Lecture 1-Economics Basics

ECONOMICS . . .The Fundamentals.

Basic economic concepts

Scarcity and Choice

Opportunity costBusiness Economics - CIT - CM2

Human wants

Unlimited wantsBusiness Economics - CIT - CM3

Resourcesused to produce goods / services to satisfy human wants

limited in supply

scarce: i.e. their quantities are insufficient to satisfy all human wants Business Economics - CIT - CM4

Types of resourcesNatural resources: e.g. sunshine, rain, crude oil

Human resources: labour service

Man made resources: e.g. machines, equipments

Business Economics - CIT - CM5

ScarcityMeaning: Resources are insufficient to satisfy ALL human wants

A relative concept: we want more than we have

Basic economic problem in human societiesBusiness Economics - CIT - CM6

CompetitionWe compete for the use of limited resources

2 ways of competition Price competitionNon price competition e.g. waiting, examination, lucky draw, violenceBusiness Economics - CIT - CM7

Making choicesWhich restaurant will you go for lunch?

What would you like to study at university?

What will you buy with Rs.100? CD or dress ?

Which girl (boy) will you marry?Business Economics - CIT - CM8


What is economics?It studies how we allocate the limited resources to satisfy unlimited wants


WHAT IS ECONOMICS???Economics the study of how individuals and societies make decisions about ways to use scarce resources to fulfill wants and needs.Business Economics - CIT - CM11

WHAT IS ECONOMICS???Welfare DefinitionIs a social science dealing with production & distribution of wealth among the people.

Welfare DefinitionIs a study of mankind in the ordinary business of life. It examines that the part of social & individual action which is most closely connected with the attainment of material requisites of well being.


WHAT IS ECONOMICS???Scarcity DefinitionIs a science which studies human behavior as a relationship between ends & scarce means which have alternative uses.

Growth DefinitionIs the study of human behavior as a relationship between competing ends & growth in the means foe meeting these ends.


Why Choices?

We make choices about how we spend our money, time, and energy so we can fulfill our NEEDS and WANTS.

What are NEEDS and WANTS?


Wants and Needs, Needs and WantsNEEDS stuff we must have to survive, generally: food, shelter, clothing

WANTS stuff we would really like to have (Fancy food, shelter, clothing, big screen TVs, jewelry, conveniences . . . Also known as LUXURIESBusiness Economics - CIT - CM15

VS.


TRADE-OFFSYou cant have it all (SCARCITY remember?) so you have to choose how to spend your money, time, and energy. These decisions involve picking one thing over all the other possibilities a TRADE-OFF!Business Economics - CIT - CM17

Trade-Offs, cont.IN YOUR JOURNAL: What COULD you have done instead of come to college today?

These are all Trade-Offs!


A special kind of Trade-Off is anOPPORTUNITY COST =The Value of the Next Best Choice

(Ex: Sleeping is the opportunity cost of studying for a test)

Opportunity cost is the highest-valued option forgone Business Economics - CIT - CM19

Opportunity CostsThis is really IMPORTANT when you choose to do ONE thing, its value (how much it is worth) is measured by the value of the NEXT BEST CHOICE.This can be in time, energy, or even MONEY

If I buy any millet Then I cant afford the movies

Q: What is the opportunity cost of buying millet?Business Economics - CIT - CM20

In the world of scarcity, choosing one thing means giving up something else.

According to Furguson: The alternative of opportunity cost of producing one unit of commodity x is the amount of commodity y that must be sacrificed in order to use resources to produce x rather than yBusiness Economics - CIT - CM21

ProductionSo how do we get all this stuff that we have to decide about?Decisions, decisions


PRODUCTION, cont.Production is how much stuff an individual, business, country, even the WORLD makes.

But what is STUFF?STUFF Goods and Services.

Goods tangible (you can touch it) products we can buy

Services work that is performed for othersBusiness Economics - CIT - CM23

Factors of ProductionSo, what do we need to make all of this Stuff?


