Taylor Economic Note

8/12/2019 Taylor Economic Note

1/44


2/44

What is Economics? Economics is a social science which studies how

resources are allocated.

A study of human behaviour emphasizing howhuman actions are influenced by the constraints ofsociety, therefore they need to make choices tosatisfy certain objectives.

As such, economics is also known of the science ofchoice.


3/44

What is Economics? Economics is derived from the Greek word oikos,

which means 'family, household, estate', and

nomos, which means 'custom, lawHence, combining both it means "householdmanagement"and "management of the state"


4/44

What is Economics? Economics is broadly divided into two(2) major

concerns namely:

(1) Microeconomics

(2) Macroeconomics


5/44

MicroeconomicsA branch in economics that examines the functioning

of individual market/industryand the behaviour ofindividual decision making units- for examplebusiness firms and households.

Microeconomics studies individual markets such asthe market for coffee or tea or ice-cream.


6/44

Microeconomics Example:

For the case of coffee, it explains

- why the price of coffee is at a certain level?

- how changes in coffee prices may affect the market fortea?

- why are there so many people are employed in coffeeproduction?


7/44

Macroeconomics The other branch of economics that examines the

economic behaviour of aggregatesor it studiesthe overall performance of an economy.

The study of aggregate demand, output or inflationare all part of study of macroeconomics.

Instead of looking at the individual price, we look atthe general price level.


8/44

Macroeconomics Instead of looking at the individual firms output,

we look at the national output.

If the society wishes to avoid or to reduce thenegative effects of f luctuations in output,employment and price level, it must have someidea of how the macroeconomy works.


9/44

Resources: Case & Fair (2010) Principles of Economics


10/44

Positive and normative statements In the analysis of the particular problem, economists

usually ask two(2) types of questions, namely positiveand normative in nature.

What is the difference between the two?


11/44

Positive and normative statementsA positive statement is a factual statement

obtained from survey and research,without

making judgementswhether the outcomes aregood or bad.

Example:

The equilibrium wage rate is RM4.50 per hour.

The unemployment rate for last year is 4.6%


12/44

Positive and normative statementsA normative statement is based onvalue

judgement, using an approach that analyzes theoutcome of economic behaviour, evaluates them

as good or bad, and may prescribe courses ofaction.

Example :

The minimum wage should be raised every year.

The government should play an active role inredistribution of wealth in this country.


13/44

Basic Economic QuestionsWe need to answer three(3) basic questions to

understand the functioning of the economic system.

Whatis to be produced? How is it produced?

Forwhom it is produced?


14/44

Economic resources Every society, no matter how big or small has a

system that works to transform the resources andprovide them into goods and services.

The goods produced are called outputs, they areproduced by using resources called inputsorfactorsof production


15/44

Factors of ProductionWhat are the resources?

The basic resources available to the society are often

referred to as inputs or factors of production. Three(3) key factors of production are:

(i) land (ii) capital (iii) labour


16/44

Concept of Scarcity To get it started, the presumption is that human wants

are unlimited, but the resources are not.

Scarcity arises because people desire more things thanavailable resources can provide. For e.g. money, timeand energy


17/44

Scarcity and Choice

In economics, limited or scarce resources forceindividuals and societies to choose among competinguses of resources, i.e. people have to make choices

These scarce resources are then transformed intouseful goods and services.


18/44

Rationality and Choices When making choices, human beings are assumed to

be rational. By rationality, economists asserts that:

(i) Humans beings act with a purpose(ii) With a purpose, he or she makes choices which are

consistent with his or her preferences in order tomaximise his or her net gain


19/44

Rationality and ChoicesIn short,

Consumers will seek to maximise their satisfaction orutility

Firms will seek to maximise their profits

These form the basic ingredients and foundations ofthe study of Economics.


20/44

Opportunity Cost Because the resources are scarce and humanwants are unlimited, we have to choose to

consume certain good and service.Consequently, this implies that we are unable

to consume something else. We have to forgoor give up consuming some other goods andservices.

The value of goods and services forgone isequal to the opportunity cost


21/44

Opportunity Cost Opportunity Cost is also known as the best

alternative forgone for choosing a particularaction.

The example of the is given as follows:At a given level of income, instead of going for a

movie which costs RM10.00, I choose to go for adrink at Starbucks which costs the same.

Hence, the opportunity cost of enjoying Starbuckscoffee is ________________.


22/44

Production Possibility Frontier (PPF)

PPF is a graph that shows all the combinations ofgoods and services that can be produced if all thesocietys resources are used efficiently.

It helps to illustrate the principles of scarcity, choiceand opportunity cost.


23/44


An example of a PPF of an economy producing onlycapital goods and consumer goods

Consumergoods - Cars

0

Capital goods -Machines

D

A

F

E

B

550

800

1100 1300

G


24/44


The assumptions for the frontier are:

1. All resources are fully employed, zero

unemployment2. There are only two(2) goods produced

3. Resources can be transferred from theproduction of capital goods to consumer goodsor vice-versa at no cost

4. Level of technology is assumed constant

5. All resources are fixed in quantity


25/44

Production Possibility Frontier (PPF) Referring to the frontier, all points below (point D)

and exactly on the curve (points A,B,E & F) representscombinations of capital and consumer goods that are

possible for the society given the available resourcesand existing technology.

