Introduction to Economics

1
Introduction to Economics

• Lecture 1 Chapter 1
• Basic Economic Concepts
• Measuring Welfare

2
The Study of Economics

• 18th -19th centuries called Political Economy
• Body of maxims for statesmen
• Governed by the thoughts of the Classical
  economists at the time
• Now referred to as Economics
• A social science concerned with individuals

3
What do you think Economics is?

• Some Definitions
• The study of how society chooses to allocate its
  scarce resources among competing goals to best
  fulfill its unlimited wants
• The social science concerned with the efficient
  use of limited or scarce resources to achieve
  maximum satisfaction of unlimited human materials
• Thomas Carlyle (19th-century Scottish writer) -
  the dismal science.

4
Definitions continued

• Simply stated by Alfred Marshall
• (English Economist 1842-1924)
• The study of Man in the ordinary business of
  life
• Concerned with the more material part of human
  welfare

5
Divisions in Economics

• Microeconomics vs. Macroeconomics
• Microeconomics studies of the behaviour of
  individual markets, workers, households and firms
  while Macroeconomics looks at the big picture
  analysing economy-wide phenomena such as growth,
  inflation and unemployment.
• Positive vs. Normative Economic Statements
• Positive Economics describes the world as it is,
  rather than trying to change it. Normative
  Economics suggests policies for increasing
  economic welfare.

6
Human Welfare

• Welfare concerns the good fortune, health,
  happiness, prosperity, wellbeing of a people
• The objective of all economic activity is to
  fulfill wants that bring about material wealth or
  some level of satisfaction.
• Anything that affects material/economic welfare
  most likely influences total welfare in the same
  direction.

7
Fundamental Concepts

• Based on our 2nd definition
• Efficiency
• Production of the desired effects using current
  resources and technology with minimum waste of
  time, effort, or skill.
• Scarcity and Choice
• Basic economic problem which arises from people
  having unlimited wants while there are and always
  will be limited resources (human natural).
• various economic decisions must be made to
  allocate resources efficiently.

8
Scarcity

• Despite our advances in technology, we can never
  produce in such abundance that everyone gets all
  they want with plenty leftover.
• Society has virtually unlimited wants wants
  change and multiply over time
• Desire for a particular good can be satisfied,
  but not the aggregate desire for all goods.
• Want satisfying activities themselves generate
  new wants.
• Economics is the therefore concerned with doing
  the best with what we have
• The fundamental economic problem scarcity, is
  that the means available are limited relative to
  the extent of wants.

9
Why Are Our Means Limited?

• Factors of production are limited because
• Resources available cannot be significantly
  increased in a given period
• Technology methods of production, the know
  how subject to limited annual improvement.
• Social Institutions and traditions change slowly

10
Resource Categories

• Property Resources
• Land
• Renewable
• Sustainable over time with proper management
• Non-renewable
• Will be depleted over time, possibly slowed by
  recycling

11
Resource Categories

• Property Resources
• Land
• Capital
• a. Human produced goods used in production
• b. All semi-finished materials that exist at a
  point

12
Resource Categories

• Property Resources
• Land
• Capital
• any form of wealth
• employed or capable
• of being employed in
• the production of more
• wealth

Notes....
INVESTMENT
13
Resource Categories

• Property Resources
• Land
• Capital
• Human Resources
• Labour
• All efforts of mind and muscle
• The labour force its size, variety
• and quality

14
Resource Categories

• Property Resources
• Land
• Capital
• Human Resources
• Labour
• Entrepreneurial Ability
• takes initiative
• makes policy decisions
• innovates
• bears risk
• combines resources

15
Resource Payments
PROPERTY RESOURCES
HUMAN RESOURCES
16
Getting the Most from Available Resources

• Full employment using available resources
• Full production using resources efficiently
• productive efficiency
• producing goods services in the least costly
  way
• allocative efficiency
• producing goods services most wanted by society

17
Production Possibilities

• Assumptions
• full employment productive efficiency
• fixed resources
• fixed technology
• only two goods produced
• pizzas symbolize consumer goods
• industrial machines symbolize capital goods

18
Production Possibilities

• What if we could produce only
• 10,000 machines
• or
• 400,000 pizzas
• using ALL of our resources

19

• to get some pizzas
• we have to give up some machines! opportunity
  cost principle
• every choice is associated with a cost

20
Production Possibilities
21
Production Possibilities
A
B
C
W
attainable but inefficient
unattainable
D
E
22
Unemployment Productive Inefficiency
a point like U represents unemployment or
underemployment
A
B
C
D
U
E
23
Unemployment Productive Inefficiency
A
B
more of either or both products is possible
C
D
U
E
24
Tracking an Economys Performance

• Gross Domestic Product
• Measures the market value of all final goods and
  services produced within the economy during 1yr.
  (ignores who owns resources)
• Gross National Product
• Measures the market value of all final goods and
  services produced by domestically owned resources
  during 1 yr. (ignores where production occurs)

25
Tracking an Economys Performance (cont)

• Opportunity Cost
• There is no free lunch
• True cost of producing an additional unit of 1
  good is the value of other goods forgone
• Living Standards
• GDP may be rising without actual increases in
  production, this is due to rising prices
  inflation.
• To correct for inflation, current GDP must be
  deflated based on price level in a base year to
  get Real GDP.
• Real GDP per capita shows the average
  distribution of real income that each person in
  the economy gets.
• Per capita real GDP indicates average well-being.

26
Tracking an Economys Performance (cont)

• GDP is not the best measure of welfare because it
  neglects
• home production
• Voluntary community activities
• Depletion of natural resources
• Distribution of income
• Includes costs that offset deteriorating
  conditions
• Capital replacement costs, pollution cleanup
  costs, crime prevention etc that drive the
  monetary value of GDP up without associated
  production.

27
Alternatives to the GDP for measuring well being

• Human Development Index
• Developed by UN real wealth of a nation is its
  people
• Includes social, political, environmental
  conditions, personal incomes
• Based on life expectancy, educational attainment,
  income
• Genuine Progress Indicator
• Adds value of household, community services
• Adjusts for the gap between rich and poor
• Subtracts negative social costs eg. Crime,
  underemployment, pollution, family breakdown,
  depletion of resources, auto accidents
• Adjusts for net capital formation, net foreign
  borrowing

28
Requisites for Economic Growth

• For living standards to rise the rate of growth
  of real GDP must exceed the rate of growth of the
  population.
• Requisites
• Quality of labour force
• Stock of capital land resources
• State of technology
• Efficiency
• Population

29
Governments role in unequal distribution of
Income

• When income is not equally distributed, per
  capita measures are misleading
• Governments of LDCs should focus on improving the
  5 requisites for economic growth and develop
  social overhead capital
• Governments of DCs can through the WB offer
  loans, grants and technical assistance to LDCs.
• DCs can alternatively offer direct help through
  national programs eg. Canada - CIDA