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Lecture 1
An Introduction to Economics
Announcements
• Dr. Nkechi S. Owoo
Email: [email protected]
Office Location: Main Building, Room W15B
Office Hours: Fridays, 9- 11am
• Other Instructors
– Dr William Bekoe
– Dr Monica P. Lambon- Quayefio
• Class Representative
– Course Outline and Weekly slides
– 2015_16\Econ 101 Syllabus_2015-16.docx
• Interim Assessment
– To be announced
2
Definition of Economics
• What is Economics?
3
Economics, Scarcity, and Choice
• Economics
– Study of choice under conditions of
scarcity
– Allocation of scarce resources among
unlimited wants
• Scarcity
– Situation in which the amount of
something available is insufficient to
satisfy the desire for it
4
Scarcity and Individual Choice
• Unlimited variety of scarcities, based on
two basic limitations:
1. Scarce time
–
Limited number of hours in each day to
satisfy our desires
2. Scarce
–
spending power
Cannot afford to buy more of the things
we want
5
Scarcity and Individual Choice
• Limitations force each of us to make
choices
• Economists study
– Choices
– Consequences of those choices
– Indirect effects of individual choice on our
society
– When the effects are harmful,
economists study what can be done
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about then. Eg. Traffic and pollution
Scarcity and Social Choice
• Society faces a scarcity of resources to satisfy goals
(???)
• Categories of resources:
– Labor
• Time spent by human beings in producing goods and
services
– Capital
• Long-lasting tool used to make other goods and services
– Human capital e.g. skills and knowledge possessed by
workers
– Physical Capital e.g. machinery and equipment, factory
buildings, computers, hammers, etc
– Land/natural resources
• Physical space on which production takes space +
natural resources
– Entrepreneurship
• Ability and willingness to combine other resources into a7
Scarcity and Social Choice
• As a society, resources insufficient to
produce all the goods and services we
desire
• For example, do we require a more
educated citizenry?
– More labour to build classrooms and
teachers to teach
– More land to set up buildings on
– More capital like bull-dozers, etc
• Same resources could be used to produce
other things that we also find useful e.g.
hospitals, homes, defense, etc
8
Scarcity and Economics
• Scarcity of resources is the source of all
problems studied in economics:
– the scarcity of resources and the choices
it forces us to make
• Households – have limited income to
allocate among goods and services
• Firms – production is limited by costs of
production
• Government agencies – the budget is
limited, so goals must be carefully chosen
9
Scarcity and Economics
• Economics studies decisions made by
households, firms and governments to:
– Explain how economic system operates
– Forecast the future of the economy
– Suggest ways to make the future better
10
MORE CONCEPTS
AND TERMINOLOGY
11
Microeconomics
• What is Microeconomics?
12
Microeconomics
• Micro comes from the Greek word
mikros, meaning “small”
• Studies the behavior of individual
households, firms, and governments
– Choices they make
– Interaction in specific markets
• Focuses on individual parts of an
economy
13
Macroeconomics
• What is Macroeconomics?
14
Macroeconomics
• Macro comes from the Greek word
makros, meaning “large”
• Studies the behavior of the overall
economy
• Focuses on big picture and ignores fine
details
15
Sample Questions
• Classify the following topics as relating to
microeconomics or macroeconomics
– A family’s decision about how much income
to save
– The effect of government regulations on
auto emissions
– The impact of higher national savings on
economic growth
– A firm’s decision about how many workers
to hire
– The relationship between the inflation rate
and the changes in the quantity of money
16
Positive and Normative Economics
• Positive economics/ statements: how the
economy works
– Can be true or false
• Need not be sensible or even accurate
• E.g. Government policy has no effect on our
standard of living
– Can be tested by looking at the facts
• Normative economics: what should be
– Value judgments, identify problems, and
prescribe solutions
– Cannot be proved or disproved by the facts
alone
17
Sample Questions
• Are these statements positive or
normative
– An increase in the personal income tax
will slow the growth rate of the economy
– The goal of any country’s economic
policy should be to increase the wellbeing of its poorest, most vulnerable
citizens
18
The Concept of Opportunity Cost
• What is Opportunity Cost?
19
The Concept of Opportunity Cost
• Opportunity cost of any choice
– What we must forego when we make that
choice
– Next alternative, affordable want that is
foregone
– Accurate and complete concept of cost
• What is the opportunity cost of your
university education?
