Introduction: Economic Issues Introduction: Economic Issues

The Economic Problem Economic problems –production and consumption –scarcity: the central economic problem Macroeconomic issues –growth –unemployment –inflation –balance of trade deficits –cyclical fluctuations Economic problems –production and consumption –scarcity: the central economic problem Macroeconomic issues –growth –unemployment –inflation –balance of trade deficits –cyclical fluctuations

The Economic Problem Microeconomic issues –choices: what how for whom –the concept of opportunity cost –rational decision making weighing up marginal costs and marginal benefits –the social implications of choice Microeconomic issues –choices: what how for whom –the concept of opportunity cost –rational decision making weighing up marginal costs and marginal benefits –the social implications of choice

The Economic Problem The production possibility curve –what the curve shows The production possibility curve –what the curve shows

Units of clothing (millions) Units of food (millions) Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m A production possibility curve

Units of clothing (millions) Units of food (millions) Units of food Units of clothing (millions) (millions) a 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m a A production possibility curve

Units of clothing (millions) Units of food (millions) Units of food Units of clothing (millions) (millions) 8m 0.0 b 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m b A production possibility curve

Units of clothing (millions) Units of food (millions) Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m c 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m c A production possibility curve

Units of clothing (millions) Units of food (millions) Units of food Units of clothing (millions) (millions) 8m 0.0 7m 2.2m 6m 4.0m 5m 5.0m 4m 5.6m 3m 6.0m 2m 6.4m 1m 6.7m 0 7.0m A production possibility curve

Units of clothing (millions) Units of food (millions) A production possibility curve

Units of clothing (millions) Units of food (millions) x A production possibility curve w

The Economic Problem The production possibility curve –what the curve shows –microeconomics and the p.p. curve: The production possibility curve –what the curve shows –microeconomics and the p.p. curve:

The Economic Problem The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost

The Economic Problem The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost

Units of clothing (millions) Units of food (millions) Increasing opportunity costs x y 1 1 z 1 2

The Economic Problem The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost –macroeconomics and the p.p. curve: The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost –macroeconomics and the p.p. curve:

The Economic Problem The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost –macroeconomics and the p.p. curve: production within the curve The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost –macroeconomics and the p.p. curve: production within the curve

v x y O Making a fuller use of resources Food Clothing Production inside the production possibility curve

The Economic Problem The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost –macroeconomics and the p.p. curve: production within the curve shifts in the curve The production possibility curve –what the curve shows –microeconomics and the p.p. curve: choices and opportunity cost increasing opportunity cost –macroeconomics and the p.p. curve: production within the curve shifts in the curve

O Growth in potential output Food Clothing Now

O Food Clothing Now Growth in potential output 5 years’ time

O Food Clothing Growth in potential and actual output

O Food Clothing Growth in potential and actual output x y

The Economic Problem The circular flow of income –firms and households The circular flow of income –firms and households

The circular flow of goods and incomes

The Economic Problem The circular flow of income –firms and households –goods markets real flows: goods and services The circular flow of income –firms and households –goods markets real flows: goods and services

The circular flow of goods and incomes

Goods and services

The Economic Problem The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure

The circular flow of goods and incomes Goods and services

£ Consumer expenditure The circular flow of goods and incomes

The Economic Problem The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure –factor markets The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure –factor markets

The Economic Problem The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure –factor markets real flows: services of labour and other factors The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure –factor markets real flows: services of labour and other factors

Goods and services £ Consumer expenditure The circular flow of goods and incomes

Goods and services £ Consumer expenditure Services of factors of production (labour, etc) The circular flow of goods and incomes

The Economic Problem The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure –factor markets real flows: services of labour and other factors money flows: wages and other incomes The circular flow of income –firms and households –goods markets real flows: goods and services money flows: consumer expenditure –factor markets real flows: services of labour and other factors money flows: wages and other incomes

Goods and services £ Consumer expenditure Services of factors of production (labour, etc) The circular flow of goods and incomes

Goods and services £ Consumer expenditure Wages, rent dividends, etc. £ Services of factors of production (labour, etc) The circular flow of goods and incomes

The Economic Problem The circular flow of income (cont.) –macroeconomic issues the size of total flows –microeconomic issues individual markets choices within goods and factor markets The circular flow of income (cont.) –macroeconomic issues the size of total flows –microeconomic issues individual markets choices within goods and factor markets

DEMAND AND SUPPLY Factors that affect both demand and supply

Demand The total amount of commodity that all households wish to purchase in some time period is called the quantity demanded of the commodity.

