3. Lecture Plan
What is Economics?
Scarcity
Basic economic problems
What are resources
Production possibility analysis
The circular flow of economic activity
The interaction of the economic participants
Economic model of income and consumption
Economic policies
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4. What is Economics?
Economics is the study of how people and society choose to
employ scarce productive resources to produce goods and services
and distribute them among various groups of society
ECONOMICS
Macroeconomics
Microeconomics
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5. Microeconomics vs. Macroeconomics
Microeconomics = the study of individual, consumers, firms and
industries
It focuses on:
(‘Micro’ = the ancient Greek word for ‘small’)
The pricing and production decisions of industrial firms
Consumer behaviour and
The output and state of single industries
Macroeconomics is concerned with how the economy functions as a
whole (e.g. total income)
(‘Macro’ is the Greek word for ‘large’)
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6. Scarcity
Every economy is endowed with what we call
resources, which are inputs used in the production of
goods and services for consumption to satisfy our needs
and wants
The basic economic problem of any society is the
relative scarcity of resources in relation to the
unlimited needs and wants of consumers
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7. Resources
Resources = All inputs that can be combined in many different ways
to produce goods and services of various types to help satisfy
people’s unlimited needs and wants
Often referred to as the factors of production
Resources include land, capital, labour and enterprise
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8. Land
All
natural resources and endowments
Examples:
Critical
The
soils, crops, minerals, forests, oceans
resource for Australia (e.g. exports)
least flexible resource
Factor
income: rent
Abundant
resource for Australia but an
increasingly scarce resource for East Asian
countries (e.g. Singapore)
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9. Capital
Any good or service used to produce
others (i.e. intermediate goods)
e.g. factories, tools, machinery and
equipment
Most abundant factor for industrial
countries (e.g. United States, Japan)
Factor income: interest
Note: Expenditure on capital
is
Investment
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10. Labour
Labour = Physical and mental work of
people, whether, skilled or unskilled
Examples: mechanics, doctors,
farmers, computer programmers
Most flexible resource
Most abundant resource in developing
countries
Factor income: wages
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11. Enterprise
Management (e.g. ownership, control
and/or coordination) of the other three
factors of production (entrepreneurship)
Covers the various organisational skills
of ‘entrepreneurs’
Example: business managers
Factor income: profit
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12. Characteristics of Resources
Scarce
Have alternative uses
Limited, finite
Quantity of resources
Physical amount of resources available
Affected by resource endowment and population
Australia’s cropland is 463 000 sq. km, while Indonesia’s cropland is
324 000 sq. km
Australia’s labour force is around 9–10 million people, while Indonesia’s
workforce is over 90 million people
(cont.)
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13. Characteristics of Resources
(cont.)
Quality of resources
Affected by technology, education and training of workforce
Land productivity (yield/ha)
Productivity of resources
Labour productivity (production per person)
We achieve economic growth by increasing the quantity and/or
quality of resources
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14. Consumer Needs and Wants
Needs: those things necessary to human survival e.g. food, shelter
Wants: goods/services desired by the consumer e.g. hi-fi, travel,
luxury cars
Characteristics:
unlimited
recurrent
complementary
NEED
changeable
WANT
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17. Opportunity Cost
The Basic Economic Problem of Relative Scarcity is illustrated by
two concepts:
Opportunity Cost, and
The Production Possibility Frontier (PPF)
Opportunity cost = The sacrifice (or alternative forgone) in
choosing to satisfy one need or want rather than another
Note: Situations where there is NO opportunity cost = free goods
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18. Production Possibility Frontier (PPF)
Theory
A simplified economic model which portrays scarcity, choice and
opportunity cost
The Static Production Possibility Frontier
Analyses the economy at a fixed point in time
Is based on the following assumptions:
