Download to read offline
![Economic Systems and the Role of Government
Command Economies: command economy An economy in which a
central government either directly or indirectly sets output targets, incomes,
and prices.
Laissez-Faire Economies / The Free Market: Laissez-faire economy
literally from the French: “allow [them] to do.” An economy in which
individual people and firms pursue their own self-interest without any central
direction or regulation. marketThe institution through which buyers
and sellers interact and engage in exchange.
Some markets are simple, and others are complex, but they all involve buyers
and sellers engaging in exchange.
The behavior of buyers and sellers in a laissez-faire economy determines
what gets produced, how it is produced, and who gets it.](https://image.slidesharecdn.com/ecnomicsunit11-250330051345-022a1a4e/75/ecnomics-unit-1-learn-the-course-1-pptx-43-2048.jpg)
![400 Entrepreneurship_Presentation [Autosaved].pptx](https://cdn.slidesharecdn.com/ss_thumbnails/400entrepreneurshippresentationautosaved-251109123130-549630e5-thumbnail.jpg?width=640&height=640&fit=bounds)
ecnomics unit 1 learn the course (1).pptx
- 1. Unit I INTRODUCTION TO ECONOMICS FIC105: PRINCIPLES OF ECONOMICS & MANAGEMENT
- 2. Unit I: Introductionto Economics Highlights ❖ Meaning, Definition of Economics, & Why Study Economics ❖ Fundamental Concepts of Economics: Scarcity, Choice, Scale of Preference, Opportunity Cost & Production Possibility Curve ❖ Principles, Nature, Scope, & Fields of Economics ❖ The Basic Economic Problems ❖ Tools & Methods of Economic Analyses: Model, Variables, Functions, Graphs, System of Equations, Derivatives ❖ Economic Policy; Specialization, Exchange, and Comparative Advantage ❖ Economic Systems and Role of Government ❖ Some Basic Economic Terms Reference Texts: Mankiw, N. Economics: Principles and Applications, 8th ed. Cengage Learning, 2019. Karl E. Case and Ray C. Fair, Principles of Economics,12th ed Pearson Education Inc, 2017
- 3. What is Economics? Theword “economics" is derived from two Greek words “oikos” (meaning "house") and “nomos” (meanin g "management" or "distribution"). The combinatio n of these refers to managing and words form “oikonomia”, which administrating a household or estate. However, it has not been particularly easy to give a strict and completely satisfactory definition of economics in the literature. This is because economics is a behavioral or social science.
- 4. Definitions of Economics ❖TheClassical Definitions ❖Neo-Classical Definitions ❖Scarcity Definitions The most widely used definition was given by Lionel C. Robbin. He defined economics as “the science which studies human behaviour as a relationship between ends and scarce means which have alternatives uses”.
- 5. Summarily, we cansay economics is the study of how people make choices, and the addition of individual choices translate into societal choices.
- 6. Why Study Economics? ▪Resource Management: Economics guides you in using limited resources wisely in engineering projects, where things like time, materials, and budget are often limited. Ex: Imagine you have limited time and budget to build a solar- powered car. Economics guides you in choosing the best materials and design to make it efficient and affordable. ▪ Cost-Benefit Analysis: Economics helps you decide by comparing costs and gains. It shows how to make smart choices that bring more benefits and fewer costs in engineering projects. Ex: If you're designing a smartphone, economics helps you decide whether adding a fancy feature is worth the extra cost, considering if people will really pay more for it.
- 7. ▪ Project Viability:Economics lets you check if engineering projects make sense financially. It helps you figure out if a project is a good idea by seeing if it will likely make money or be successful. Ex: When planning to create a new software app, economics helps you figure out if the money you'll earn from selling the app will be more than what you spend on developing it. ▪ Market Understanding: Engineers create stuff for people. Economics helps you understand how people act, what they want, and how to price things. This way, you can make products that match what people need and like. Ex: If you're designing a bicycle, economics helps you decide if people want a lightweight racing bike or a sturdy city commuter, based on what's in demand.