20
Opportunity Cost for Individuals
• The opportunity cost of a choice includes
– Explicit cost
• The dollars sacrificed - and actually paid out
for a choice
– Implicit cost
• The value of something sacrificed when no
direct payment is made
21
Opportunity Cost and Society
• Arises from the scarcity of society’s
resources
• Our desire for goods is limitless
– Limited resources to produce them
• To produce more of one thing
– Society must shift resources away from
producing something else
22
A model of Society’s Opportunity Cost
• Economic models
– Abstract representation of reality
– Should be as simple as possible to
accomplish its purpose
• Use economic models to develop
economic theories
• Economic models are built with words,
diagrams, and mathematical statements
23
Production Possibilities Frontiers model
• Production Possibilities Frontier (PPF)
– A curve showing all combinations of two goods that
can be produced with the resources and technology
available
• Assumptions
– Only two goods produced in economy (military
goods and consumer goods)
– Fixed resources
– Fixed technology
• Tabular illustration
– Quantitative measure of opportunity cost
• Opportunity cost of having more of one good measured
in the units of the other good that must be sacrificed
• At B, if society currently produces 1000 tanks, the
opportunity cost of 1000 more tanks is 100,000 bushels24
of wheat
Production Possibilities Frontiers
• Graphical Illustration
• PPF shows maximum quantity of wheat
that can be produced for each quantity of
tanks (or v.versa)
– Points outside the PPF
• Unattainable
– Points on or inside the PPF
• Attainable
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Production Possibilities Frontiers
• The Production Possibilities Frontier
Bushels of
Wheat
per Year
1,000,000
950,000
850,000
700,000
500,000
400,000
all resources are
used for wheat
A
B
C
Moving from point A to point B
requires shifting resources out
of wheat and into tanks
D
E
all resources are
used for tanks
F
100,000 200,000 300,000 400,000 500,000
Number of Tanks
per Year
26
Increasing Opportunity Cost
• The law of increasing opportunity cost
– The more of something we produce, the greater
the opportunity cost of producing even more of it
– Each time tank production rises by 1000, wheat
production falls by more and more
• Illustration with table
– Why?
– Explains
• The concave (upside-down bowl) shape of the PPF
• Why the PPF becomes steeper as we move
rightward and downward
27
Increasing Opportunity Cost
• The law of increasing opportunity cost
– The more of something we produce, the
greater the opportunity cost of producing
even more of it
– Each time tank production rises by 1000,
wheat production falls by more and more
• Illustration with table
– Why?
• Because most resources are better suited to
some purposes than to others.
28
The PPF, Productive Inefficiency
and Recessions
• There is no such thing as a free lunchMilton Friedman
– Producing more of one thing requires us
to pay an opportunity cost by producing
less of something else…
• Possible Violation?
– Operating inside the PPF:
• Productive inefficiency
• Recessions
29
Productive Inefficiency
• The Production Possibilities Frontier
Bushels of
Wheat
per Year
1,000,000
950,000
850,000
A
B
C
D
700,000
500,000
400,000
W
E
F
100,000 200,000 300,000 400,000 500,000
Number of Tanks
per Year
30
Productive Inefficiency
• Would an economy ever operate inside its
PPF?
– All resources are being used, but not in the
most productive way
• Wheat farmers used in tank production and tank
producers working on farms
– Increase production of one good without
decreasing production of the other good
• Solution would be to better match workers’
skills to available jobs
• No firm, industry or economy ever 100%
productively efficient
– Productive inefficiencies not that rampant
31
Recessions
• A slowdown in overall economic activity
– Many resources are idle
– Widespread unemployment
– Factories shut down
• Land and capital are not being used
• Economy is at a point inside its PPF
32
Economic Growth and the PPF model
• Economy’s productive capacity grows so
produce more of everything
• Factors contributing to economic growth
– Increase in the quantities of available
resources
• Physical capital
• Human capital
– Technological change
• New ways to produce more from a given
quantity of resources
33
Economic Growth
• Economic Growth and the PPF (a)
Wheat
(bushels per year)
1,200,000
1,000,000
700,000
Additional resources or
technological advance
affect only the wheat
production e.g. improved
seeds
A’
H
A
J
D
F
3,000
5,000
Tanks
per Year
34
Economic Growth
Economic Growth and the PPF (b)
Wheat
(bushels per year)
1,200,000
1,000,000
A
Additional resources
or technological
advance affect only
the tank production
D
5,000 6,000
Tanks
per Year
35
Economic Growth
• Economic Growth and the PPF (c)
Wheat
(bushels per year)
Additional resources or
technological advance
affect the production of
both goods
1,200,000
1,000,000
D
5,000 6,000
Tanks
per Year
36
Assigned Reading
• Economic Systems and Resource
Allocation
37
Next Class
• DEMAND
– Markets
– the demand schedule and the demand
curve;
– The law of demand
– Market demand and individual demand
– factors influencing quantity demanded;
– changes in quantity demanded vs.
changes in demand
38