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