants
• Resources are things that have value and are used to produce things that satisfy people’s wants (Supply)
• Wants are all of the things that people would consume if they had unlimited income (Demand)
www.lrjj.cn
Resources
• Factor of production– Human resources: Labor– Natural resources: Land, raw materials– Manufactured resources: Capital
www.lrjj.cn
Branches of Economics
www.lrjj.cn
Macroeconomics
• The branch of economics that studies economics aggregates – demand and supply
• The part of economic analysis that studies the behavior of the economy of a whole – deals with economy wide phenomena e.g. GDP, CPI
www.lrjj.cn
GDP & CPI
• GDP– A measure of the total income and
expenditures of an economy– The total market value of all final goods and
services produced within a country in a given period time
• CPI– A measure of the overall cost of the goods
and services bought by a typical consumer
www.lrjj.cn
GDP & economic well-being
• GDP is a good measure of the economic well-being of a society
• GDP per person tells us the income and expenditure of the average person in the economy
• But it misses…– Leisure reduction increases GDP but may reduce
well-being– The value of clean environment– Non-market activities?
www.lrjj.cn
Macroeconomic Issues
• Aggregate demand – The total level of spending in the economy
• Aggregate supply – the total amount of output in the economy
• AD > AS– Inflation– Balance of trade deficit (Export & Import)
• AD < AS– Recession– Unemployment
www.lrjj.cn
Macroeconomic policy
• AD = AS– Demand-side policy– Supply-side policy
www.lrjj.cn
Microeconomics
• The part of economic analysis that studies decision making undertaken by individuals and by firms
• Focus on the small part of economics
www.lrjj.cn
Microeconomics Issues
• Choices:– What– How– For whom
• Opportunity cost• Rational decision making
– Weighting up the benefit (Value for money)
• Marginal Costs & Marginal Revenues• Social implications/consequences of
choices
www.lrjj.cn
Economic Models
• “Ceteris Paribus” (other things being equal)
• Production Possibility Curve
• Circular Flow of Goods and Incomes
www.lrjj.cn
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8Units of clothing (millions)
Un
its o
f foo
d (
mill
ion
s)
Units of food Units of clothing (millions) (millions)
8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m
A production possibility curveA production possibility curve
www.lrjj.cn
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8Units of clothing (millions)
Un
its o
f foo
d (
mill
ion
s)
Units of food Units of clothing (millions) (millions)
a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m
a
A production possibility curveA production possibility curve
www.lrjj.cn
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8Units of clothing (millions)
Un
its o
f foo
d (
mill
ion
s)
Units of food Units of clothing (millions) (millions)
8m 0.0b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m
b
A production possibility curveA production possibility curve
www.lrjj.cn
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8Units of clothing (millions)
Un
its o
f foo
d (
mill
ion
s)
Units of food Units of clothing (millions) (millions)
8m 0.0 7m 2.2mc 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m
c
A production possibility curveA production possibility curve
www.lrjj.cn
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8Units of clothing (millions)
Un
its o
f foo
d (
mill
ion
s)
x
A production possibility curveA production possibility curve
w
www.lrjj.cn
Production Possibility Curve
• Microeconomics & PPC– Choices and opportunity cost– Increasing opportunity cost
• Macroeconomics and PPC– Production within the curve– Shift in the curve
www.lrjj.cn Units of clothing (millions)
Un
its o
f foo
d (
mill
ion
s)Increasing opportunity costsIncreasing opportunity costs
x
y1
1
z1
2
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8
www.lrjj.cn
v
x
y
O
Making a fuller use of resourcesMaking a fuller use of resourcesF
oo
d
Clothing
Production insidethe production
possibility curve
www.lrjj.cn
O
Growth in potential outputGrowth in potential outputF
oo
d
Clothing
Now
www.lrjj.cn
O
Fo
od
Clothing
Now
Growth in potential outputGrowth in potential output
5 years’ time
www.lrjj.cn
Goods and services
£Consumer
expenditure
Wages, rentdividends, etc.
£
Services of factors of production (labour, etc)
The circular flow of goods and incomesThe circular flow of goods and incomes
www.lrjj.cn
The Circular Flow of Income
• Macroeconomic issues– The size of total flows
• Microeconomic issues– Individual markets– Choices within goods and factor markets
www.lrjj.cn
Economic Systems
• Command economy (Socialist/Communist)
• Free-market economy– Price mechanism: price respond to shortage
and surpluses– Equilibrium
• Mixed market economy
www.lrjj.cn
Command Economy
• Planning– Consumption and investment– Matching of inputs and outputs– Distribution of output
• Advantages– High investment, high and stable growth– Social goal pursued– Low unemployment
www.lrjj.cn
Command Economy
• Problem– Gathering information– Expensive to administer– Inefficient allocation of resources
• Inappropriate incentives• no system of prices
– shortages and surpluses– lack of response to consumer demand
www.lrjj.cn
Free-Market Economy
• Based on free decision making by individuals and firms
• Demand and supply decisions
• Price mechanism– Price respond to shortage and surpluses– Equilibrium
www.lrjj.cn
Goods Market
Dg shortage(Dg > Sg)
Pg Sg
Dguntil Dg = Sg
Factor Market
Sg Sf
Df until Df = Sf
Df shortage(Df > Sf)
Pf
The price mechanism:the effect of a rise in demand
The price mechanism:the effect of a rise in demand
www.lrjj.cn
Competitive Market
• Perfectly competitive market
• Price taker