There is a fixed quantity of resources
The economy only produces two products
Resources can be used interchangeably
All resources within the economy are used
Resources are used at maximum efficiency
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20. Maximum Output Levels
The PPF shows the maximum output of the economy
If the economy devotes all of its resources to the production of
VCRs it is able to produce 800 (+ zero tractors)—Production
Possibility A
Alternatively, if the economy chooses Production Possibility C it is
able to produce 200 tractors and 400 VCRs
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21. Opportunity Costs
The PPF shows that to produce more of one product means
producing less of another
Opportunity costs of production can be measured e.g. if the
economy moves from point C to D (along the PPF) it will produce an
extra 100 tractors BUT 200 VCRs must be sacrificed
Hence the opportunity cost is 200 VCRs
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22. Points Outside the Static PPF
Points outside the PPF (e.g. X) are not possible using existing
technology and resources
A
.X
PPF
B
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23. Points Inside the Static PPF
PPF
A
At point Y, the economy is satisfying
fewer needs and wants than is possible
This is due to:
Resources not being fully employed
and/or
Resources not being used in the most
efficient way
.Y
B
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24. The Dynamic PPF Model
This model differs from the static PPF in that it
incorporates changes over time
It demonstrates the effect of changes in the quantity
and quality of productive resources e.g. new resource
discoveries, improvements in technology
Changes in the quantity and/or quality of resources will
SHIFT the PPF
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25. Dynamic PPF
A
When the quality/quantity
of resources increases
(decreases), the economy
can produce more (less) of
both products and the entire
curve will SHIFT outwards
(inwards)
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26. Note
If the change in resources affects ONLY one product, the PPF will ONLY shift on
one axis e.g.:
A
A
OR
B
B
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27. The Significance of PPF Shifts
Increased maximum output levels enable:
1.
2.
higher levels of consumption
greater satisfaction of consumer needs and wants
Improvements in the quality of resources results in the more
efficient use of scarce resources
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28. Basic Economic Activities
Production
The
use of economic resources in the creation of goods and
services for the satisfaction of human wants.
Consumption
The
using up of goods and services by consumer purchasing
or in the production of other goods.
Employment
The
use of economic resources in production; engagement
in activity
Income
The
Generation
production of maximum amount an individual can
spend during a period without being any worse off.
30. Stock and Flow Variables
Flow
A
quantity measured over a particular period of time.
Stock
A
quantity measured as of a given point in time.
The concepts of stock and flow measurements
are essential in understanding the economic
variables of wealth and income.
Wealth
Anything
of valued owned. It is a stock since it is what is
owned at a particular time.
Income
The
rate at which we earn money. It is a flow since income
that is saved, increases the stock of wealth.
31. Economic Model of Production
The Circular Flow of the Production Process
ECONOMIC
RESOURCES
PRODUCING
UNITS
HOUSEHOLDS
GOODS AND
SERVICES
32. Circular Flow of Goods Among Production Units
RAW
MATERIALS
RAW MATERIAL
FIRM
INTERMEDIATE
GOOD FIRM
CONSUMERS
INTERMEDIAT
E GOODS
FINAL GOODS
FINAL GOOD FIRM
34. Economic Model of Income and Consumption
The Circular Flow of Goods and Income
Among Producers & Households
RESOURCES
RAW MATERIAL
FIRM
MONEY PAYMENT FOR RERESOURCES
RESOURCES
MONEY PAYMENT FOR RESOURCES
HOUSEHOLDS
INTERMEDIATE
GOOD FIRM
RESOURCES
MONEY PAYMENT FOR RESOURCES
MONEY PAYMENT FOR PURCHASE OF FINAL GOODS
FINAL GOODS
FINAL GOOD FIRM
35. The Circular Flow of Income
INCOME FLOW OF WAGES,
INTERESTS, RENTS
HOUSEHOLDS
PRODUCING UNITS
PURCHASES OF GOODS AND
SERVICES
36. Circular Flow of Income Among Production
Units
MONEY PAYMENTS
FOR RAW MATERIALS
INTERMEDIATE
GOOD FIRM
RAW MATERIALS FIRM
MONEY PAYMENTS FOR
INTERMEDIATE GOODS
FINAL GOOD
FIRM
MONEY PAYMENTS
FOR FINAL GOODS
HOUSEHOLDS
37. The Circular Flow of Output and Income
Circular Flow of Physical Goods and Money Income
Goods and Services
Factors of Production
(land, labor, capital, entrepreneur)
Household
Sector
Business
Sector
Payments of Factors
(rent, wages, interest, profit)
Payment of Purchase
of goods and services.