What determines Quantity demanded? Commodity’s own price Average household income Prices of related commodities Tastes Distribution of income among households Size of population Commodity’s own price Average household income Prices of related commodities Tastes Distribution of income among households Size of population

Demand and price A basic economic hypothesis is that the lower the price of a commodity, the larger the quantities that will be demanded other things being equal.

Supply The amount of a commodity that firms wish to sell in some period is called the quantity supplied. The amount of a commodity that firms wish to sell in some period is called the quantity supplied.

What determines Quantity Supplied Commodity’s own price Price of inputs Goals of firms State of technology Commodity’s own price Price of inputs Goals of firms State of technology

What is Macroeconomics As it is study of how the economy behaves in broad outline without dwelling on much of its interesting.the price levels, employment, total output and the interest rate are key macroeconomic variables for the domestic side of economy.

DEMAND INCOME The higher the income the greater the quantity of goods demanded The lower the income the greater the quantity of goods demanded The graph shows a decrease in income. INCOME The higher the income the greater the quantity of goods demanded The lower the income the greater the quantity of goods demanded The graph shows a decrease in income.

POPULATION This affects the number and type of buyers. The size, age of the population etc all affect demand. E.g a rise in the birth rate will increase the demand for baby products The graph shows a rise in population. This affects the number and type of buyers. The size, age of the population etc all affect demand. E.g a rise in the birth rate will increase the demand for baby products The graph shows a rise in population.

TASTES Each consumer has a particular set of preferences. These change over time and businesses need to continue to provide appropriate products. The graph shows the change in demand over the years for flared trousers. Each consumer has a particular set of preferences. These change over time and businesses need to continue to provide appropriate products. The graph shows the change in demand over the years for flared trousers.

ADVERTISING A business will need to be aware of the tactics of its competitors so as to respond. If businesses advertise their business then it stands to reason that demand for a good or service will increase. A business will need to be aware of the tactics of its competitors so as to respond. If businesses advertise their business then it stands to reason that demand for a good or service will increase.

SUBSTITUTES If the price of a similar good falls then the demand for the original good is likely to decrease because more people will buy the substitute good. E.g The price of crunchy nut cornflakes fall so the demand for rice crispies fall. If the price of a similar good falls then the demand for the original good is likely to decrease because more people will buy the substitute good. E.g The price of crunchy nut cornflakes fall so the demand for rice crispies fall.

SUPPLY COSTS These costs may include the costs for raw materials, labour, expenses etc. Obviously if costs are reduced then the company will be able to supply more and vice versa The graph shows a decrease in costs. COSTS These costs may include the costs for raw materials, labour, expenses etc. Obviously if costs are reduced then the company will be able to supply more and vice versa The graph shows a decrease in costs.

CHANGES IN TECHNOLOGY New production methods using computer-controlled systems and new materials can reduce production costs. This means a company can supply more of a good. New production methods using computer-controlled systems and new materials can reduce production costs. This means a company can supply more of a good.

PHYSICAL CONDITIONS World events often affect the supply of resources. This may include war in other countries or physical conditions such as an earthquake or disease. These factors will all limit supply. World events often affect the supply of resources. This may include war in other countries or physical conditions such as an earthquake or disease. These factors will all limit supply.

SUBSIDIES The government use subsidies to protect industries. Here producers do not bear all the costs, goods become cheaper to produce and they are supplied to the market at a lower price This has the affect of increasing supply. The government use subsidies to protect industries. Here producers do not bear all the costs, goods become cheaper to produce and they are supplied to the market at a lower price This has the affect of increasing supply.