Title: Introduction to Economics
1Introduction to Economics
- Lecture 1 Chapter 1
- Basic Economic Concepts
- Measuring Welfare
2The Study of Economics
- 18th -19th centuries called Political Economy
- Body of maxims for statesmen
- Governed by the thoughts of the Classical
economists at the time - Now referred to as Economics
- A social science concerned with individuals
3What do you think Economics is?
- Some Definitions
- The study of how society chooses to allocate its
scarce resources among competing goals to best
fulfill its unlimited wants - The social science concerned with the efficient
use of limited or scarce resources to achieve
maximum satisfaction of unlimited human materials - Thomas Carlyle (19th-century Scottish writer) -
the dismal science.
4Definitions continued
- Simply stated by Alfred Marshall
- (English Economist 1842-1924)
- The study of Man in the ordinary business of
life - Concerned with the more material part of human
welfare
5Divisions in Economics
- Microeconomics vs. Macroeconomics
- Microeconomics studies of the behaviour of
individual markets, workers, households and firms
while Macroeconomics looks at the big picture
analysing economy-wide phenomena such as growth,
inflation and unemployment. - Positive vs. Normative Economic Statements
- Positive Economics describes the world as it is,
rather than trying to change it. Normative
Economics suggests policies for increasing
economic welfare.
6Human Welfare
- Welfare concerns the good fortune, health,
happiness, prosperity, wellbeing of a people - The objective of all economic activity is to
fulfill wants that bring about material wealth or
some level of satisfaction. - Anything that affects material/economic welfare
most likely influences total welfare in the same
direction.
7Fundamental Concepts
- Based on our 2nd definition
- Efficiency
- Production of the desired effects using current
resources and technology with minimum waste of
time, effort, or skill. - Scarcity and Choice
- Basic economic problem which arises from people
having unlimited wants while there are and always
will be limited resources (human natural). - various economic decisions must be made to
allocate resources efficiently.
8Scarcity
- Despite our advances in technology, we can never
produce in such abundance that everyone gets all
they want with plenty leftover. - Society has virtually unlimited wants wants
change and multiply over time - Desire for a particular good can be satisfied,
but not the aggregate desire for all goods. - Want satisfying activities themselves generate
new wants. - Economics is the therefore concerned with doing
the best with what we have - The fundamental economic problem scarcity, is
that the means available are limited relative to
the extent of wants.
9Why Are Our Means Limited?
- Factors of production are limited because
- Resources available cannot be significantly
increased in a given period - Technology methods of production, the know
how subject to limited annual improvement. - Social Institutions and traditions change slowly
10Resource Categories
- Property Resources
- Land
- Renewable
- Sustainable over time with proper management
- Non-renewable
- Will be depleted over time, possibly slowed by
recycling
11Resource Categories
- Property Resources
- Land
- Capital
- a. Human produced goods used in production
- b. All semi-finished materials that exist at a
point
12Resource Categories
- Property Resources
- Land
- Capital
- any form of wealth
- employed or capable
- of being employed in
- the production of more
- wealth
Notes....
INVESTMENT
13Resource Categories
- Property Resources
- Land
- Capital
- Human Resources
- Labour
- All efforts of mind and muscle
- The labour force its size, variety
- and quality
14Resource Categories
- Property Resources
- Land
- Capital
- Human Resources
- Labour
- Entrepreneurial Ability
- takes initiative
- makes policy decisions
- innovates
- bears risk
- combines resources
15Resource Payments
PROPERTY RESOURCES
HUMAN RESOURCES
16Getting the Most from Available Resources
- Full employment using available resources
- Full production using resources efficiently
- productive efficiency
- producing goods services in the least costly
way - allocative efficiency
- producing goods services most wanted by society
17Production Possibilities
- Assumptions
- full employment productive efficiency
- fixed resources
- fixed technology
- only two goods produced
- pizzas symbolize consumer goods
- industrial machines symbolize capital goods
18Production Possibilities
- What if we could produce only
- 10,000 machines
- or
- 400,000 pizzas
- using ALL of our resources
19- to get some pizzas
- we have to give up some machines! opportunity
cost principle - every choice is associated with a cost
20Production Possibilities
21Production Possibilities
A
B
C
W
attainable but inefficient
unattainable
D
E
22Unemployment Productive Inefficiency
a point like U represents unemployment or
underemployment
A
B
C
D
U
E
23Unemployment Productive Inefficiency
A
B
more of either or both products is possible
C
D
U
E
24Tracking an Economys Performance
- Gross Domestic Product
- Measures the market value of all final goods and
services produced within the economy during 1yr.
(ignores who owns resources) - Gross National Product
- Measures the market value of all final goods and
services produced by domestically owned resources
during 1 yr. (ignores where production occurs)
25Tracking an Economys Performance (cont)
- Opportunity Cost
- There is no free lunch
- True cost of producing an additional unit of 1
good is the value of other goods forgone - Living Standards
- GDP may be rising without actual increases in
production, this is due to rising prices
inflation. - To correct for inflation, current GDP must be
deflated based on price level in a base year to
get Real GDP. - Real GDP per capita shows the average
distribution of real income that each person in
the economy gets. - Per capita real GDP indicates average well-being.
26Tracking an Economys Performance (cont)
- GDP is not the best measure of welfare because it
neglects - home production
- Voluntary community activities
- Depletion of natural resources
- Distribution of income
- Includes costs that offset deteriorating
conditions - Capital replacement costs, pollution cleanup
costs, crime prevention etc that drive the
monetary value of GDP up without associated
production.
27Alternatives to the GDP for measuring well being
- Human Development Index
- Developed by UN real wealth of a nation is its
people - Includes social, political, environmental
conditions, personal incomes - Based on life expectancy, educational attainment,
income - Genuine Progress Indicator
- Adds value of household, community services
- Adjusts for the gap between rich and poor
- Subtracts negative social costs eg. Crime,
underemployment, pollution, family breakdown,
depletion of resources, auto accidents - Adjusts for net capital formation, net foreign
borrowing
28Requisites for Economic Growth
- For living standards to rise the rate of growth
of real GDP must exceed the rate of growth of the
population. - Requisites
- Quality of labour force
- Stock of capital land resources
- State of technology
- Efficiency
- Population
29Governments role in unequal distribution of
Income
- When income is not equally distributed, per
capita measures are misleading - Governments of LDCs should focus on improving the
5 requisites for economic growth and develop
social overhead capital - Governments of DCs can through the WB offer
loans, grants and technical assistance to LDCs. - DCs can alternatively offer direct help through
national programs eg. Canada - CIDA