- 8. ▪ Interdisciplinary Collaboration:Economics is a shared language. It helps engineers work with others like a team, especially when solving tough problems that need input from different experts. Ex: When designinga new video game, economics helps you explain to the team how adding extra levels might bring in more players and more money.
- 9. Fundamental Concepts ofEconomics ❖ Scarcity: This concept is used to describe the situation that arises as a result of limited productive resources in relation to unlimited human wants. ❖ Choice: The problem of scarcity gives rise to the problem of choice, while making a choice entail giving up something to get another ❖ Scale of Preference: Scale of preference is a list of all unsatisfied wants arranged in order of relative importance. ❖ Opportunity cost: The concept of opportunity cost describes the sacrifice made in making a choice. That is, The best alternative that we give up, or forgo, when we make a choice or decision ❖ Production Possibility Curve (PPC): A PPC, PPF, or PPB describes the various alternative combinations of two commodities that the society can produce using allavailable resources and
- 10. All points belowand to the left of the curve (the shaded area) represent combinations of capital and consumer goods that are possible for the society given the resources available and existing technology. Points above and tothe right of the curve, such as point G, represent combinations that cannot be reached. If an economy were to end up at point A on the graph, it would be producing no goods at all; all resources used for the production of consume r would be capital. If an economy were to end up at point B, it would produce only consumer goods.
- 11. Although an economymay be operating with full employment of its land, labor, and capital resources, it may still be operating inside its PPF, at a point such as D. The economy could be using those resources inefficiently. Periods of unemployment also correspond to points inside the PPF, such as point D. Moving onto the frontier from a point such as D means achieving full employment of
- 12. ▶ FIGURE 2.4Production Possibility Frontier The PPF illustrates a number of economic concepts. One of the most important is opportunity cost. The opportunity cost of producing more capital goods is fewer consumer goods. Moving from E to F, the number of capital goods increases from 550 to 800, but the number of consumer goods decreases from 1,300 to
- 13. 10 Principles ofEconomics How Do People make Decisions Principle 1: People Face Trade- Offs. Principle 2: The Cost of Something Is What You Give Up to Get It. Principle 3: Rational People Think at the Margin. Principle 4: People Respond to Incentives
- 14. How People Interact? ❖Principle 5: Trade Can Make Everyone Better Off. ❖ Principle 6: Markets Are Usually a Good Way to Organize Economic Activity. ❖ Principle 7: Governments Can Sometimes Improve Market Outcomes.
- 15. How the Economyas a whole works ▪ Principle 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services. ▪ Principle 9: Prices Rise When the GovernmentPrints Too Much Money. ▪ Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment.
- 16. The Nature &Scope of Economics The Nature of Economics Basically, economics is a science because its fundamental objectives is to establish valid generalization about the principles underlying the choices people make with respect to the use of scarce resources. Thus, it will be easier to predict the outcomes of people’s behaviour, as well as formulate policies to bring about the desired
- 17. The Scope ofEconomics Microeconomics and Macroeconomics: ❖Microeconomics talks about the production of individual industries, the price of individual goods and services, the distribution of income and wealth, and the employment of individual industries. ❖Macroeconomics talks about the national output/production, aggregate price level, national income, and employment and unemployment in an economy as a whole.
- 18. Normative and PositiveEconomics: ❖ Normative Economics: Normative economics deals wit h valu e judgments and opinions about what ought to be done. It is not value-free, as a result, it is a subjective science. It also an approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works ❖ Positive Economics: This focuses on objective analysis and facts about how the economy functions. It is value free, hence, it is an objective science. An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics
- 19. The Diverse Fieldsof Economics TABLE 1.1 The Fields of Economics Behavioral uses economics psychological theories relating to emotions and social context to help understand economic decision making and policy. Much of the work in behavioral economics focuses on the biases that individuals have that affect the decisions they make. examines the ways' alternative economic systems function. What are the advantages and disadvantages of different systems? Comparative economic systems Econometric s applies statistical techniques and data to economic problems in an effort to test hypotheses and theories. Most schools require economics majors to take at least one course in statistics or econometrics. focuses on the problems of low-income countries. What can be done to promote development in these nations? Important concerns of development for economists include population growth and control, provision for basic needs, and strategies for international trade. traces the development of the modern economy. What economic and political events and scientific advances caused the Industrial Revolution? What explains the Economic development Economic history tremendous growth and progress of post-World War II Japan? What caused the Great Depression of the 1930s? Continued .