4 Factors of ProductionLAND Natural ResourcesWater, natural gas, oil, trees (all the stuff we find on, in, and under the land)LABOR Physical and IntellectualLabor is manpower CAPITAL - Tools, Machinery, FactoriesThe things we use to make thingsHuman capital is brainpower, ideas, innovationENTREPRENEURSHIP Investment $$$Investing time, natural resources, labor and capital are all risks associated with production


THREE parts to the Production ProcessFactors of Production what we need to make goods and services

Producer company that makes goods and/or delivers services

Consumer people who buy goods and services (formerly known as stuff)

Which Came First?Business Economics - CIT - CM26

Production Process

CapitalLaborLandEntrepreneurshipProduction/ManufacturingFactoryGoodsServicesConsumers


Land earns rent. Labour earns wages. Capital earns interest. Entrepreneurship earns profit.


Capital Goods and Consumer Goods

Capital Goods: are used to make other goods

Consumer Goods: final products that are purchased directly by the consumer


CHANGES IN PRODUCTION

If we INCREASE land, labor, capital we INCREASE productionMany entrepreneurs invest profit back into production

If we DECREASE land, labor, capital we DECREASE production

BUT WHY would we ever DECREASE production?


The Circular Flow Model


PRODUCTION, cont. againA measure of the production of an entire country in one year isGDPThe total $ value of ALL final Goods and Services produced in a country in a year.(GROSS DOMESTIC PRODUCT)Business Economics - CIT - CM32

ECONOMICS: 5 Economic QuestionsSociety (we) must figure out

WHAT to produce (make)HOW MUCH to produce (quantity)HOW to Produce it (manufacture)FOR WHOM to Produce (who gets what)WHO gets to make these decisions?


Economics GoalsECONOMIC GROWTHFULL EMPLOYMENTECONOMIC EFFICIENCYPRICE LEVEL STABILITYEconomic FreedomEQUITABLE DISTRIBUTION OF INCOMEECONOMIC SECURITYBALANCE OF TRADE


The Study of EconomicsMacroeconomicsThe big picture: growth, employment, etc.Choices made by large groups (like countries)

MicroeconomicsHow do individuals make economic decisions


Micro vs. Macro Economics

MICROeconomics: Study of small economic units such as individuals, firms, and industries (how many employees should the L&T hire?).MACROeconomics: Study of the large economy as a whole or aggregates (government spending, national unemployment, inflation).Business Economics - CIT - CM36

MacroeconomicsDevelopment (In construction field):InfrastructuresHousingTransportEnergyBusiness Economics - CIT - CM37

How it(economics) relates( affects, causes or response) to our EnvironmentEcologyEnergy resources Whether + or -Business Economics - CIT - CM38

Its Urban problemsPovertyMigrationUnemploymentPollution


Market, Command and Mixed Economies: Market Economy: Where individuals and private firms make the major decision about production & consumption. It may also be called lassez-faire economy e.g. India and other democratic countriesCommand Economy: Where the Government makes all important decisions about production & distribution e.g. Cuba (Soviet Union). It may be called as communistic economy as well.Mixed Economy: Where the decision pertaining to production, consumption & distribution are taken by the Government as well as the individual such a market is called to have a mixed economy. There can not be a 100% Capitalist Economy but in the 19th century England came most close to it.Business Economics - CIT - CM40

The Basics The fallacy of composition - What is true of the parts may not be true of the whole. What is true of the whole may not be true of the parts.Economic efficiency - Production costs are as low as possible and consumers are as satisfied as possible with the combination of goods and services that is being produced. Economic growth - The increase in incomes and production per person. It results from the ongoing advance of technology, the accumulation of ever larger quantities of productive equipment and ever rising standards of education.Economic stability - The absence of wide fluctuations in the economic growth rate, the level of employment, and average prices.


The Modern economy

Economy - A mechanism that allocates scarce resources among alternative uses. This mechanism achieves five things: What, How, When, Where, Who.

Decision makers - Households, Firms, Governments.

Household - Any group of people living together as a decision-making unit. Every individual in the economy belongs to a household.Business Economics - CIT - CM42

ContFirm producers are called firms, no matter how big they are or what they produce. Car makers, farmers- An organization that uses resources to produce goods and services. All, banks, and insurance companies are all firms.

Government - A many-layered organization that sets laws and rules, operates a law-enforcement mechanism, taxes households and firms, and provides public goods and services such as national defense, public health, transportation, and education. Market - Any arrangement that enables buyers and sellers to get information and to do business with each other.


Positive vs. Normative StatementsPositive Statement: Based on facts. Avoids value judgments (what is).Normative Statements: Includes value judgments (what ought to be).


Documents

Lecture 1-Economics Basics