Transcript AGEC 102 Lectures 1 & 2

INTRODUCTION TO ECONOMICS
OVERVIEW OF ECONOMICS
• What is the subject of economics about
– Wants: many/unlimited (insatiable)
– Scarcity: means to attaining our wants limited
therefore we cannot satisfy all our wants
– Choices: must make choices; need to priority;
each choice has a cost
– Concept of ‘Opportunity Cost’
What is Economics?
• Economics is the study of how scarce resources
are allocated among competing wants
• Economic problem is What to produce; How to
produce it; and for whom to produce
• Economic decisions face individuals, households,
businesses, communities, and nations.
The different themes of
economics
• Scarcity
• Choice
• Specialization (based on comparative
advantage; also competitive advantage)
• Exchange
Themes of Economics
• Scarcity – resources are limited
• Scarcity of resources means choices must be
made
– Individual choices
– Household choices
– Community choices
– Choices by firms
– Choices by nations
• Each choice comes at a cost – opportunity
cost
Specialisation
• Economic entity engages in activities in which
they are particularly suited and do better than
others, given their available resources.
• Resources are also committed to economic
activities in which the resources are particularly
suited to generate a product or service
Specialisation
• Individuals specialise in professions (law,
engineering, economics, agriculture)
• Countries specialise in production (e.g
Saudi Arabia in crude oil production;
Ghana in cocoa production
Specialisation
• Specialization creates division of labour.
• Specialisation is based on comparative
advantage
• Specialization raises productivity/efficiency
– produce larger output from available
inputs/resources
Exchange
• Exchange is the fourth theme of
economics.
• Exchange complements specialization.
Individuals trade the goods they produce
for other goods that others have
produced.
• Without the possibility for exchange
among economic assets/entities
specialization would be meaningless.
Exchange
• Individual exchange his/her specialized
labour services for a fee and then
exchanges the money earned for other
goods.
• Ghana may exchange her cocoa beans for
machinery, equipment, drugs.
The Economic System
• The set of arrangement that is established
to solve the economic problem is called
an economic system.
• 2 main systems
– Market system
– Planned system
• However, most societies, apply hybrid
economic system (a mix of the two
systems)
Command System (Planned
Economy)
• In a command system The bulk of the
resources and property is owned by the
state; collective ownership of property
• The basic economic questions are
answered by the central government.
• Through central government planning, the
government, either directly or indirectly
sets output targets, prices and incomes
Command system
• The command system is applied in socialist
countries e.g. Cuba, China, former Soviet Union.
• China is undergoing reforms currently but
remains committed to many of the principles of
the command economy.
• The command system has collapsing in China.
• Eastern European Countries – The command
system has completely collapsed in these
countries.
The Free Market System
• Also known as the Laissez-Faire System
• Individuals/households and firms are
owners of property- private ownership and
all allocation is done through the market.
• Individuals/households and firms pursue
their own self interest in an economy
without any central control or regulation.
• There is a complete lack of government
involvement in the economy.
Market system
• The main medium for addressing the
economic problem in the market economy
the market.
• Market : An institution through which
buyers and sellers interact and engage in
exchange.
The Market System
• The basic coordination mechanism is the
price.
• The individual owner of a property has the
legal right to obtain the best deal possible
from their property.
• The laissez-faire system is applied in
capitalist societies: with private ownership
of property and market allocation of
resources.
Economic Systems in Practice
• In reality a pure capitalist economy in which all
property is owned by private individuals and
firms in which all allocation is done through the
market does not exist.
• Eg in Ghana, the state owns some property
• There may be restrictions on how some
resources are used by private individuals
• There is some amount of regulation
• To protect public interest and ensure fair play
Examples of regulation
• one cannot use his/her private property in
such a way as to injure a neighbour or
harm the community. eg. Cannot use your
factory waste to damage/pollute the
environment.
• The owner of land in a part of a town
designated for residential use only cannot
build a factory.
