Economics and the Economy

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 8th Edition, McGraw-Hill Education, 2005 PowerPoint presentation by Alex Tackie and Damian Ward

Chapter 1

The McGraw-Hill Companies, 2005

What is Economics?
ECONOMICS ... is the study of how society decides:
What For whom How

to produce...
1
The McGraw-Hill Companies, 2005

The price of oil

Tripled in 1973-74, and doubled again in 1979-80 and affected people all over the world.
60

US$ per barrel

50 40 30 20 10 0
19 65 19 70 19 75 19 80 19 85 19 90 19 95 20 00

The McGraw-Hill Companies, 2005

An increase in the price of oil affects

What to produce
less oil-intensive products

How to produce
less oil-intensive techniques

For whom to produce

oil producers have more buying power, importers have less
3
The McGraw-Hill Companies, 2005

The distribution of world population and GNP, 2003

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Population LIC MIC HIC

GNP

The McGraw-Hill Companies, 2005

Scarcity forces choices to be made

Opportunity cost a crucial concept in economic analysis the quantity of other goods that must be sacrificed to obtain another unit of a good
5
The McGraw-Hill Companies, 2005

The production possibility frontier (1) For each level of the output of one good, the production possibility frontier shows the maximum amount of the other good that can be produced.

The McGraw-Hill Companies, 2005

The production possibility frontier (2)

F/G = opportunity cost (=1/2)

Food output (F)

14

F= 4

10

G = 8

B
Production possibility frontier Film output (G)

14

The McGraw-Hill Companies, 2005

The operation of markets

Market a shorthand expression for the process by which
households decisions about consumption of alternative goods firms decisions about what and how to produce and workers decisions about how much and for whom to work

are all reconciled by adjustment of prices

8
The McGraw-Hill Companies, 2005

Resource allocation
Resource allocation is crucial for a society and is handled in different ways in different societies, e.g.: Command economy Mixed economy Free market
9
The McGraw-Hill Companies, 2005

Market orientation
China Cuba Hungary Sweden UK USA

Command economy

Free market economy

10

The McGraw-Hill Companies, 2005

Normative and Positive Economics

Positive economics deals with objective explanation
e.g. if a tax is imposed on a good its price will tend to rise

Normative economics offers prescriptions based on value judgements

e.g. a tax should be imposed on tobacco to discourage smoking
11
The McGraw-Hill Companies, 2005

Micro and Macro (1)

Microeconomics
offers a detailed treatment of individual economic decisions concerning particular commodities Footballers wages and the price of oil, for example, are both microeconomic issues

12

The McGraw-Hill Companies, 2005

Micro and Macro (2)

Macroeconomics
emphasises the interactions in the economy as a whole Gross domestic product, the aggregate price level and unemployment, for example, are all macroeconomic issues

13

The McGraw-Hill Companies, 2005