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Economic Framework

Economic Framework. Overview. What is Economics? What are the Factors of Production? Needs v Wants Opportunity Cost Economic Systems Economic Growth Inflation Interest Rates. Economics. Is the study of how individuals, businesses and governments wi th limited resources make choices.

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Economic Framework

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  1. Economic Framework

  2. Overview • What is Economics? • What are the Factors of Production? • Needs v Wants • Opportunity Cost • Economic Systems • Economic Growth • Inflation • Interest Rates

  3. Economics • Is the study of how individuals, businesses and governments with limited resources make choices.

  4. Resources • Are things such as land, machinery, workers, materials, oil, crops, money. • They are used in the production of goods and services.

  5. The Factors of Production • Are those scarceresources which we use to produce wealth.

  6. 4 Factors of Production • Land • Labour • Capital • Enterprise

  7. Land • All things supplied by nature. • Eg. water, natural gas, oil, coal, minerals, trees…….. • The payment/reward for land is rent.

  8. Labour • The human element in the production process. • Eg. employees, builders, carpenters, factory workers….. • The reward for labour is wages.

  9. Capital • All man-made things that help produce goods. • Buildings, machinery… • The reward for capital investment is interest.

  10. Enterprise • Taking the risk to sell new product/idea.. • Eg. Bill Cullen, Richard Branson… • The reward for enterprise is profit. • The risk of enterprise is loss.

  11. Example: Bread

  12. Needs • Are essentials required for survival. • Basic needs. • Food, shelter, clothing.

  13. Wants • Are anything in excess of our needs. • Things we can live without. • TV, holidays, i-pod………………

  14. Opportunity Cost • The opportunity cost is the sacrifice of the item you must do without when you have to make a choice between two items you want to produce or purchase.

  15. Opportunity Cost • Example • I have €2.00. • I can buy ice-cream or Pringles. • I choose ice-cream. • Financial cost = €2.00 • Opportunity cost = Pringles.

  16. Economic System Is how a country makes decisions about their factors of production. An Economic System is important to ensure the economy is controlled and run properly.

  17. Centrally Planned Economy Communism • All industries are owned & controlled by the government. Eg China

  18. 2. Free Enterprise Economy Capitalism • All industries are owned by private entrepreneurs. Eg. USA (is the closest to free market model)

  19. 3. Mixed Economy • Some industries are controlled by the government & some are controlled by private entrepreneurs (business people). Eg. Ireland

  20. Economic Growth • Occurs where there is an increase in the amount of goods and services produced in a country from one year to the next.

  21. Advantages of economic growth • Increase in standard of living • More employment will be create • More money available for social welfare, health and education

  22. Explain • GNP • Gross National Product • GDP • Gross Domestic Product • The total amount produced in a country. • + = Growth • - = Recession

  23. Formula • Change X 100 • Original

  24. Example 1 • 2009 100 million produced in Ireland • 2010 95 million produced in Ireland • - 5 million X 100 = -5% • 100 million Recession

  25. Example 2 • 2009 200 million produced in USA • 2010 220 million produced in USA • 20 million X 100 = + 10% • 200 million Growth

  26. Inflation • Is an increase in the general level of prices/cost of living from one year to the next. • It is calculated by the Consumer Price Index (CPI).

  27. Consumer Price Index • Is the measure of inflation. • The Central Statistics Office (CSO) conducts a survey of prices every few months. • This tells us if prices are rising or not.

  28. What causes inflation? • Too much money in circulation. • Interest rates too low. • Increase in oil prices.

  29. ECB • The European Central Bank tries to control inflation. • See Inflation Monster DVD

  30. Formula for calculating rate of inflation Increase in price x 100% ______________ Original Price

  31. Example • Cost of living in 2007 is €9000 • Cost of living in 2008 is €9600 • Rate of Inflation = €600 x100% ________ €9000 • =6.6%

  32. Benefits of low inflation • Economic growth is aided • Prices are stable • Wage demands are lower

  33. Deflation • Is when prices are falling. • While this may seem good it is not. • Consumers will delay spending in case prices fall further. • This may lead to unemployment.

  34. Interest Rates • Is the cost of borrowing. • Irish rates are controlled by the European Central Bank

  35. Benefits of low interest rates • Mortgages and loans will be cheaper. • Encourages new investment. • Increased consumer spending.

  36. Disadvantages of high interest rates • Discourages new investment. • Reduces consumer demand. • Increases business costs.

  37. Recap • What is Economics? • What are the Factors of Production? • Needs v Wants • Opportunity Cost • Economic Systems • Economic Growth • Inflation • Interest Rates

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