- 20. TABLE 1.2 TheFields of Economics (continued) Environmental economics studies the potential failure of the market system to account fully for the impacts of production and consumption on the environment and on natural resource depletion. Have alternative public policies and new economic institutions been effective in correcting these potential failures? examines the ways in which households and firms actually pay for, or finance, their purchases. It involves the study of capital markets (including the stock and bond markets), futures and options, capital budgeting, and asset valuation. analyzes the health care system and its players: government, insurers, health care providers, and patients. It provides insight into the demand for medical care, health insurance markets, cost-controlling insurance plans (HMOs, PPOs, IPAs), government health care programs (Medicare and Medicaid), variations in Finance Health economics medical practice, medical malpractice, competition versus regulation, and thought national health care reform. The history of economic which is grounded in philosophy, studies the development of economic ideas and theories over time, from Adam Smith in the eighteenth century to the works of economists such as Thomas Malthus, Karl Marx, and John Maynard Keynes. Because economic theory is constantly developing and changing, studying the history of ideas helps give meaning to modern theory and puts it in perspective. The Diverse Fields of Economics
- 21. TABLE 1.3 TheFields of Economics (continued) Industrial organization International economics looks carefully at the structure and performance of industries and firms within an economy. How do businesses compete? Who gains and who loses? studies trade flows among countries and international financial institutions. What are the advantages and disadvantages for a country that allows its citizens to buy and sell freely in world markets? Why is the dollar strong or weak? deals with the factors that determine wage rates, employment, and unemployment. How do people decide whether to work, how much to work, and at what kind of job? How have the roles of unions and management changed in recent years? Labor economics Law and economics analyzes the economic function of legal rules and institutions. How does the law change the behavior of individuals and businesses? Do different liability rules make accidents and injuries more or less likely? What are the economic costs of crime? Public economics examines the role of government in the economy. What are the economic functions of government, and what should they be? How should the government finance the services that it provides? What kinds of government programs should confront the problems of poverty, unemployment, and pollution? What problems does government involvement create? Urban and regional studies the spatial arrangement of economic activity. Why do we have cities? Why economics are manufacturing firms locating farther and farther from the center of urban The Diverse Fields of Economics
- 22. ▼ FIGURE 2.1The Three Basic Questions The Basic Economic Problems Every society has some system or process that transforms its scarce resources into useful goods and services. In doing so, it must decide what gets produced, how it is produced, and to whom it is distributed. The primary resources that must be allocated are land, labor, and capital.
- 23. The Basic EconomicProblems Within the limits of available resources and technology, a society whether capitalist, socialist, or mixed, developed or developing, faces four basic problems. The problems are; what and how much to produce, how to produce, for whom to produce, and how much of resources to use.
- 24. i. What andhow much to produce: The list of goods that could be produced in any society is incredibly long. Nevertheless, every society must determine what goods and how much of each to produce because resources are scarce. ii. How to produce: This question addresses how the resources will be combined, who to produce what, and where to produce.
- 25. iii. For whomto produce: The economy’s total output can be distributed among the individual members of the society in two ways: First, to individuals according to their contribution to the total output. Secondly, to take from each according to his or her ability and give to each according to their productive capability. iv. Efficient use of resources: To satisfy society’s wants to the full extent of the available productive potentialities, there must be no misallocation of economic resources to inappropriate activities.
