An Introduction to Economics Lecture 1 An Introduction to Economics

Announcements Dr. Nkechi S. Owoo Email: nowoo@ug.edu.gh 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

Definition of Economics What is Economics?

Economics, Scarcity, and Choice 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

Scarcity and Individual Choice Unlimited variety of scarcities, based on two basic limitations: Scarce time Limited number of hours in each day to satisfy our desires Scarce spending power Cannot afford to buy more of the things we want

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 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 a productive enterprise

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

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

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

More Concepts and terminology

Microeconomics What is Microeconomics?

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

Macroeconomics What is Macroeconomics?

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

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

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

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 well-being of its poorest, most vulnerable citizens

The Concept of Opportunity Cost What is Opportunity Cost?

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?

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

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

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

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 bushels 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

Production Possibilities Frontiers The Production Possibilities Frontier Number of Tanks per Year Bushels of Wheat per Year 100,000 200,000 300,000 400,000 500,000 1,000,000 950,000 850,000 700,000 all resources are used for wheat Moving from point A to point B requires shifting resources out of wheat and into tanks A B C D E all resources are used for tanks F

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

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.

The PPF, Productive Inefficiency and Recessions There is no such thing as a free lunch- Milton 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

Productive Inefficiency The Production Possibilities Frontier Number of Tanks per Year Bushels of Wheat per Year 100,000 200,000 300,000 400,000 500,000 1,000,000 950,000 850,000 700,000 A B C D W E F

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

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

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

Economic Growth Economic Growth and the PPF (a) Wheat (bushels per year) Additional resources or technological advance affect only the wheat production e.g. improved seeds A’ 1,200,000 H A 1,000,000 J 700,000 D F 3,000 5,000 Tanks per Year

Economic Growth Economic Growth and the PPF (b) Wheat (bushels per year) 1,200,000 A 1,000,000 Additional resources or technological advance affect only the tank production D 5,000 6,000 Tanks per Year

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

Assigned Reading Economic Systems and Resource Allocation

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