The Fundamentals of Economics: Basics, Concepts, and Organization

1. Chapter 1The Fundamentals of Economicsby: Yenny sulastri, S.E.,M.M

2. Why Study economics? • With a study of economics, we can be fully informed about international trade etc. • Choosing your life’s occupation is the most important economic decision you will make, because your future depends not only on your own abilities but also on how economic forces beyond your control affect your wages.

3. Definition of Economics The study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants. The study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

4. 2 key ideas in economics: • That goods are scarce • That society must use its resources efficiently

5. Efektif vs Efisien • Efektif: pencapaian tujuan/target dalam batas waktu yang sudah ditetapkan tanpa sama sekali memperdulikan biaya yang sudah dikeluarkan. • Efisien: pencapaian target dengan menggunakan input (biaya) yang sama untuk menghasilkan output (hasil) yang lebih besar. • Efektivitas adalah tingkatan sejauh mana tujuan tercapai dan sejauh mana sasaran masalah dapat diselesaikan. Berbeda dengan efisiensi, efektivitas ditentukan tanpa mengacu pada biaya. Efektivitas = “Doing the right thing” sedangkan Efisiensi = “Doing the thing right”

6. BASIC CONCEPTS: • Scarcity - the fundamental economic problem that human wants exceed the availability of time, goods, and resources. • Choice – Because individuals andsociety can never have everything they desire, they therefore are forced to make choices

7. Microeconomics vs. Macroeconomics • Microeconomics The branch of economics that studies the behavior and decision-making by a single individual, household, firm, industry, or level of government • Macroeconomics The branch of economics that studies decision-making for the economy as a whole

8. Microeconomics vs. Macroeconomics • Microeconomics: How individual prices are set, studied the determination of prices of land, labor and capital and inquired into the strengths and weaknesses of the market mechanism. • Macroeconomics: How total investment and consumption are determined, how central banks manage money and interest rates, what causes international financial crisis and why some nations grow rapidly while others stagnate.

9. 3 Fundamental questions of economic organization • What: What commodities are produced and in what quantities? • How: How are goods produced? A society must determine who will do the production, with what resources, and what production techniques they will use. Will factories be run by people or robots? The HOW question requires society to decide the resource mix used to produce goods. • Whom: For whom are goods produced? It concerns the division of output among society’s citizens.

10. Video What, How, for Whom

11. Positive Economics vsNormative Economics • Positive economics: describes the facts of an economy. Ex: why do doctors earn more than janitors? Does free trade raise or lower the wages of most Americans? What is the impact of computers on productivity? analysis & empirical evidence. • Normative economics: Involves ethical precepts and norms of fairness. Should poor people be required to work if they are to get government assistance? Should the US break up Microsoft because it has violated the antitrust laws? There are no right or wrong answers to these questions because they involve ethics and values rather than facts. They can be resolved only by political debate and decisions, not by economic analysis alone.

12. Market, Command and Mixed Economies • A Market Economy is one in which individuals and private firms make the major decisions about production and consumption. A system of prices, of markets, of profits and losses, of incentives and rewards determines what, how and for whom. Ex: USA Firm: produce the commodities that yield the highest profits (the what) by the techniques of production that are least costly (the how). Consumption: determined by individuals’ decisions about how to spend the wages and property incomes generated by their labor and property ownership (the for whom).

13. Market, Command and Mixed Economies • A Command Economy is one in which the government makes all important decisions about production and distribution : Uni soviet where the government owns most of the means of production (land and capital) and it also owns and directs the operations of enterprises in most industries; it decides how the output of the society is to be divided among different goods and services. • Mixed Economy with elements of market and command. Ex: Indonesia

14. Video Sistem Ekonomi

15. Inputs & Outputs • Inputs: commodities or services that are used to produce goods and services. Ex: eggs, flour, heat, pizza oven, chef’s skilled labor. • Outputs: the various useful goods or services that result from the production process and are either consumed or employed in further production. Ex: Pizza.

16. Factors of Production • Land: natural resources – represents the gift of nature to our productive processes. It consists of the land used for farming or for underpinning houses, factories and roads; the energy resources that fuel our cars and heat our homes; and the nonenergy resources like copper and iron ore and sand. clean air and drinkable water • Labour: The mental and physical capacity of workers to produce goods and services • Capital: The physical plants, machinery, and equipment used to produce other goods(Financial capital - The money used to purchase capital) • Entrepreneurs: The creative ability of individuals to seek profits by combining resources to produce innovative products

17. Labor Land Capital Entrepreneurship organizes resources to produce goods and services

18. Video Factors of Production

19. Production Possibilities Curve: - A curve that shows the maximum combinations of two outputs that an economy can produce, givenits available resources and technology

20. Production Possibilities Curve: Ex: Defense Spending. Countries must decide how much of their limited resources goes to their military and how much goes into other activities (such as new factories or education). The more output that goes for defense, the less there is available for consumption and investment.

21. Alternative Production possibilities

24. Production Possibilities Curve A Efficient Unattainable Military Goods Inefficient B Consumer Goods

25. Problems • As a student , you might have 10 hours to study for upcoming tests in both economics and history. If you study only history, you will get a high grade there and do poorly in economics, and vice versa. Treating the grades on the two tests as the “output” of your studying, sketch out the PPF for grades, given your limited time resources. Alternatively, if the two student commodities are “grades” and “fun”, how would you draw this PPF? Where are you on this frontier? Where are your lazy friends?

26. Opportunity Costs • Life is full of choices: Resources are scarce, we must always consider how to spend our limited incomes or time. • In a world of scarcity, choosing one thing means giving up something else. The opportunity cost of a decision is the value of the good or service forgone.

27. Video Opportunity Costs

28. Efficiency • Productive efficiency occurs when an economy cannot produce more of one good without producing less of another good; this implies that the economy is on its production-possibility frontier.