- 26. Basic Tools &Methods of Economic Analysis Economic analysis surrounds but not limited to verification or validation of economic theories, laws, and hypothesis. However, this verification and/or validation is aided by building a model for empirical investigation (empirical economics). A model is a formal statement of a theory, law, or hypothesis usually in a mathematical statement for a presumed relationship between two or more variables. E.g., Q = 200 – 5P ………………
- 27. Basic Tools &Methods of Economic Analysis ❖Variables A variable is a quantity which assumes different values that may be measured or counted in some numerical units. Examples of variables which are often encountered in economics discussions are prices, income, expenditure, output, profits, interest, rent, wages, and so on. i. Dependent and Independent Variables: E.g., Q = 200 – 5P ……………… (1)
- 28. ❖Functions When a relationshipexists between two variables, we say one is a function of the other. Consider: y = f (x) ……………………….. (3) Equation (3) can be read as y is a function of x. In ordinary language it means the value of y depends upon the value of x in some (unspecified) way. The equation can also be written in some other ways such as y = y(x); y = g(x); y = h(x), etc. The mode of expression is mostly a matter of convenience. Notably, a function can be implicit or explicit in nature.
- 29. 1 Types Examples . Linearfunctions i i i i i. Q = 100 – 10P . Q = =20 + 10P i. C = 24 + 0.8Y Demand function Supply function Consumption function 2.Quadratic functions i i i i i. Q = -20 P . Q = 100P2 i. AC = 10 + 10/Q – 4Q + Q2 Supply function Demand function Average cost function Table 1.4: Types and Examples of Economic Functions
- 30. ❖ Graphs The useof graphs in economics has the advantage of making discussions more concise and less ambiguous as against lengthy discussions in verbal presentations. A graph is a two-dimensional representation of a set of numbers, or data. It is a convention in economics on the vertical axis dependent variable and the on the horizontal axis. A graph can be used to show positive or negative relationship between variables.
- 31. Year Total Disposable Personal Income Year Total Disposable Personal Income 1975 1,187.31994 5,184.3 1976 1,302.3 1995 5,457.0 1977 1,435.0 1996 5,759.6 1978 1,607.3 1997 6,074.6 1979 1,790.8 1998 6,498.9 1980 2,002.7 1999 6,803.3 1981 2,237.1 2000 7,327.2 1982 2,412.7 2001 7,648.5 1983 2,599.8 2002 8,009.7 1984 2,891.5 2003 8,377.8 1985 3,079.3 2004 8,889.4 1986 3,258.8 2005 9,277.3 1987 3,435.3 2006 9,915.7 1988 3,726.3 2007 10,423.6 1989 3,991.4 2008 11,024.5 1990 4,254.0 2009 10,772.4 1991 4,444.9 2010 11,127.1 1992 4,736.7 2011 11,549.3 1993 4,921.6 2012 11,930.6 TABLE 1A.1 Total Disposable Personal Income in the United States, 1975–2012 (in billions of dollars) ▼ FIGURE 1: Total Disposable Personal Income in the United States: 1975–2012 (in billions of dollars) A time series graph shows how a single measure or variable changes over time.
- 32. Graphing Two Variables X-axis:The horizontal line against which a variable is plotted. Y-axis: The vertical line against which a variable is plotted. Origin: The point at which the horizontal and vertical axes intersect. Y-intercept: The point at which a graph intersects the Y-axis. X-intercept: The point at which a graph intersects the X-axis.
- 33. ▲ FIGURE 1A.2Household Consumption and Income This graph displays the data from Table 1A.2. Along the horizontal scale (X-axis), we measure household income. Along the vertical scale (Y-axis), we measure household consumption. Note: At point A, consumption equals $22,304 and income equals $10,263. At point B, consumption equals $31,751 and income equals Average Income Before Taxes Average Consumption Expenditures Bottom fifth $ 10,263 $ 22,304 2nd fifth 27,442 31,751 3rd fifth 47,196 42,659 4th fifth 74,090 58,632 Top fifth 158,652 97,003 TABLE 1A.2 Consumption Expenditures and Income, 2008 Plotting Income and Consumption Data for Households
- 34. A graph candepict both positive and negative relationship between variables Positive relationship A relationship between two variables, X and Y, in which a decrease in X is associated with a decrease in Y, and an increase in X is associated with an increase in Y. Negative relationship A relationship between two variables, X and Y, in which a decrease in X is associated with an increase in Y and an increase in X is associated with a decrease in Y. Slope of graph This is a measurement that indicates whether the relationship between variables is positive or negative and how much of a response there is in Y (the variable on the vertical axis) when X (the variable on the horizontal axis) changes. It is calculated as:
- 35. ▼ FIGURE 1A.3A Curve with (a) Positive Slope and (b) Negative Slope A positive slope indicates that increases in X are associated with increases in Y and that decreases in X are associated with decreases in Y. A negative slope indicates the opposite—when X increases, Y decreases; and when X decreases, Y increases.
