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Chapter 1 Economics and the Economy

Chapter 1 Economics and the Economy. David Begg, Stanley Fischer and Rudiger Dornbusch, Economics , 8th Edition, McGraw-Hill Education, 2005 PowerPoint presentation by Alex Tackie and Damian Ward. What is Economics?. ECONOMICS ... is the study of how society decides: What For whom How.

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Chapter 1 Economics and the Economy

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  1. Chapter 1Economics and the Economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill Education, 2005 PowerPoint presentation by Alex Tackie and Damian Ward

  2. What is Economics? • ECONOMICS ... • is the study of how society decides: • What • For whom • How to produce...

  3. The price of oil Tripled in 1973-74, and doubled again in 1979-80 … and affected people all over the world.

  4. An increase in the price of oil affects • What to produce • less oil-intensive products • How to produce • less oil-intensive techniques • For whom to produce • oil producers have more buying power, importers have less

  5. The distribution of world population and GNP, 2003

  6. Scarcity forces choices to be made • Opportunity cost • a crucial concept in economic analysis • the quantity of other goods that must be sacrificed to obtain another unit of a good

  7. The production possibility frontier (1) • For each level of the output of one good, the production possibility frontier shows the maximum amount of the other good that can be produced.

  8. A  14 F= 4  B Food output (F) 10 G = 8 Production possibility frontier 14 6 Film output (G) The production possibility frontier (2) F/G = opportunity cost (=1/2)

  9. The operation of markets • Market • a shorthand expression for the process by which … • households’ decisions about consumption of alternative goods • firms’ decisions about what and how to produce • and workers’ decisions about how much and for whom to work • … are all reconciled by adjustment of prices

  10. Resource allocation • Resource allocation is crucial for a society • and is handled in different ways in different societies, e.g.: • Command economy • Mixed economy • Free market

  11. China Sweden USA Hungary UK Cuba Free market economy Command economy Market orientation

  12. Normative and Positive Economics • Positive economics deals with objective explanation • e.g. if a tax is imposed on a good its price will tend to rise • Normative economics offers prescriptions based on value judgements • e.g. a tax should be imposed on tobacco to discourage smoking

  13. Micro and Macro (1) • Microeconomics • offers a detailed treatment of individual economic decisions concerning particular commodities • Footballers’ wages and the price of oil, for example, are both microeconomic issues

  14. Micro and Macro (2) • Macroeconomics • emphasises the interactions in the economy as a whole • Gross domestic product, the aggregate price level and unemployment, for example, are all macroeconomic issues

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