Chapter 1 Economics and the Economy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill Education, 2008 PowerPoint presentation by Alex Tackie and Damian Ward 1

What is Economics? to produce... ECONOMICS ... is the study of how society decides: What For whom How See the introduction to Chapter 1 in the main text. to produce... 2

The price of oil Tripled in 1973-74, and doubled again in 1979-80 … and affected people all over the world. See Section 1-1 in the main text, and Figure 1-1. 3

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 See Section 1-1 in the main text. 4

The distribution of world population and GNP, 2007 5

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 See Section 1-2 in the main text. 6

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. See Section 1-2 in the main text. 7

The production possibility frontier (2) F/G = opportunity cost (=1/2) Film output (G) Food output (F) Production possibility frontier G = 8 F= 4 A B 10 14 6  See Section 1-2 in the main text, and Figure 1-2. 8

The operation of markets 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 See Section 1-3 in the main text. 9

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 See Section 1-3 in the main text. 10

Market orientation China Sweden USA Hungary UK Cuba Command economy Free market See Section 1-3 in the main text, and Figure 1-3. 11

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 See Section 1-4 in the main text. 12

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 See Section 1-5 in the main text. 13

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 See Section 1-5 in the main text 14