38. The Circular Flow of
Goods & Income of Households & Firms
with the Government & Foreign Countries
GOVERNMENT Purchase of Goods
Wages, Transfer Payments
& Services
Taxes
Taxes
Economic Resources
Purchase of Goods & Services
HOUSEHOLDS
PRODUCING UNITS
Income Payments of Wages, Rent,
Dividends, & Interests
Goods & Services
Money Payments for
Money Payments for
Imports
Exports
FOREIGN COUNTRIES
39. Implications of the
Circular Flow of Economic Activity
1.
The goods, resources, and money payments
will flow as long as households continue to
consume, and as long as firms continue to
produce.
2.
That since goods and resources flow in
exchange for payments, the rate of
payments flow will in the end be the same.
Money is the inducing factor, and the pillar
of the price system. Without it, there is no
price system.
40. Inflows and Outflows
Outflows (factors that decrease the level of economic activity)
Savings
Taxes
Import
Outflows are difficult to control because they are dependent on income. When
income increases, we expect savings, taxes, and imports to increase.
Inflows (factors that increase the level of economic activity)
Investment
Government Spending
Exports
Inflows are easier to manipulate. The proper use of policy enables the
government to encourage exports and investments and to increase its
expenditures when it desires to expand the flow of economic activity.
41. Fiscal and Monetary policy
Fiscal- the utilization of certain governmental activities
and actions in the development and stabilization of the
economy.
Monetary- this pertains to the amount of money
circulation or the money supply in our country.
42. Economic Policies
Monetary policy
Fiscal policy
Affects the savings and investment.
Controls taxes and government expenditures.
Trade policy
Affects a country’s exports and imports.
43. Elements of Fiscal Policy
Taxation- means of obtaining revenue/s from
government, as a means of transferring resources from
private to public sector.
Expenditure-means the amount of the expenses of the
government to finance the goods and services they
provide.
Debt management- how government manage the debts
in the country in various forms.
44. Public Finance
Income- it is the financial resources that the
government get from taxes and other revenues.
Outgo- is the government’s expenditure of funds to
finance the goods and services.
45. Public Finance
5 step process
the formulation of fiscal policy.
The generation of revenue from taxation and other
sources.
The expenditure of funds through the national budget.
Public borrowings
accountability
46. References
This presentation is a mashup of 3 different sources. They are:
Cristabol M. Pagoso, Rosemary P. Dinio, and George. A Villasis .
(2011). The circular flow of economic activity
http://www.slideshare.net/dienshMBA/dmydocspatricelourdescollegepowerpointsecon1theci
Accessed date: 05 March 2014
Faizan Chaudhry. (2011) Economic concepts and systems
http://www.slideshare.net/HUKKAM/ch01-ppt-7484908
Accessed date: 05 March 2014
April Van Diwata. (2013)
http://www.slideshare.net/FairywithBraces/fiscal-and-monetary-policy
Accessed date: 05 March 2014
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Editor's Notes
The Quantity of productive resources refers to the physical amount of resources available. It is affected by:
resource endowment and population.
The Quality of productive resources refers to the productivity of resources and is affected by:
Technology, education and training of workforce.
By increasing the quantity and/or quality
of resources we achieve ECONOMIC GROWTH.
The Quantity of productive resources refers to the physical amount of resources available. It is affected by:
resource endowment and population.
The Quality of productive resources refers to the productivity of resources and is affected by:
Technology, education and training of workforce.
By increasing the quantity and/or quality
of resources we achieve ECONOMIC GROWTH.
