EconomicsNotes
Week1–Chapter1–EconomicsIssues
TheEconomicProblem
• Whatiseconomicsallabout?
• Productionandconsumption:satisfyinghumanneedswith
availableresources
• Scarcity,thecentraleconomicproblem:potentiallyunlimited
humanneedsandlimitedresources
• Demandandsupply:helpsolvescarcitybyreconciling
resourcesandneeds
MacroeconomicIssues
• Managingdemandandsupplyaggregates
• Encouragingnationaleconomicgrowth
• Minimizinginflation
• Managingthebalanceoftrade
• Managingcyclicalemploymentfluctuations
• Minimizingunemployment
MicroeconomicIssues
• Thechoicestobemade:
o Whattoproduce?
o Howtoproduce?
o Forwhomtoproduce?
• Theconceptofopportunitycost
• Makingrationaldecisions
• Marginalbenefitsvs.marginalcost
• Thesocialimplicationsofchoice
ModelingEconomicRelationships
Diagrams:
• Represent‘models’ineconomics
• Illustratebasiceconomicrelationships
• Simplifyandexplaineconomicissues
ProductionPossibilityCurve(PPC):
• Afundamentaleconomic‘model’
• Illustratessociety’sproductionchoices
UnitsofFood(millions)
UnitsofClothing(millions)
8.0
0.0
7.0
2.2
6.0
4.0
5.0
5.0
4.0
5.6
3.0
2.0
1.0
0.0
6.0
6.4
6.7
7.0
MicroeconomicsandthePPC:
• Choicecreatesopportunitycost
• Increasingopportunitycosts
Asthenationconcentratesmoreontheproductionofonegood,ithas
tostartusingresourcesthatarelesssuitable–resourcesthatwould
havebeenbettersuitedtoproducingothergoods.Inourexample,
theproductionofmoreclothingwillinvolveagrowingmarginalcost:
ever-increasingamountsoffoodhavetobesacrificedforeach
additionalunitofclothingproduced.
Thereisnoguaranteethatresourceswillbefullyemployedorthat
they’llbeusedinthemostefficientwaypossible.Theeconomymay
thusproduceatapointinsidethePPC,(pointV).
Overtime,investmentinnewplantandmachinerywillincreasethe
stockofcapital;newrawmaterialsmaybediscovered;technological
advancesarelikelytooccur;andthrougheducationandtraining,
laborislikelytobecomemoreproductive.Thisgrowthinpotential
outputisillustratedbyanoutwardshiftinthePPC.
TheCircularFlowofGoodsandIncome
GoodsMarkets:
• Moneyflowsfromhouseholdstofirmsintheformofconsumer
expenditure
• Goodsandservicesflowfromfirmstohouseholds.
FactorMarkets:
• Householdssupplylaborandotherfactorstofirms
• Firmspaywages,rent,dividendsandinteresttohouseholds.
EconomicSystems
CommandEconomy:
• Decisionmaker:thecentralauthorities
Free-MarketEconomy:
• Decisionmaker:individualhouseholdsandfirms,withno
governmentintervention
MixedEconomy:
• Decisionmaker:governmentandmarket
Inacommandeconomy,thestateplans:
• Theallocationofresourcesbetweencurrentconsumptionand
investmentforthefuture.
• Theoutputofeachindustryandfirm,thetechniquesthatwill
beusedandthelaborandotherresourcesrequiredbyeach
industryandfirm.
• Thedistributionofoutputbetweenconsumers.
• Thereisconsiderablecostassociatedwiththecommand
economybecause:
• Thelargerandmorecomplextheeconomy,thegreaterthetask
ofcollectingandanalyzingtheinformationessentialto
planning,andthemorecomplextheplan.
• Complicatedplansarelikelytobecostlytoadministerand
involvecumbersomebureaucracy.
• Ifthereisnosystemofprices,orifpricesaresetarbitrarilyby
thestate,planningislikelytoinvolvetheinefficientuseof
resources.
• Itisdifficulttodeviseappropriateincentivestoencourage
workersandmanagerstobemoreproductivewithouta
reductioninquality.
• Completestatecontroloverresourceallocationwouldinvolve
aconsiderablelossofindividualliberty.
• Thegovernmentmightenforceitsplanseveniftheywere
unpopular.