- 36. ▲ FIGURE 1A.4Changing Slopes Along Curves
- 37. ❖ Systems ofEquations The mathematical knowledge of systems of equations is applicable in economics when we are faced with such problems as determining the equilibrium price of a commodity by demand and supply, the equilibrium (or profit-maximizing) output of a firm by equating marginal cost of production to marginal revenue, the equilibrium national income for economy, and so on. E.g., finding the equilibrium of Q = 100 – 10P (demand function) and Q =
- 38. ❖ Derivatives In economicpolicy formulations, the need often arises to measure the rate of change in a dependent variable relative to a change in the independent variable. This exercise required application of an aspect of applied mathematics called differential calculus.
- 39. Economic Policy Four criteriain judging economic outcomes: 1. Efficiency: Producing what people want at the least possible cost. 2. Equity: Fairness 3. Growth: An increase in the total output of an economy. 4.Stability: A condition in which national output is growing steadily, with low inflation and full employment of resources.
- 40. Specialization, Exchange, andComparative Advantage Theory of comparative advantage: Ricardo’s theory that specialization and free trade will benefit all trading parties, even those that may be “absolutely” more efficient producers. Absolute advantage: A producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources (a lower absolute cost per unit). Comparative advantage: A producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost.
- 41. ▶ FIGURE 2.2Comparative Advantage and the Gains from Trade Panel (a) shows the best Colleen and Bill can do each day, given their talents and assuming they each wish to consume an equal amount of food and wood. Panel (b) shows what happens when both parties specialize. Notice more units are produced of each good.
- 42. ▲ FIGURE 2.3Production Possibilities with and without Trade This figure shows the combinations of food and wood that Colleen and Bill can each generate in one day of labor, working by themselves. Colleen can achieve independently any point along line ACB, while Bill can generate any combination of food and wood along line DFE. Specialization and trade would allow both Bill and Colleen to move to the right of their original lines, to points like C ′ and F ′ . In other words, specialization and trade allow both people to be better off than they were acting alone. A Graphical Presentation of the Production Possibilities and Gains from Specialization
- 43. Economic Systems andthe Role of Government Command Economies: command economy An economy in which a central government either directly or indirectly sets output targets, incomes, and prices. Laissez-Faire Economies / The Free Market: Laissez-faire economy literally from the French: “allow [them] to do.” An economy in which individual people and firms pursue their own self-interest without any central direction or regulation. marketThe institution through which buyers and sellers interact and engage in exchange. Some markets are simple, and others are complex, but they all involve buyers and sellers engaging in exchange. The behavior of buyers and sellers in a laissez-faire economy determines what gets produced, how it is produced, and who gets it.
- 44. Some Basic EconomicTerms ❖ Factors of production: The inputs into the process of production. Another term for resources. ❖ Ceteris paribus or all else equal: A device used to analyze the relationship between two variables while the values of other variables are held unchanged. Using the device of ceteris paribus is one part of the process of abstraction. In formulating economic theory, the concept helps us simplify reality to focus on the relationships that interest us. ❖ Consumer goods: Goods produced for present consumption. ❖ Investment: The process of using resources to produce new capital.
- 45. ❖ Consumer sovereignty:The idea that consumers ultimately dictate what will be produced (or not produced) by choosing what to purchase (and what not to purchase). ❖ Free enterprise: The freedom of individuals to start and operate private businesses in search of profits ❖ Income: is the amount that a household earns each year. It comes in a number of forms: wages, salaries, interest, and the like. ❖ Wealth: Is the amount that households have accumulated out of past income through saving or inheritance.