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Economic Systems Engineering Economics Lecture 22 27 January 2010

Economic Systems Engineering Economics Lecture 22 27 January 2010. Economic Systems Production Possibilities Frontier (PPF). Consider. Why are economies around the world growing more market oriented? How much can an economy produce with the resources available?

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Economic Systems Engineering Economics Lecture 22 27 January 2010

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  1. Economic SystemsEngineering EconomicsLecture 2227 January 2010 Economic Systems Production Possibilities Frontier (PPF)

  2. Consider Why are economies around the world growing more market oriented? How much can an economy produce with the resources available? Can you actually save time by applying economic principles to your family chores? Why is ‘experience’ a good teacher? Why is ‘fast food’ so fast?

  3. INFINITE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE

  4. Best case scenario: Maximize our satisfaction with our limited resources, i.e. choose how to use our resources to our greatest advantage ECONOMISE

  5. LAND – all natural resources • LABOUR – human effort involved in production • CAPITAL – money, machinery, equipment for manufacturing

  6. Three Economic Questions • All economies must answer these three questions: 1. What goods and services will be produced? 2. How will they be produced? 3. For whom will they be produced?

  7. ‘Real Economy’ versus ‘Money Economy’ Q: Would the wealth & standard of living of the country increase if the Government printed more money? The real economy is concerned with the amount of Goods & Services available to the population - e.g., shopping centres, public transport, quantity of food, number of hospital beds etc.. Whereas, money has no intrinsic value – it merely enables transactions to take place – it can be exchanged for G&S’s

  8. Money • Money is a liquid asset(can easily be converted into other assets) • The functions of money: • medium of exchange • unit of account • a store of wealth

  9. Economic System • All economies face the ‘economic problem’ • Society must adopt an economic system in order to allocate their resources • When allocating resources, the society must consider 3 questions: • What is to be produced? • How are the goods to be produced? • For whom? • Society’s answers to these questions will determine which economic system they adopt: Capitalist, Mixed , Socialist or Islamic

  10. Economic System • An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions. • Some standards used to distinguish among economic systems are: • Who owns the resources? • Allocation of resources? • Incentives and rewards?

  11. Market Economy - Capitalism • All resources are privately owned • Economic activity is based on the prices generated in competitive markets • Any income derived from selling resources goes exclusively to each resource owner • Also called capitalism • USA Model

  12. Capitalist Economic System • Free enterprise system • Price mechanism - Competition • Privately owned resources • Profit motive • Sovereignty of Dollar

  13. Advantages of Capitalist System • Encourages most efficient methods of production by private businesses (profit motive) • Encourages competition in production techniques • Allows economic freedom

  14. Problems with Market Economies • Difficulty enforcing property rights • Some people have few resources to sell • No public service motive except for some essential • Inequality in distribution of goods & services • Monopoly lead to unfair practices

  15. Centrally Planned Economy - Socialism • All resources government owned • Economy by the central plans of government • Sometimes called Socialist Economy • Use visible central planners • UK Model

  16. Problems with Centrally Planned Economies • Consumers get low priority • Little freedom of choice • Central planning can be inefficient • Resources owned by the state are sometimes wasted

  17. Mixed Economy • Market economy + Social Economy • Government regulates the private sector in a variety of ways. • China & Pak Model

  18. Features of Mixed Economies • Monetary system & legal system • Controlling monopolies • Provision of essential goods & services • Regulating undesirable business practices • Alleviate inequality in society (progressive tax, social welfare) • Attempting to provide stable economy

  19. Islamic Economy • Sovereignty of Allah • Circulation and not accumulation • Money is for help to get better reward in the world hereafter – social welfare • Discourages lust, greed and materialism • Discourage wrong means

  20. Production Possibilities Frontier (PPF) • PPF model • Shows possible combinations of types of goods that can be produced when available resources are used fully and efficiently

  21. Production Possibilities Frontier • A through Fare attainable • I represents inefficient use of resources • U represents unattainable combinations

  22. Reasons of Shifts in the PPF • Economic Growth – an expansion in the economies ability to produce • Changes in resource availability • Increases in stock of capital goods • Technological change

  23. Increase in available resources Decrease in available resources Shifts in the PPF

  24. Thanks we have finished the course

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