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Lecture 1

1) Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different people. It can be divided into microeconomics and macroeconomics. 2) Microeconomics examines individual units like households and firms, while macroeconomics looks at aggregate economic performance and national income. 3) There are three main types of economic systems - market economies, command economies, and mixed economies - that differ in how they allocate resources and make production decisions.

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19 views47 pages

Lecture 1

1) Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different people. It can be divided into microeconomics and macroeconomics. 2) Microeconomics examines individual units like households and firms, while macroeconomics looks at aggregate economic performance and national income. 3) There are three main types of economic systems - market economies, command economies, and mixed economies - that differ in how they allocate resources and make production decisions.

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raniabaha08
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THE CENTRAL CONCEPTS OF

ECONOMICS

Lecturer: Jonada Tafa


Economics is the study of how societies use scarce resources to
produce valuable goods and services and distribute them
among different people.
Which activity is related to economics?

Setting up a business, working, to make money, looking for a


job, shopping, bank operations, buying and selling
anything...
We need money to buy commodities (goods and services).
We must consume commodities to survive.
Consuming activity is economical for every person, family
(household), people (society) and government.
• Shopping centres are the driving force of the economy.
• Buyers (consumers) and sellers (producers) interact in
shopping centres or in small markets.
• Buyers want to buy and sellers want to sell goods.
Shopping Mall in California
Toronto Eaton Centre
Nanjing Road, Shanghai, China
Paris Shopping Centre
Galleria Vittorio Emanuele II, Milan
Grand Bazar, Istanbul, Turkey
• Needs or wants are unlimited. Physical, biological, mental, educational, healthy,
cultural... Unlimited...

• But resources are limited or scarce. Because people desire much more than the
economy can produce.

• Economic goods are scarce, not free, and society must choose among the limited
goods that can be produced with its available resources.

• Resources are factors of production. The firms produce goods and services using
factors of production or resources.

• Resources are: nature or raw material, labour and capital.

• There is a contradiction between scarce resources and unlimited wants. These


situation is the cause of the economic problem.
This is the Logic of Economics...
Unlimited Wants
• Humans have many different types of wants and needs. Economics looks only at man's material wants
and needs. These are satisfied by consuming (using) either:
goods (physical items such as food)
• Consumer good, military good, capital good, luxury good.

services (non-physical items such as heating).


• Trading, telecom, transport, education, culture, health, social security.

Limited Resources
• Commodities (goods and services) or outputs are produced by using resources.
• The resources shown in following Table are sometimes called factors of production or inputs.
Table: Different types of resource

Description Reward
Type

Land and All natural resources:


Rent
raw material LAND, COTTON,OIL,IRON,GAS,WATER...

The physical and mental work of people:


Labour Wage
HUMAN BEING, WORK FORCE.

All man-made tools and machines:


Capital BUILDINGS, COMPUTERS, MACHINES, TOOLS, Interest
EQUIPMENTS...

Entrepreneur
(some
economists do All managers and organisers Profit
not accept it
resource)
• Capital refers to the things that are used to
produce other goods and services.
• The basic resources that are available to a
society are factors of production:
1. Land
2. Labour
3. Capital
• Capital goods are goods used to produce other
goods and services.
• Consumer goods are goods produced for present
consumption.
• Production is the process that transforms scarce
resources into useful goods and services.
• Resources or factors of production are the inputs
into the process of production;
• Goods and services are the outputs of the process of
production.
• The economic problem refers to the scarcity of
commodities.
limited amount of resources available to
• There is only a
produce the unlimited amount of goods and services we
desire.
• Society has to decide which commodities to produce.
• For example, do we make guns or schools?
• We have to decide how to produce those commodities. Do we
employ robot arms or workers? Who is going to use the
goods?

What, How, and For Whom to produce? = Economic Problem


ü WHAT or WHICH GOODS AND SERVICES WILL BE PRODUCED? AND IN
WHICH QUANTITIES? The amount of goods and services produced in a
year or the amount total output produced in a year (as kg., meters)
ü HOW IT WILL BE PRODUCED? Using more labour than capital: labour
intensive. Using more capital than labour: capital intensive.
ü FOR WHOM IT WILL BE PRODUCED? For poor people or rich people or
mid-class people.
Economics is the study of how societies use scarce resources to produce valuable and distribute
them among different people.

Economics is divided by two: microeconomics and macroeconomics.

Microeconomics is concerned with the behaviour of individuals, markets, firms and households. Ex:
price determination in the market. Adam Smith is the founder father of microeconomics.

Macroeconomics is concerned with the performance of the economy. John M. Keynes is the founder
of modern macroeconomics. Ex: general price increases in the economy: CPI

Ø Microeconomics is concerned with personal or households income; macroeconomics deals with


national income.
Ø Microeconomics looks at the individual unit-the household, the firm, the industry. It sees and
examines the “different trees in the forest”. Macroeconomics looks at the whole, the aggregate. It
sees and analyses the “forest as a whole”.
The Wealth of Nations by A. Smith
The General Theory of Employment,
Interest, and Money by J.M.Keynes
• An economic system is the way a society sets about allocating
(deciding) “which goods to produce and in which quantities”.
• Different countries have different methods of solving the economic
problem.

There are three main types of economic systems:


Market, Command, and Mixed economies.
ü A market economy
is one in which individuals and private firms make the major decisions about production and consumption.
In the US and most democratic countries, most economic problems and questions are solved by the market.
ü A command economy
is one in which the government makes all important decisions about production and distribution. The government
owns of the means of production: land and capital. Former Soviet Union, China, Cuba operated in a command
economy.
Today command economies are changing to transition economies.

ü In a mixed economy private firms generally produce goods while the government organises the
manufacture of essential goods and services such as education and health care. The UK is an example of a mixed
economy.
The production-possibility frontier, or PPF , represents the
maximum amounts of a pair of goods or services that can
both be produced with an economy’s given resources,
assuming all resources are fully employed.
PPF is a graph that shows all the combinations of
goods and services that can be produced if all society’s
recourses are used efficiently.

PPF curve has a negative slope which indicates the


trade-off between producing one good or another.
A move along the curve illustrates the concept of
opportunity cost.

Points inside the PPF curve is point of inefficiency,


recourses are not fully employed or used
inefficiently.

Points outside the PPF curve are infeasible or


unattainable, the economy should raise the amount
of the recourses or improve productivity.
The Circular Flow
Thank You J

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