Economics

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Economics
The study of how scarce, or limited resources are
used to satisfy unlimited material wants and
needs the study of decision making in a world of
scarcity.
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Unlimited wants
Limited resources to satisfy wants
Choose between alternatives
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Scarcity and Choice
Scarce Goods
Limited Resources
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In more advanced economies
Division of Labor
allows
Specialization
which increases
Production
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Specialization allows for
1. Focus on a particular production process.
2. Faster and higher quality production.
3. Economies of scale.
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Division of Labor

• Workers on an assembly line are an example of the
  divisions of labor.

• Specialization is often paired with trading your
  specialty for theirs.

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Benefits of Trade
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Economic Analysis
Macroeconomics (ECO201)
Monetary policy
Fiscal policy
Microeconomics (ECO202)
Households and firms
Marginal analysis
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modeling
1. Make Assumptions
a. Principle - relationship
b. Theory string of principles
c. Law theory proven to hold true most times
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The Circular Flow of Goods and Services
Factor (Labor) Markets
4 Participants
2. Illustration of a model
Households
Businesses
Goods and Services Markets
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Another Circular Flow
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The Circular Flow Diagram

• Four key markets coordinate the circular
  flow of income.

• 1. the resource market coordinates demand for
  factors of production between businesses and
  households.

2. The goods services market coordinates the
demand for output between businesses and
households.
3. The loanable funds marketdirects household
and foreign investments to business and
government borrowers .
4. The foreign exchange market coordinates
demand for currencies for export/import
transactions
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Circular Flow Markets

• 1. Resource (Labor) Marketa. Business firms
  demand resources
• b. Households supply labor and other resources
• c. in exchange for income.
• Goods and Services Marketa. Businesses supply
  goods services
• b. Receive sales revenue.
• c. Households, investors, governments, and
  foreigners (net exports) demand goods.

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Which one?
a. A real flow through a product market?
b. A money flow through a product market?
c. A real flow through a resource market?
d. A money flow through a resource market?
1. Receiving a paycheck at the end of each month?
2. Delivering a specially ordered car to a buyer?
3. Receiving patient care in a hospital?
4. Using a credit card to buy a meal in a
restaurant?
5. Earning profit at your summer ice cream stand?
6. Obtaining college credits?
7. Working overtime?
a
d
b
c
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How Decisions are Made
Using an Economic System
Method of organizing the relationship between
businesses, households and the government to make
the production decisions
4 Types
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2. Using an Economic System
Method of organizing the relationship between
businesses, households and the government to make
the production decisions
4 Types
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1. Agrarian or Traditional
A. What?
What the family business has been producing (for
generations)
B. How?
Using the same method that have been used (for
generations) No incentive for change
C. For Whom?
Determined by place in society.
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3. Command Economy
A. What?

• Goods needed to meet economic planning targets

B. How?
Aimed at achieving targets Switch resources
around to meet targets
C. For Whom?
Government decides who gets goods Bonuses for
important workers
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2. Market Economies
A. What?
- Goods and services that are profitable - Goods
and services consumers want.
B. How?
Efficiently- least cost combination of resources
C. For Whom?
Those who can pay.
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4. Mixed Economies

• Combine aspects of market and planned economies
• Includes almost all economies

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4. Mixed Economies
Coordinating Mechanism
Market System Planning
Nazi Germany
Private Public
US
Resource Ownership
Cuba
China
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Most Economic Freedom Least Economic Freedom
1. Hong Kong 168. Iran
2. Singapore 169. Turkmenistan
3. Australia 170. Equatorial Guinea
4. New Zealand 171. Democratic Republic of the Congo
5. Switzerland 172. Burma
6. Canada 173. Eritrea
7. Chile 174. Venezuela
8. Mauritius 175. Zimbabwe
9. Denmark 176. Cuba
10. United States 177. North Korea
Economic Freedoms, 2013 (Source The Heritage
Foundation, 2013 Index of Economic Freedom,
Country Rankings, http//www.heritage.org/index/ra
nking)
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Which Market Type??
1. Businesses are free to produce what ever they
want and are always looking for cost-cutting
techniques of production.
Mixed?
Market?
Traditional?
Planned?
Market
Market
Market
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Which Market Type??
2. A catering business goes bankrupt, but its
employees receive unemployment compensation while
they look for other jobs.
Mixed
Market?
Mixed
Mixed
Traditional?
Planned?
Mixed?
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Which Market Type??
3. Union and management representatives submit a
deadlocked labor contract negotiation to the
government for mediation.
Mixed
Mixed
Mixed?
Traditional?
Mixed
Planned?
Market?
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Which Market Type??
4. Workers who have lost their jobs and incomes
cut back their spending because there is no
alternative source of emergency financial support
once their savings runs out.
Market
Mixed?
Market
Market?
Traditional?
Planned?
Market
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Which Market Type??
5. Consumers are unable to obtain fuel
injectors and windshield wiper motors for their
cars because they are not being produced, yet
accordions, which are plentiful and not in
demand, continue to be produced.
Planned
Planned
Planned
Traditional?
Planned?
Market?
Mixed?
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Underground Economy
Seen in heavily regulated economies
Buyers and sellers make transactions without
government approval
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Globalization

• The trading of goods, services, and assets
  across national boundaries

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Economic Equations
Most of the relationships we use in this course
are expressed as linear equations of the form
y b mx or y 9 3x
x y
0 ___
1 ___
2 ___
3 ___
4 ___
5 ___
6 ___
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Economic graphs

• Graphs of one Variable
• - market shares
• - bar graphs, pie charts

Figure 1A.1
Bar Graphs and Pie Charts
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Economic graphs
2. Graphs of two Variables - price, quantity -
demand curve
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Economic graphs

• Direct, or positive, relationship
• - Graph slopes up from left to right

• Inverse, or negative, relationship
• - Graph slopes down from left to right

• Slope Rise
• Run

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Formulas
3. Percent change new - old old
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1. When an economist states that a good is
scarce, he means that a. Production cannot
expand the availability of the good. b. It is
rare. c. Desire for the good exceeds the amount
that is freely available from nature. d.
People would want to purchase more of the good at
any price.
2) By definition, economics is the study of A)
how to make money in the stock market. B) how to
make money in a market economy. C) the choices
people make to attain their goals, given their
scarce resources. D) supply and demand.
3) How are the fundamental economic questions
answered in a market economy? A) The government
alone decides the answers. B) Individuals, firms,
and the government interact in markets to decide
the answers to these questions. C) Households
and firms interact in markets to decide the
answers to these questions. D) Large
corporations alone decide the answers.
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4) Specializing in the production of a good or
service in which one has a comparative advantage
enables a country to do all of the following
except A) engage in mutually beneficial trade
with other nations. B) increase the variety of
products that it can consume with no increase in
resources. C) consume a combination of goods that
lies outside its own production possibilities
frontier. D) produce a combination of goods that
lies outside its own production possibilities
frontier.
5) Households A) have no influence on the
circular flow in a market economy. B) purchase
resources in the factor market. C) sell goods in
the product market. D) sell resources in the
factor market.
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True or False?
1. Highly-developed economies must make the basic
economic choices, whereas less-developed
economies produce so little that no choices are
possible. 2. Households buy goods and services in
output markets and sell factors of production in
input markets.
3. In a planned economy, economic decisions are
made by individual buyers and sellers.
4. In a command economy, goods and services go
only to those who can pay for them with money
earned from resources they own. 5. There is no
difference between a market economy and a command
economy in how income is distributed 6. Scarcity
is a problem in a market economy but not a
command economy.