Chapter 1 Introduction to Economics 1.1 What is Economics? 1.2 The Language of Economics 1.3 What is a Market? 1.4 The Circular Flow of Income 1.5 The Economic Problem 1.6 The Production Possibility Frontier 1.7 Economic Systems www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Apply Economic Principles to Work in the Financial Services Industry What is Economics? Economics is the study of the allocation of scarce resources. Resources are scarce because they are limited and can be used up. Resources include: Oil Water Crops Platinum Labour www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Apply Economic Principles to Work in the Financial Services Industry Scarcity A basic assumption of economics is that a person’s wants are unlimited and never satisfied. Resources are used to satisfy wants. As our wants are unlimited and resources are scarce, we must make choices as to how to use these scarce resources most efficiently, so that as many wants as possible are satisfied. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Apply Economic Principles to Work in the Financial Services Industry Opportunity Cost Is the next best choice for the use of an available resource. Opportunity cost measures the trade-off consumers face when choosing how to use a scarce resource. When we use a resource for one purpose we are giving up using it for something else. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

The Language of Economics Positive economics: When economists state a fact. “The price of butter is $3.00 for 250 grams.” Normative economics: When economists make a value judgment or a statement of what something should be. Used by policy makers such as politicians. “The price of butter is too high and ought to be cheaper.” www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

The Role of Assumptions Economists make a range of assumptions to simplify complex real world situations to make them easier to understand. Some common economic assumptions: People act rationally. A firm’s goal is to maximise profits. An individual or consumers’ goal is to maximise utility. Firms and consumers are fully informed and aware of all available information. “Ceteris Paribus” a Latin phrase meaning “all other things being equal” or assume that all other factors remain constant. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Incentives An incentive can be the good feeling or the happiness we get out of doing something for somebody else. Likewise, payment in money is a form of incentive. A negative incentive is gaol time for breaking the law. Basic economic assumption that people respond to incentives. “What’s in it for me?” www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Apply Economic Principles to Work in the Financial Services Industry What is a Market? A market is a “place” where buyers and sellers of goods or services come together. In today’s world that place no longer has to be physical e.g. EBay, the ASX. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

The Circular Flow of Income Firms are the producers in the economy; they produce goods and services using the factors of production. Households are the consumers in the economy; they consume goods and services and provide the factors of production to firms. The factors of production are land, labour and capital. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

The Circular Flow of Income www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Apply Economic Principles to Work in the Financial Services Industry The Economic Problem The set of basic decisions that must be made by society regarding goods and services produced and consumed. What to produce? How much to produce? How to produce? Who consumes? www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

The Production Possibility Frontier Shows the set of all feasible production combinations of two alternate goods. At any point on the frontier the economy is using its scarce resources in the best way to produce the highest possible level of output. Any point inside the frontier is inefficient as the economy is producing less than it could be with its available resources. The PPF is a good example of opportunity cost. At the frontier, an economy cannot produce more of one good without giving up some production of another good. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

The Production Possibility Frontier www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Economic Systems: Command Economies A command economy is one in which a central authority or government controls every aspect of the economy. Usually associated with communism or socialism. No private ownership of land or goods, everything is owned by the state. Does not take advantage of the fact that people respond to incentives. Fidel Castro led Cuba’s command economy through the later 20th century. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Economic Systems: Free Market Economies Decisions made by a central planner in a command economy are replaced by individual decisions of millions of individuals, households and firms. The market looks after itself (no government regulation) Advantages : Recognises incentives Market mechanisms create efficient outcomes Promotes quick decision making motivated by profit Disadvantages: Large inequalities between rich and poor Promotes overproduction and waste Under-produces public goods e.g. parks, hospitals and schools. Hong Kong’s economy is arguably the most liberal in the world. www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry

Economic Systems: Mixed Economies In-between a free-market economy and a command economy. Uses market mechanisms and incentives. Some government intervention (public goods, unemployment benefits, etc.) No pure free market or command economies left. All today’s economies have elements of both types of systems i.e. mixed economies. What is the best mix? How much government intervention is the right amount? www.learnnowbiz.com Apply Economic Principles to Work in the Financial Services Industry