Examples of Regulation
• There are minimum wage restriction in
Ghana. That is cannot sell or purchase
labour at wage less than the minimum
wage.
• Also pharmacist, engineers, dentist,
medical doctors and lawyers require a
license before practicing.
Mixed Economic System
• Pure forms of the command economy and
laissez faire economy do not exist in the
world.
• No market economies exist without
government involvement and regulation.
• All economies are mixed economies;
• where individual property rights exist,
independent choice is allowed, but
government plays a major role in the
economies
Roles of Government
• Major purchaser and employer in an economy.
• Redistributes income by means of taxation and social
welfare programs.
• Regulates many economic activities, in an attempt to
ensure fairness.
.
Resources
• Natural resources: ( land, mineral deposit,
water bodies, forests)
• Capital equipment: ( plants, machinery,
inventories)
• Human resources: ( workers with different
skills, talents) that are used to produce
scarce goods
Resources
• Productive resources are also known as Factors of
Production or inputs.
• The resources available to a society represent the
economic wealth of the society because they determine
how much output the society can produce
• Resources also include knowledge – that generates
technology
Resources and their rewards
• Land – Rent
• Labour – Wages
• Capital – Interest
– Stock of capital (total value of capital at a point in
time
– Investment (addition or flow from time to time)
• Entrepreneurship - Profits
Entrepreneurs and Entrepreneurship
• They organize the factors of production to produce
output, seek out and exploit new business opportunities,
and introduce new technologies.
• The entrepreneur must have information about the best
methods of production.
• The entrepreneur takes the risk and bears the
responsibility if the venture fails.
• The entrepreneur puts inventions into business practice.
• Therefore entrepreneurship is also a resource or factor
of production
Good
Is a commodity or service that has economic
value. A good is an object or activity
desired by people.
Commodity: is a tangible good. A tangible
object/product that has economic value.
A Service : is an intangible good. Is an
intangible activity or product that has
economic value.
Scarce Good and Free Good
• An item is a scarce good if the amount available
is less than the amount people would want if it
were given away free of charge.
• A Scarce goods has a positive opportunity cost.
• A Free Good is one where the amount available
is greater than the amount people want at a zero
price.
• A Free good has an opportunity cost of zero.
Other Classifications of Goods
Final goods: are consumption goods purchased by
households (e.g. bicycle). .
They are not used up in the production of other goods,
particularly in the current period.
Intermediate goods: goods that are completely used up in
the production of another good (e.g. bicycle tyres)
The value of the intermediate products is reflected in the
price of the final goods.
A durable Good: is not consumed/used up immediately. It is
consumed gradually over time (e.g. household
appliances)
A nondurable Good: is used up immediately when it is
consumed (e.g. food).
Branches of Economics
2 main branches of Economics
Microeconomics
Macroeconomics
Microeconomics
• Deals with study of the economic decision
making of firms and individuals.
• It focuses on the individual participants in the
economy: the household, the firm, the industry.
(the producers, workers, employers, and
consumers).
• Microeconomics studies how business firms
operate under different competitive conditions
and how the combined actions of buyers and
sellers determine prices in specific markets
Microeconomics
• Microeconomics studies households as
earners of wages, interest, rent and profit.
It deals with analyzing the costs and
benefits of all kinds of actions at the
margin.
• It is used by sociologists to explain
marriage, divorce, fertility, crime and
sometimes suicide patterns.
Macroeconomics
Deals with economic decision/activity of the
economy as a whole.
Studies relationships between aggregate
Measures.
• What are the determinants of inflation?
• What is the relationship between inflation
and interest rates?
• Is it necessary to trade off higher
aggregate employment for lower inflation?
• What are the effects of government deficits on prices
and interest rates?
• What is the relationship between the money supply and
inflation?
