1 Economic Systems Engineering Economics Lecture January 2010  Economic Systems  Production Possibilities Frontier (PPF)

2  Why are economies around the world growing more market oriented?  How much can an economy produce with the resources available?  Can you actually save time by applying economic principles to your family chores?  Why is ‘experience’ a good teacher?  Why is ‘fast food’ so fast? Consider

3 INFINITE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE

4 Best case scenario: Maximize our satisfaction with our limited resources, i.e. choose how to use our resources to our greatest advantage ECONOMISE ECONOMISE

5 1.LAND – all natural resources 2.LABOUR – human effort involved in production 3.CAPITAL – money, machinery, equipment for manufacturing

6 Three Economic Questions  All economies must answer these three questions: What goods and services will be produced? How will they be produced? For whom will they be produced?

7 ‘Real Economy’ versus ‘Money Economy’ Q: Would the wealth & standard of living of the country increase if the Government printed more money? The real economy is concerned with the amount of Goods & Services available to the population - e.g., shopping centres, public transport, quantity of food, number of hospital beds etc.. Whereas, money has no intrinsic value – it merely enables transactions to take place – it can be exchanged for G&S’s

8 Money Money is a liquid asset (can easily be converted into other assets) The functions of money:  medium of exchange  unit of account  a store of wealth

9 Economic System  All economies face the ‘economic problem’  Society must adopt an economic system in order to allocate their resources  When allocating resources, the society must consider 3 questions:  What is to be produced?  How are the goods to be produced?  For whom?  Society’s answers to these questions will determine which economic system they adopt: Capitalist, Mixed, Socialist or Islamic

10 Economic System  An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions.  Some standards used to distinguish among economic systems are:  Who owns the resources?  Allocation of resources?  Incentives and rewards?

11 Market Economy - Capitalism  All resources are privately owned  Economic activity is based on the prices generated in competitive markets  Any income derived from selling resources goes exclusively to each resource owner  Also called capitalism  USA Model

12 Capitalist Economic System  Free enterprise system  Price mechanism - Competition  Privately owned resources  Profit motive  Sovereignty of Dollar

13 Advantages of Capitalist System  Encourages most efficient methods of production by private businesses (profit motive)  Encourages competition in production techniques  Allows economic freedom

14 Problems with Market Economies  Difficulty enforcing property rights  Some people have few resources to sell  No public service motive except for some essential  Inequality in distribution of goods & services  Monopoly lead to unfair practices

15 Centrally Planned Economy - Socialism  All resources government owned  Economy by the central plans of government  Sometimes called Socialist Economy  Use visible central planners  UK Model

16 Problems with Centrally Planned Economies  Consumers get low priority  Little freedom of choice  Central planning can be inefficient  Resources owned by the state are sometimes wasted

17 Mixed Economy  Market economy + Social Economy  Government regulates the private sector in a variety of ways.  China & Pak Model

18 Features of Mixed Economies  Monetary system & legal system  Controlling monopolies  Provision of essential goods & services  Regulating undesirable business practices  Alleviate inequality in society (progressive tax, social welfare)  Attempting to provide stable economy

19 Islamic Economy  Sovereignty of Allah  Circulation and not accumulation  Money is for help to get better reward in the world hereafter – social welfare  Discourages lust, greed and materialism  Discourage wrong means

20 Production Possibilities Frontier (PPF)  PPF model  Shows possible combinations of types of goods that can be produced when available resources are used fully and efficiently

21 Production Possibilities Frontier  A through F are attainable  I represents inefficient use of resources  U represents unattainable combinations

22 Reasons of Shifts in the PPF  Economic Growth – an expansion in the economies ability to produce  Changes in resource availability  Increases in stock of capital goods  Technological change

23 Shifts in the PPF Increase in available resourcesDecrease in available resources

24 Thanks we have finished the course