Point D shows the combination of two goods which are

not at the maximum as there are unemployedresources in the society (inefficiency).


26/44


Points A & B shows the maximum combination of twogoods that can be produced as all resources are fullyemployed (productive and allocative efficiency).

Point above and to the right of the curve such as pointG, represents combinations that cannot be reached,

given the available resources and existing technology.


27/44

Production Possibility Frontier (PPF) The concept of scarcity, choice and opportunity

can be explained by the movements of the pointson the PPF.

Assuming that the economy is operating at fullemployment level (all resources are fullyemployed), the economy decides to produce more

capital goods than consumer goods. Thus, there is a movement from point Eto Fon the

PPF.


28/44

Production Possibility Frontier (PPF)Moving from point E to F indicates that:

1. A rise of 250 units in the quantity of capitalgoods produced (from 550 units to 800 units)

2. A fall of 200 units in the quantity of consumergoods produced (1300 units to 1100 units)


29/44

Production Possibility Frontier (PPF) Given the existing resources available, scarcity is

prevalent when the economy is unable to producemore of both capital and consumer goods.

Thus, the economy will have to make a choice ofwhich good to produce.

In the case here, capital good is chosen, as a result

there is additional 250 units of capital goods to beproduced.


30/44

Production Possibility Frontier (PPF) The economy will have cut down on the production of

consumer goods by 200 units.

In other words, the opportunity cost of producing anadditional 250 units of capital goods is the 200 units ofconsumer goods that we have to forgo.


31/44

Production Possibility Frontier (PPF) From the PPF, it is observed that more and more of

consumer goods will have to be given up in order toproduce additional units of capital goods.

This is due to the concave shape of the PPF. This is known as Increasing Opportunity Cost.


32/44

Production Possibility Frontier (PPF) For point G on the PPF, these combinations can be

achieved if there is an outward shift of the PPF.

How can this happen?

It is due to the existence of economic growth!

An economic growth is characterized by anincrease in total output of an economy.


33/44

Production Possibility Frontier (PPF) and

Economic GrowthFactors causing economic growth:

Discovery of new resources

Higher labour productivity Improvement in human capital

Technological advancement

Immigration of skilled foreign labour

Favourable government policies


34/44

Economic Systems Given scarce resources, how exactly do large and

complex societies go about answering the threebasic questions?

What gets produced? How is it produced? For whom it is produced?

Now we shall explore the alternative economicsystems and their means of allocating resources.


35/44

Thecommand economy It is also known as the centrally-planned economy In a pure command economy, the basic questions

are all answered by the government.

The central authority usually comprises a group ofcommittee of top government officials, whichassumes that it owns the natural, capital andlabour resources.


36/44

Thecommand economy Through the government ownership of state

enterprises, the government either directly orindirectly, determines what to produce, the level ofoutput to produce, the method of which it isproduced and to whom it is produced for.

Examples: North Korea, Cuba and the former

Soviet Union.


37/44

Thecommand economyAdvantages: Full employment with moderate inflation Distribution of wealth is equal More public goods are provided High level of savings and capital accumulation


38/44

Thecommand economyDisadvantages:

High costs in planning

Difficult to plan when the economy becomes moreadvanced and complex

Low efficiency, poor quality

No incentive to innovate


39/44

The free market economy

It is also called the capitalist or laissez-faireeconomy.

In a free-market economy, individuals and

firms pursue their own self interests withoutany central direction or regulation.

Consumers ultimately dictate what will beproduced (or not produced) by choosing what

to purchase (or not to purchase)


40/44

The free market economy

Basically, the economic questions are answeredwithout the help of a central government planor directives.

Free market means the system is left to operateon its own, with no outside interference.

Government is responsible for the law of theland and provision of public goods and otherfacilities.

Examples: United States and Hong Kong


41/44

The free market economyAdvantages Maximise consumer sovereignty

Efficient allocation of resources through pricemechanism

Competition ensures high productivity

Free market ensures that there is no shortage orsurplus of goods and services


42/44

The free market economyDisadvantages Goods produced may not be in the best interest of the

society (alcohol, tobacco)

Unequal distribution of wealth

Unemployment of labour

Underproduction of public goods

Pollution and wastage


43/44

The mixed economy In reality, there are no pure planned/command

economies or pure free market economies in theworld.

All systems are in some sense mixed. The individual enterprise exists and government

involves in the decision making as well.

The basic questions are jointly answered by themarket forces and the government.


44/44

The mixed economy Free market enterprises may not be perfect as they

do not produce at the lowest cost and it may alsolead to unfair income distribution.

Therefore, it justifies the need for governmentinvolvement to ensure an and efficient andequitable distribution of resources

Examples: Malaysia, United Kingdom, Japan andmost of the countries in the world

Taylor Economic Note

Documents

Transcript of Taylor Economic Note