It should be noted that macroeconomics have come to
apply more microeconomic analysis(tools) to traditional
macroeconomic problems/questions. This is because is
assumed that the economy is made up of individuals and
how these individuals behave on the average can explain
how the economy as a whole behaves.
However, generalizing from the part (micro-level) to the
whole (macro-level) can lead to mistakes.
Micro Economics
Macroeconomics
Studies what determines
the output of a single firm or
industry or the consumption
patterns of a single
household
Studies factors that
determine national output
(Aggregate
output).
household income
national income (in its
aggregate).
The modern convergence of microeconomics and
macroeconomics: follows from the realization that
macroeconomic relationships cannot be analyzed without
understanding the behaviour of the individuals who make
up the economy.
Agricultural Economics
• Application of Economic Principles in
agriculture
• Farm level
• National level
The Art and Science of Economic
Analysis
• Understanding the economic concepts is important to each
person as an individual consumer, a producer and as a
voter in a democratic society.
• Economics as an art sorts out and puts into shape the
occurrence of certain phenomenon in the society to give a
clear picture/meaning about their occurrence (i.e it helps to
explain how a phenomenon occurs).
• As a Science, Economics is an evolving and changing
social or behavioural science. It uses the scientific method
of enquiry to study the society
Positive Economics
• Concerns the study of what is in the economy. It
describes what exists in the economy and how it
works.
• Attempts to understand the behaviour and
operation of the economic systems without
making judgments about whether the outcomes
are good or bad (i.e. no value judgements).
• eg. What determines the wage rate for unskilled
labour? What would happen if the national
reconstruction levy is abolished?
Normative Economics
Is concerned with the study of what ought to be in the
economy.
It looks at the outcomes of economic behaviour, evaluates
them as good or bad outcomes and may prescribe courses
of action.
Normative economics is also called policy economics.
• Should the government subsidize the price of agricultural
inputs?
Should the government regulate the cost of education in
private institutions?
• Should medical care be free for pregnant women?
Tools/ Techniques of Economic Analysis
Inductive and Deductive reasoning.
Inductive Reasoning
- Is a logically deduced conclusion that is based on
observations of various facts and experiences.
- Inductive reasoning is conditional or probable reasoning.
- As researchers we attempt to infer that there is a relation
between one variable (the independent variable) and
another (the dependent variable) based on observations
of samples.
- On the basis of collected data/facts or observations we
make inferences about the populations the
data/facts represent. We conduct research to determine if a
dependent variable is meaningfully related to the
independent variable.
Deductive Reasoning
Involves logically deriving a specific idea(hypothesis) from
general ideas using the general ideas developed in a
theory, you may logically deduce that one variable causes
changes in a second variable.
The specific statement
connecting these two variables is a hypothesis.
Hypothesis and Theory
Hypothesis: A tentative statement made/put forward
concerning the occurrence of a phenomenon.
eg. - A tentative statement made concerning the
relationship between two variables of interest (height
and age; farm size and wealth; income and expenditure.
- a hypothesis developed stand testable with empirical
research.
Theory
A theory is a plausible, coherent systematic/ordered,
structured, authentic explanation of the occurrence of a
phenomenon: how certain facts are related.
The Scientific Method
Economics as a social science subscribing to the scientific
method of enquiry. To rationally apply the scientific method,
you must be able to state clearly the relationship you
expect to emerge in a research study. That is, you must be
able to formulate a precise testable hypothesis.
The procedure:
1. Formulate a statement of hypothesis
2. Operationalize the concepts in the hypothesis
3. Collection of data/facts from the real world
4. Validation of hypothesis
• Evaluate the hypothesis using the data/facts gathered.
• If the hypothesis is not validated then the hypothesis is
revised and steps 2 and 4 are repeated.
The scientific method of enquiry is a repetitive
process/iterative process.
Tools
Graphics
line
Bar chart
Bie chart
histogram
Equations : Mathematical equations
Statistics : Mean, Median, Standard deviation